Block Busters

During the last two and a half years, the C block has been called everything from a "tragedy" to a "fiasco." When the FCC established the C-block payment arrangements to allow small companies to enter the wireless industry, companies only were required to pay cash for the initial down payment on the license. As a result, some bid higher than they could afford because they knew they could finance the rest.

The fact that many license holders have gone into debt despite solid business plans is not news to anyone who follows the wireless industry. What has gotten lost in the frenzy is that there are some C-block carriers that have either been able to launch successfully or are almost there. Airadigm Communications, Horizon Personal Communications and Indus are three cases in point.

Although it isn't affiliated with a national carrier, Airadigm is part of the North American GSM Alliance, so it offers national roaming through other GSM carriers. Once Indus launches in October, it will have nationwide roaming through AT&T, and Horizon provides its PCS service through Sprint. Each carrier has chosen a different digital technology, and each has a different approach to the marketplace, but all three have one thing in common: they offer the convenience of a national network through a local carrier.

AIRADIGM SHOWS ITS 'GENIUS' When the PCS C block was first envisioned -- before the delays, reconsiderations, bankruptcies and lawsuits -- the powers that be in Washington probably were thinking of a nation of carriers that would resemble Airadigm Communications.

The first C-block carrier to market in March 1997, Airadigm, of Little Chute, WI, now has launched in cities including Appleton and the Fox Valley, Fond du Lac, Green Bay, Madison, Manitowoc, Oshkosh, Sheboygan and Wausau. Airadigm is on its way to completing a footprint that includes much of Wisconsin, except Milwaukee, and areas in northeastern Iowa.

"We are doing much better than anticipated," said George Benson, chairman & CEO, who does not give out subscriber numbers. "The signal is unbelievable, churn is low, and sales are increasing every month."

PCS made sense to Benson from the beginning. He initially received five experimental licenses from the FCC for 1.9GHz spectrum in Wisconsin. At the time he was in the process of selling a previous business, and he stayed on to run that during the transition. In the meantime, he and a partner started Wisconsin Wireless to do some work in unlicensed wireless. (Wisconsin Wireless is Airadigm's parent company and the entity that deals with wireless business customers.) He also established Crytycal Services Management, which does remote monitoring of PBX devices all over the United States. (Sprint is a major customer.) Benson serves as CEO of all three companies.

As the distribution of PCS spectrum was evolving, Benson was contacted by MCI, which was putting together a national consortium of companies to bid on licenses. The consortium consisted of women- and minority-owned businesses as well as other small businesses.

"I was the little white guy who stood up and said I was from Green Bay when we did our road show with the FCC and up on the hill," Benson said. When the first rulemaking denied MCI, Benson joined a similar group of small businesses, including women and minorities, to "lobby for a set-aside license for the little people."

Benson said he visited Washington 37 times that year and was named the Sheraton Hotel's No. 1 guest.

"We did get the set-aside for minorities and small businesses, but then a reverse- discrimination decision fromthe Supreme Court eliminated the women and minority part of it," Benson said. "They kept the small businesses and gave birth to the C block."

*Oneida Tribe is Partner Benson began setting up his PCS company and was fortunate in finding a financial partner in the Oneidas, an Indian tribe based in Green Bay. The Oneidas own 49% of the business; Wisconsin Wireless holds the other 51%.

He stuck to his business plan throughout the bidding and emerged with 13 C-block licenses, supplemented by two F-block licenses, the footprint he originally conceived.

The new company was named Airadigm, which Benson described as a combination of "paradigm" and "air" since air is essentially what the company is selling. Its product was dubbed Einstein PCS after focus groups indicated that the public would be receptive to a brand name that denoted "smart, bright and brilliant."

The staff selected GSM as its technology and Ericsson as its vendor. No one has ever questioned either decision, Benson said, but the billing decision was a different story.

"We paid that price twice and are now on our second system," he said.

