Controversy, Huge Bids Mark Airwave Auction

WASHINGTON — A government effort to help small businesses get a toehold in the burgeoning mobile phone business through a special auction of airwave licenses ended Monday with a record $10.2 billion in bids--and controversy over whether the San Diego company that dominated the contest violated at least the spirit of the rules.

The aggressive bidding on the licenses for so-called personal communications services, or PCS, shocked industry observers, since this auction was reserved for small businesses who supposedly did not have the resources to compete with the giant telecommunications firms that dominated two earlier PCS auctions.

But the loose rules on what constitutes a small business enabled NextWave Personal Communications Inc. of San Diego--a company related to communications equipment maker Qualcomm Inc., whose backers include consumer electronics makers Sony Corp. of Japan and Lucky Goldstar of South Korea--to win licenses for 56 markets, including Los Angeles and New York, with bids totaling $4.2 billion.

Several other big winners also had Asian backing, including No. 2 DCR PSC Inc. of Washington, D.C., which bid $1.4 billion for licenses in Dallas, Chicago and 41 other markets; Dallas-based GWI PCS Inc., which offered $1.1 billion for 14 licenses, including $403.3 million for the license covering San Francisco; and BDPCS Inc. of Portola Valley, Calif., which offered $870 million for 17 licenses.

The prices in the end were so stratospheric that Reed Hundt, chairman of the Federal Communications Commission and chief architect of the airwave auction policy, likened the contest to the wild frenzy that marked the recent sale of some of former First Lady Jacqueline Kennedy Onassis’ personal belongings.

“This is the Jackie O of auctions; it is much higher than anyone expected,” Hundt said. The bids not only topped the $8 billion anted up in the previous big-company PCS auctions--which offered more desirable pieces of radio spectrum--it also raised more money for the federal government than 30 years of auctions for offshore oil leases.

But critics say the astronomical bidding could be a financial drag on the rapid deployment of personal communications services, which promise to create new competition for existing cellular phone operators while also bringing an array of more advanced wireless services to market. They also say the high bids hurt small businesses, women and minorities who were hoping for an opportunity to join the fast-growing PCS industry.

“I was disappointed that there weren’t more minorities and women firms who were successful in winning licenses in the larger markets,” said Thomas A. Hart Jr., a Washington communications lawyer who last year petitioned the FCC to liberalize its rules to allow for more participation by women and minorities. “I think the rules need to be revised in the future.”

And one contestant who dropped out when the bidding got too rich reportedly threatened to petition the FCC to deny NextWave’s PCS licenses, alleging that the company was little more than a front for Qualcomm, which stands to benefit immensely from NextWave’s bidding success.

“We’ll be looking for a re-auction of [NextWave’s] licenses,” Steve Zacola, president of bidder Go Communications Corp., told the Wall Street Journal. Zacola could not be reached at his home or Alexandria, Va., office for further comment.

NextWave spokesman Greg McQuerter defended the company’s bidding tactics, saying it had complied with all government rules. “We are a small business,” McQuerter said. “There are just 50 employees now. The spirit of this auction was to let new players in to compete . . . and that’s all we want to do.”

NextWave was founded less than a year ago by several former Qualcomm executives and counts former Assistant Secretary of Commerce Janice Obuchowski as its vice chairwoman. Qualcomm holds a small stake in the firm and has reportedly made a commitment to providing it with equipment on favorable financing terms.

But NextWave chief executive Allen Salmasi said the company has no firm commitments as to whom it would buy equipment from, adding: “Qualcomm has no direct or indirect control of our company.”

Although the FCC defined “small business” as any firm that had annual gross revenues of $40 million or less over the last three years, most of the 255 original bidders found themselves competing against companies like NextWave that had backing from major multinational corporations.

Hundt and other FCC officials rejected the contention that small businesses, women and minorities were outmaneuvered by firms with big overseas investors.

“This worked out exactly as we hoped,” said Hundt, noting that 20% of the 493 licenses up for grabs were won by companies headed by women and 31% were won by firms claiming minority status.

The auction was the last in a series of airwave sales that began in 1994 and has raised an astounding $20 billion for the federal government--nearly triple some initial government efforts. The sales represented a radical shift in policy from the days when permission to use specific radio frequencies was granted for free by the federal government in exchange for often-vague requirements on serving the public interest.

The aspiring PCS providers have their eye on a wireless communications market that has been growing explosively in recent years despite a relative lack of competition and high prices. The cellular industry, generally with two carriers in each major market, is signing up more than 1,200 new customers a day.

Experts say the nation’s increasingly mobile work force and the spread of portable computers, pagers and other mobile communications devices will spur demand for an array of digital PCS services and make the overall wireless industry into a $40-billion-a-year business by the year 2010.

Still, the 89 winners on Monday will be the fifth, or in some cases the sixth, competitor in particular markets, vying with established cellular providers like AirTouch Communications of San Francisco and previous PCS auction winners such as Pacific Telesis and Sprint.

“We think PCS is a game for large sophisticated players with deep pockets,” said Mark Lowenstein, director of wireless mobile communications for the Yankee Group, a Boston research firm. “So it’s going to be a challenge for these Japanese and Korean investors. They are taking a big, big risk.”

NextWave’s winning bids will give it a nationwide wireless reach rivaled only by AT&T; Corp., Sprint and other communications industry giants. NextWave and other contestants are required under FCC rules to provide service in at least one-third of their license areas within three years.

Unlike AT&T;, NextWave won’t be marketing its wireless services directly to consumers, but rather will offer its wireless phone circuits to other companies for resale. MCI Communications Corp., which has tried but failed to develop a wireless strategy to compete with AT&T; and Sprint Corp., is widely thought to be a potential customer for such such resale agreements.

Even so, most experts question whether many of Monday’s winners will be able to recoup their investments, which besides the $10.2 billion pledged for licenses will also include comparable sums for building the networks themselves.

“We have no idea how the values being bid can possibly warrant a business case for PCS,” said Herschel Shostek, president of his own Wheaton, Md., telecommunications research firm. “This is a classic example of fiscal self-delusion. We’ve seen this before in terms of the savings and loan fiasco. I don’t think the FCC is to blame . . . [but] this might mean a slower roll-out for PCS services.”