History All Over Again

If James Murray were only an author, he'd be little more than a talking head tilting at the unfairness of a big government system that tried to mix social engineering and sound economics, only to screw up the wireless industry.

But Murray is more than the author of “Wireless Nation,” a historical account of developments in the mobile market that details why the federal government got it all wrong by auctioning off spectrum. Murray also is managing partner of Court Square Ventures, a Charlottesville, Va.-based private equity firm that invests in early-stage technology ventures.

Murray isn't the average venture capitalist, though. Instead of having a typical VC's penchant for looking to the horizon, Murray is decidedly focused on the past sins of the industry. And Murray's own past gives him some authority in trying to right telecom's wrongs: Since 1982, he has been a principal in firms specializing in investment banking and telecom venture capital.

In the early 1990s, Murray co-founded Columbia Capital, which invested in numerous wireless ventures, most notably the predecessor of Nextel. In 1994, he created Columbia Spectrum Management to provide relocation services for incumbent microwave providers being pushed out of the 2 GHz band by the PCS auction winners.

Murray's newest venture, Court Square, isn't likely to gorge itself at the wireless buffet, whereas most VCs appear headed for second helpings. Indeed, he is decidedly pessimistic about wireless, in part because of the impact the industry's history is having on its current financial problems. And he thinks he has a fix.

At the crux of Murray's argument is the debt many carriers accumulated during the various spectrum auctions. While governments around the globe tend to view auctions as a way to generate billions for their treasuries — literally out of thin air — the economic toll it has wrought on the industry has put the market in such a bind that recovery is far from assured, even with a general economic rebound. The situation also has soured Murray on many future investments, sending him on something of a crusade to convince the rest of the world that there is a more logical way to allocate spectrum.

“I think the logic is fairly unassailable,” said Murray. “If you could take off the debt that they incurred at auction, yet still have all the public benefits of the auction, what we would have is an economic model that allows a company to invest less money up front and invest it all in capital improvement and technological innovation.”

At the same time, incumbent carriers with wireless groups were essentially given what amounted to millions in free assets.

Under Murray's theory, which he lays out in detail in “Wireless Nation,” governments would continue auctioning off spectrum but allow bidders to offer up a percentage of their gross revenues. In addition, winning bidders would own the spectrum, but would retain lease rights much in the same way that oil and gas companies carry lease rights to certain areas. The result would be bidders emerging from auction with little debt and a continuing revenue stream for governments.

Murray uses the European 3G auctions as a prime example. Last year, carriers around the Continent bid up licenses to what Murray said are irrational heights, pledging $50 billion. The subsequent closure of capital markets has left the majority of European license holders swamped with debt, unable to build out even the more rudimentary 3G networks.

“That single process has bankrupted KPN, France Telecom, British Telecom, Deutsche Telekom and on and on,” he said. “If Europe had let bidders bid a percentage of gross revenue, they would have the governments getting revenue on an annualized basis that would exceed $50 billion over the next 10 years.”

Instead, carriers that are having a difficult time accessing the capital markets are forced to stall 3G network buildouts.

“As a businessman, sunk capital when you're facing incalculable delays means two things: It's hard to get anyone to invest, and the rate of return is such that you have no hope of attracting new investment,” Murray said. “That money was spent, and not only has it not produced a profit, but they have to spend another tens of billions to build out the network before they have any hope of generating revenue. The government also is not getting full value out of that spectrum.”

Court Square hasn't completely sworn off investments in the wireless market, but it is being a lot more selective and opportunistic. For instance, it's unlikely the company will invest in a service provider start-up, partly because of the large upfront costs, Murray said. In fact, the uncertainty in the market comes at a good time for Court Square, which probably won't look much like Columbia Capital.

“Right now, Court Square is much younger,” Murray said. “We're not an institutional fund and we haven't promised any particular investment philosophy to any particular investors.” Still, the company has a fund to invest and has been shelling out between $2 million and $10 million for start-ups.

Like most venture capitalists, Murray is intrigued by unlicensed spectrum. Unlike the other VCs, though, Court Square likely won't be jumping into that market anytime soon. “We admire them from afar right now,” he said.

Instead, Murray is looking closely at the impact Wi-Fi may have on wired parts of the network should it take off. “We spend some time studying the backhaul problems that Wi-Fi will have in the future,” he said. “As we get more bandwidth-intensive applications and more ubiquitous Wi-Fi coverage, then you're going to have a strain on the telco network.”

Nor is Court Square following the VC template when it comes to the timing of its investments. The company joined the investment group that helped the former Advanced Radio Telecom emerge from bankruptcy as First Avenue Networks.

Murray, who had served as a director for ART, was instrumental in that process, according to Dean Johnson, CEO of First Avenue. “Jim was kind of active in picking up the holdings of the former preferred shareholders,” he said, noting that when those shareholders ended up with 5% of the common stock in the new company, Murray offered to buy up those shares.

The problem with following the VC pack is a lack of applications. While VCs are rushing to put money into start-up vendors, the growth in wireless is dependent on developing an application that will bring new users to the network. “It is the single biggest black cloud on the horizon for the wireless industry,” Murray said. “No one is seeing any great take up.”

Murray also doesn't necessarily see relief in the removal of the spectrum cap, which is expected to generate what many analysts believe is much needed consolidation. Indeed, with consolidation, the role of small, venture-based vendors could be marginalized even more, he said.

“I don't think the disappearance of the spectrum cap is going to do a thing for innovation,” he said. “On the hardware side, someone's going to have to come up with something creative. It would have to create a dramatic increase in spectrum usage. We would definitely look positively at anything like that.”