The business plan emphasizes serving large and small businesses. When Wireless Review spoke with Benson in June, he was waiting for Ericsson to deliver the functionality for a wireless Centrex look-alike service, which will allow creation of virtual private networks to serve business needs including 4-digit dialing, Internet access and high-speed data. The carrier already had completed wireless installations in about 20 "decent-size" companies.

For example, in March, Lindquist Machine in Green Bay and Neenah, WI, went totally wireless by using Einstein PCS handsets, each of which is programmed to allow or disallow certain features. Lindquist allows its 150 employees to add a second number to their phones, at their expense, so that they also can use the phone for personal calls that will be billed separately.

*Consumers Enthusiastic In the meantime, the consumer side of the business is going strong. The Einstein name has become well known, aided in part by an ad campaign that was recognized as a Clio Award finalist. The commercials depict PCS' superiority to analog cellular. In one the actor speaks with his head in a fish bowl to display how a cellular call sounds; in another he "Velcro's" himself to a wall to dramatize a cellular contract.

The company's Einstein PCS stores generate a major percentage of the consumer business. Here sales representatives hold the title of "communications geniuses." Customers appear to like statewide calling for free or 10 cents a minute, no contracts, the clear signal and over-the-air activation. A dual-mode phone diverts to analog in areas where Airadigm does not have service, including Milwaukee.

"We mother-hen our customers," Benson said. "As soon as a problem hits our help desk, it's no longer the customer's problem; it's our problem," he said.

He and others of the 110 employees also take time for community involvement with organizations such as Girls' and Boys' clubs, Children's Hospital and the University of Wisconsin in Madison.

In Wisconsin, being a local company matters, Benson said, and he has been in the community for a long time.

"The other side of that coin is the obligation to be good, to perform. If you don't perform, sayonara," he said.

Airadigm currently is backfilling some of its areas and will start building the second phase of the system in the fall. It hopes to pick up a few more licenses that are supposed to come up for reauctioning and are contiguous to its footprint. It also is looking for another strategic partner and one more debt or equity partner.

"We have a large enough footprint to make a business of this if we stick to our knitting and don't try to be all things to all people," Benson said, adding that this is the best business he's been in.

There have been a few surprises, both bad and good, he admitted.

On the negative side, he learned "how totally inept government could be. They still can't get it right," he said.

On the other hand, Benson was pleasantly surprised at the capability of both GSM and PCS.

"They're as good as they said they would be," he said.

Would he do anything differently?

"Had I known, I would have waited for the F-band for 1/100th the cost, literally."

HORIZON'S HOMETOWN TOUCH Anyone who has ever questioned the demand for PCS in rural areas should visit Chillicothe, OH. A city with slightly more than 22,000 residents, Chillicothe sits in the midst of 268,000 acres of farmland about an hour outside of Columbus. Here, PCS has taken off faster than anyone ever expected. Horizon Personal Communications, an affiliate of Chillicothe Telephone, provides CDMA PCS service in the area and has seen its subscriber base increase 71% since the beginning of the year.

"The demand for wireless service in rural areas is the same as, or sometimes even greater than, metropolitan areas," said William McKell, Horizon Personal Communications president. "The myth that rural-area people stay put is no longer true, if it ever was. There is a tremendous percentage of people in any given rural community that work in some different community, so I think the mobility of society puts a lot of demand on it. The customer doesn't want to be tied down to a physical location."

Although many people drive from Chillicothe to Columbus to work every day, they don't have to go any farther than their local phone company for PCS service. Horizon PCS only has been around since August 1997, but residents of Chillicothe have trusted its parent company for more than a century. Chillicothe Telephone provides local exchange telephone services to approximately 35,000 access lines in southern Ohio. The company was formed in 1895 as Home Telephone Company; the McKell family has run it for almost as long. Today, Thomas McKell heads the entire operation while nephew William leads Horizon PCS.

