Compound Fractures

Could the U.S. spectrum process be more broken? The NextWave (www.nextwavetel.com) soap opera reveals a serious fracture, one that potentially could cripple the U.S. wireless industry.

The first fracture was sustained in the 2G spectrum auctions. Although the process was studied seriously to come up with the most even-handed approach, in hindsight, there was a serious flaw. The main focus was to make the process fair to minorities and small businesses, but it didn't make provisions for the greedy.

This weakness permitted, even encouraged, bidders to raise the stakes so high that they precluded other bidders from having a legitimate shot at the available spectrum. But there was nobody there to say, “Wait a minute, that's too much money.” In fact, the Clinton administration was rubbing its hands together and saying, “Isn't the American way wonderful?”

Further, the process allowed bidders that clearly had no means or opportunity to toss out dollar amounts willy-nilly, as if they were plastic poker chips rather than real hard-earned greenbacks. But there was no one around to say, “Hold on. Where's the business sense in this?”

In the cellular-spectrum-distribution plan of the early 1980s, potential carriers were required to develop complete business and engineering plans to prove their cases to the government. For a reasonable license fee of $250, potential players had a shot at the business of wireless. Although it was viewed more as a beauty contest, it demanded a certain amount of due diligence and consideration for the public good.

The second fracture — and probably one more serious than the first — is the American government's spectrum process, which at the heart is flawed. To the untrained eye, it would appear that spectrum distribution today is based more on the government's desire to raise buckets of money than for the public good.

If the process were based on delivering the public good, money should be a secondary concern, rather than the greedy primary focus. Looking back on the timing of the last auction, you have to wonder about the continuous delays. Did they truly stem from operational concerns? Or was there a feeling that carriers weren't desperate enough for the spectrum and simply wouldn't pay enough?

Today, because of this, there are no winners. NextWave is in bankruptcy. Yes, it currently holds licenses for which it clearly didn't pay and for which it has no means of delivering service. It should let them go, but someone needs to pay the lawyers. The re-auction bidders — primarily Verizon (www.verizon.com) — are in a compromised position. After paying huge sums to gain additional spectrum, their hands are tied. How can they move forward with the spectrum held hostage by the courts? The American public is at a disadvantage. Regardless of what happens, millions of dollars have been spent trying to resolve this issue. In doing so, carriers somehow need to recapture their expenditures. Customers likely are the ones who will pay.

And what of the 3G auctions? No one is talking about a new, improved way to distribute the spectrum. If we proceed based upon highest bidder, can we guarantee that there won't be future NextWave bidders that gain and hold the spectrum hostage?

Further, after watching exorbitant bids in the European auctions create buyers remorse, will U.S. wireless carriers become desperate enough for spectrum that they will pay the piper the ghastly fees the government so desires?

Like any serious break, it will take many months, perhaps years, of rehabilitation to recover. And even then you have to wonder if, when it's all said and done, a greater good has been served. Or will future wireless services be constrained while the tied-up spectrum lies fallow?

How would you like to see the NextWave case resolved? Send your thoughts to rwickham@intertec.com.