William McKell credits the company's success in PCS to the fact that its customers already know the company personally. Right now, Horizon's PCS service is available in Chillicothe, Zanesville and Athens. Of the three markets in which it has launched service, the Chillicothe market is doing the best because it is locally known, he said. Zanesville's local exchange service is provided by Ameritech, Athens' by GTE. Those residents are not used to going to a store or office to talk with someone from the phone company face-to-face. They do everything through a toll-free number. On the other hand, one would be hard-pressed to find a Chillicothe resident who has not visited the small local company's headquarters set in the renovated historic buildings overlooking Main Street.

"People in Chillicothe are sort of spoiled in that regard, so I think the concept of a local approach for wireless is attractive to them," he said.

*Breaking Into Wireless Horizon had high hopes of getting into the wireless business when the FCC held cellular lotteries back in the mid-'80s, McKell said. The rural service area (RSA) that Chillicothe was part of in the cellular lotteries also touched on three different RSAs where GTE, Ameritech, and Minford Telephone offer local exchange service. Chillicothe Telephone made an agreement with Ameritech and GTE that if it won the cellular lottery in their RSAs, they could take the license, but if they won the lottery in Chillicothe, they would give it to Chillicothe Telephone. The company was unable to strike a similar deal with Minford.

"We had a three out of four chance of getting the license, but Minford won the cellular," he said. "So we were not in the cellular business."

As PCS started rolling out, Chillicothe Telephone saw its own customers moving toward wireless service. McKell said his company knew inevitably it would lose market share on the wireline side if competition came into its core business. Likewise, it felt it needed an opportunity to expand beyond its traditional geographic boundaries, which were limited to Ross County, OH. PCS was the opportunity to do so. The company conducted studies and decided it needed about 1 million POPs in order to make an economically viablebusiness, so it carved out six basic trading areas: Chillicothe, Athens and Zanesville in Southern Ohio, and Parkersburg, Huntington and Portsmouth in West Virginia. It waited for the C-block auction and ended up winning all of the licenses, with the exception of Portsmouth, which it dropped. The company plans to launch Parkersburg and Huntington within the next few months.

*Surviving the C Block The C-block picture has not been pretty so far, but some companies, including Horizon, were able to beat the odds and get service up and running despite financial difficulties. McKell said the difference between Horizon and some other C-block licensees is that his company had a specific plan going into the auction and stuck with it, although some companies went after any territory they could get, whether it made sense or not.

"The biggest reason we made it was that we knew all along we would be depending on debt financing, and most of the other companies were betting on equity financing," he said. "Their plan was to get the licenses, and once they had them they would be able to find investors to help them build the rest of the business. Unfortunately, the bottom fell out of the equity market, and they weren't able to find the necessary financing."

Because of Horizon's relationship with Chillicothe Telephone and its experience in the telecommunications business, it was able to get financing through the Rural Telephone Finance Cooperative (RTFC). McKell pointed out that most of the CDMA C-block licensees that were able launch are affiliated with telephone companies and had debt financing from the RTFC, so they didn't have to find much equity financing.

Although Horizon was the first PCS player in its markets, it still had to compete with two cellular incumbents. Differentiation was the key to getting customers, and it did so through a "community cordless" approach. McKell said Horizon's campaign had to be something that would attract customers despite the fact that they couldn't use their phones in Columbus. (There currently is no CDMA PCS provider in Columbus.) It put together a package that allowed customers to feel they were getting a value even if they could use it only in Ross County, which was Horizon's only operating market for several months. It offered unlimited local calling for $40 and basically mirrored its sister company's local phone service.

"So while they couldn't take the phone to Columbus or roam nationwide with it, they had the ability to make as many calls as they wanted to, so they were truly untethered," McKell said. "And we have found that to be a very successful way to break into the business."

Horizon now has dual-mode phones and roaming agreements with several major cellular carriers, so customers can roam in Columbus.

In the next few months, Horizon will shift to a new marketing strategy. The company announced June 19 that it would return all its licenses to the FCC with the exception of 15MHz in Chillicothe and enter into an affiliation with Sprint PCS, which holds the D- and E-block licenses in all its markets. Horizon's marketing materials will say, "Sprint PCS service provided by Horizon Personal Communications, a Sprint PCS network member."

"It is really the best of both worlds because we have got the power of Sprint's national brand with Horizon's local presence and reputation," McKell said.

He said people at Chillicothe Telephone were sitting around one day after the D-, E- and F-block auctions, joking about how great it would be if they could return their C-block licenses, get out of debt and buy somebody's D-, E- or F-block license at a cheaper price. They all laughed about it, and then asked, "Why not?"

Horizon first approached Northcoast, which owns the F block, to see if it wanted to work together, but it was not interested. Next, it contacted Sprint and proposed buying either a D- or E-block license in exchange for a commitment to offer a service compatible with Sprint PCS. Sprint was not contemplating selling its licenses, but it was willing to allow companies to operate businesses on its licenses. McKell hopes that by yearend Sprint will serve Columbus and Cincinnati, which would give Horizon customers a broader home service area.

"It turned out to be an excellent opportunity for us; we were able to shed our debt and enter into a relationship with what we think is the most respected brand in the wireless business, plus we picked up Portsmouth and Charleston, West Virginia."

Just because Horizon now is affiliated with Sprint doesn't mean that competition is over. McKell said the company is mentally prepared to compete. Simply getting into the PCS market has been the best teacher.

"With wireline, change is slow to take place," he said. "There has been no competition; it has been regulated by a government entity. Chillicothe Telephone's first taste of competition has been Horizon, its sister company. We wanted to be a competitor in a competitive environment because we wanted to learn to think like a competitor."

Now, the parent company not only is prepared to come out on top if companies like MCI decide to compete with it for wireline service, but Horizon is ready for more PCS competition. With the Sprint affiliation on its side, McKell said Horizon still can offer the hometown appeal to customers by sponsoring Little League teams, being involved in the community and getting to know residents personally, yet provide broader service and take advantage of buying, branding and advertising power through Sprint's national presence. After that, McKell said, you'll just have to wait and see what is on the Horizon.

INDUS' VISION FOR MILWAUKEE When the constellation Indus becomes visible in the North American fall sky, Industar Digital PCS should be launching in Milwaukee.

In the C-block auctions, Kailas Rao, Indus chairman & president, won the Milwaukee BTA consisting of seven counties with 1.8 million POPs. The price was $60 million.

"Almost half the people in Wisconsin are here and roughly 70% of the economy. This is the heart of Wisconsin," Rao said. And Rao, like many C-block operators, is interested in the hometown advantage. Milwaukee is the market he knows, and the only market for which he bid.

"Milwaukee has been good to me, and I want to give back to Milwaukee," Rao said of his adopted hometown. He came to America from India about 30 years ago, obtained citizenship as well as a master's degree and a doctorate, and arrived in Milwaukee in 1974 to become an assistant accounting professor at the University of Wisconsin-Milwaukee. By 1981, he was ready for a new venture. The computer industry was starting to come into its own, and Rao said he discovered that the sellers of computers really had no understanding about the needs of the users. Deciding there was some value he could add to this equation, he started Computer Bay with three employees and his wife working part-time. The company, a franchising operation, had expanded to 350 centers in 44 states and Canada by 1992 when Rao decided it was time to get out and sold his business. He had started out with minus $300 and ended up with "a little more than that today," Rao said. According to the Milwaukee Journal Sentinel, "a little more" was $67 million for the sale of the company.

Rao actually retired for all of three months. Then he decided he needed something else to do. He describes himself as a researcher and a visionary, trying to determine where things are going three, five and 10 years down the line.

It became clear to Rao that the wireless phone was getting closer to the computer. The potential of integration between the computer, cable TV, the wireless industry and the Internet led Rao to PCS.

*Small Businesses Need Chance Rao recalled meeting Congressman Ed Markey (D-MA) and telling the congressman that telecommunications at that time was the only industry where the small businessman had no chance to get into the business.

"It was either AT&T, Sprint or nothing," Rao said. When the C-block opportunity became a reality, Rao got started with his plans to create a unique model in the wireless industry.

"It was out of the frying pan and into another frying pan," he said.

Rao's model involves forging strategic relationships. One is with AT&T Wireless Services, which has a D-block license for Milwaukee but no 30MHz license. Because both Indus and AT&T are using TDMA technology, an agreement was reached. AT&T customers can use Indus' network in Milwaukee, and Indus customers will be able to access AT&T's North American footprint.

Other relationships included Hughes Network Systems, which is putting $60 million in the business ($5 million equity and the rest in infrastructure financing); Uniden, which will provide handsets, with a $5 million equity stake; and Kanematsu, a global mercantile company from Tokyo, also with $5 million in equity.

Rao then turned to local business people. He told them his plans and then said, "One of the missing links is you." When they asked why, Rao answered, "Because you are going to use my services."

At least another $5 million came from these local Wisconsin investors, among them Bud Selig, owner of the Milwaukee Brewers. Local business people serve on the board of directors, and Rao plans to take the company public in three years.

What the business community wants is wireless office service, Rao said, and TDMA is the only technology today that can successfully provide this. But his plans go beyond wireless office service to niche markets and vertical applications such as remote banking, wireless vending machines, meter reading, inventory and fleet management. He envisions emergency medical technicians wirelessly transmitting vital patient information from the ambulance to the hospital where doctors can advise on treatment and wireless links between patients and nurses' centers within hospitals.

Rao and his staff, then numbering about 25 and growing, moved into their new offices in downtown Milwaukee in June. The building next door houses the switch, and he has built 63 cell sites in his BTA. In July, the system began testing the phones, switch, base stations and power, in preparation for the October launch. But it will take a while longer before the profits start rolling in.

"I have a $200 million investment and no sales yet," Rao said. "All I'm doing is writing checks. It takes two years to break even and see some profit. But we knew that would happen."

*Plans to Franchise So far everything has gone according to plan, Rao said. Once his model is operating and he gets the kinks out, he wants to franchise it in order to help other carriers.

For now, Rao is working hard and counting his blessings.

"I feel very fortunate. I have a great team of people who have come from Ameritech, Sprint, U.S. Cellular. I'm blessed to have people so in love with what they're doing," he said.

Rao now serves on the board of the Universal Wireless Communications Consortium, the organization of TDMA operators, and has toured cities such as Kuala Lumpur, Malaysia; Moscow; Prague, Czechoslovakia; Singapore; and Tokyo, sharing in-formation about the technology's capabilities and also discussing the model he has developed for Industar. He believes that as an operator, he has more credibility than, for example, a vendor.

Rao already has seen the difference wireless technology has made in the land of his birth. Three years ago when he visited India, there was a 5-year wait for a wireline phone. Last August, he was driving along the highway in India using a wireless phone to order his wife an anniversary gift. Conversely, when he was in Moscow, he spent 15 minutes attempting to get a call through to his wife on the wireline system only to have the call disconnect the minute he finally reached her.

"Countries like that will get wireless phones and see what changes will occur," he said.

"I have the highway in the sky," Rao said. "The more I use it, the more it puts nickels and dimes into my pockets." The business is capital intense with a lot of players and companies and a lot of work. And that, he concluded, is fun.

PCS carriers Airadigm, Horizon and Indus have at least one thing in common: Even though each has a different technology, each leader is convinced his company has selected the best technology to fulfill its business plan.

"GSM is like an older person, TDMA is a 20-year-old and CDMA is like a 2-year-old kid," said Kailas Rao, Indus chairman & CEO. He selected TDMA because he wanted a technology that was somewhat mature, but not ancient, he said.

TDMA also is the technology that will best provide what business customers want, an office wireless system using in-building picocells that provides 4-number dialing throughout the world, Rao said. Other benefits include roaming arrangements with TDMA-carrier AT&T Wireless Services in Chicago, an important city to the Milwaukee market Rao will serve. The AT&T national footprint was another important consideration.

While Rao is partial to the TDMA technology, he also noted that it is not always the technology that drives success.

"Go back in history. Macintosh was a greater technology than IBM, but today DOS technology is the one," he said. "You have to look at who is driving the technology. With TDMA it's AT&T, BellSouth, the companies in the UWCC."

The primary reason Horizon chose CDMA was that no other licensee in the Southern Ohio markets had chosen it yet, said William McKell, Horizon Personal Communications president. The A-block licensee was AT&T, a TDMA carrier, and the B-block licensee was Aerial, a GSM carrier. The two cellular companies in Cincinnati and Columbus, AirTouch and Ameritech, both had CDMA technology, as did PCS providers PrimeCo and Sprint.

"We didn't necessarily choose it because we were convinced it was the perfect solution; it was just a nice fit and was chosen by companies that we have a lot of respect for," McKell said. "Our thought was if we choose CDMA technology, either roaming or affiliation opportunities would pop up."

Now that Horizon has launched service, McKell said he is certain it was the best choice.

Airadigm selected GSM through a specific research process, according to George Benson, CEO & chairman. Staff members were divided into four teams representing the four aspects of the business: technical, financial, marketing and sales, and strategic. Each team was to go out and gather information in order to decide which technology would be best. The teams reconvened one morning to present their findings.

"It was unanimous. For their own reasons, each team came to the same decision, GSM. We'd planned to spend the good part of a day, but the meeting took an hour. By 10 a.m. we were done," Benson said.

He believes GSM with its high level of security and its smart card differentiates Airadigm.

"We were a wireless company, then a PCS company and now we are a GSM company, " Benson said. He is a member of the GSM Alliance, where he represents the C block.

Although the C block looked like a good option for smaller businesses at its conception, C-block carriers have mixed emotions about the way it has evolved.

William McKell, Horizon Personal Communications president, said his company has no regrets today about bidding for C-block licenses instead of waiting for the D-, E- or F- block licenses, because it might have been restricted from affiliating with Sprint if it had. However, there was a time when it was concerned. He explained that there was no reason for any company, whether it was well financed or poorly financed, to pay for everything up front.

"We took advantage of the 10-year payment terms and thought that they were great at the time," McKell said. "As it turns out, once you saw what happened to the wireless market, and when you saw what happened to the D, E and F blocks, all of a sudden those arrangements became very silly. And in the long run, they sort of backfired on the FCC."

"The C block is one of the wonderful things Congress has done," said Kailas Rao, Indus president & chairman. "Lots of people got in and got licenses."

But he said that the FCC and Congress looked at only one part of the equation, the license side.

"Once they get the license, what do they do after that?" he asked. "The good part was allowing small businesses to participate, but who will finance it? And that's the problem we are facing right now," he said.

Airadigm CEO George Benson is blunter, calling the C block "an absolute fiasco. It's the saddest thing. We came out all right, but we shouldn't have paid what we paid," he said. "Delay deflated the price and then the F-band came in so much lower. What could have been a neat thing, ended up being a nightmare."

Benson said the C block wasn't set up for the companies like Pocket and NextWave that got so many licenses.

"It was set up for the Airadigms, but there weren't enough Airadigms out there," Benson said. There was no chance for the matchmakers of money to get with the matchmakers of talent -- the entrepreneurial people with the money people, he said.

"They should have had a process in place that limited the number of licenses a company could have gone after, because then the financial market would have followed those companies," Benson continued. "You could have had a couple hundred nice operations in this country."

Benson believes it all will work out, and the market will prevail, but there is a lot of pain in the meantime. "Anything that happens from this point forward will be a benefit to Airadigm," he said. "We want to have a good business, and it has been impacted by delays and lack of proper management on the part of the FCC. The FCC has greatly failed their constituency in the C-band process."