FCC C- AND F-BLOCK AUCTION RAISES $16.9 BILLION, LED BY VERIZON

Outcome of auction, which went for 101 rounds, came as little surprise, with bidding positions in most markets remaining unchanged for much of last week. Alaska Native Wireless, designated entity in which AT&T Wireless has 39.9% stake, won 44 licenses for $2.89 billion, and Salmon PCS, small business bidder that has 85% investment from Cingular, won 79 licenses for $2.35 billion. Dobson Communications subsidiary DCC PCS, gained 14 licenses for $546 million; Cook Inlet 22 licenses for $506.38 million, VoiceStream PCS 19 licenses for $482.65 million, Leap Wireless International 22 licenses for $350.06 million and Black Crow Wireless, designated entity with backing from U.S. Cellular Corp., 17 licenses for $283.88 million. Of top bidders, VoiceStream and Verizon Wireless, joint venture of Verizon and Vodafone, were only large carriers to bid as standalone companies. AT&T Wireless, Cingular Sprint PCS, Nextel and Alltel all applied to participate in auction and later dropped out as standalone companies. Of total, 170 licenses were available only to entrepreneurs in closed bidding, with remaining 252 available to any bidder.

FCC expects to release public notice early this week announcing close of PCS auction. Winners then have 10 business days to make down payments and to file long-form applications that contain more financial details.

With 2 new 10 MHz N.Y.C. licenses, Verizon Wireless would have 45 MHz in N.Y.C., bringing it to limit of FCC’s 45 MHz spectrum cap. Several industry observers said that came at time when FCC had just reopened active reconsideration of cap, potentially giving larger carriers more leverage, because in past no carrier has been bumping against cap. “It changes that dynamic at a critical juncture for the FCC,” Precursor Group analyst Rudy Baca said. Notice of proposed rulemaking issued by FCC last week that asked for feedback on continued utility of cap tacitly acknowledged that its use in promoting competition “may have passed,” Baca said. Now that carrier actually has reached cap, “the case is much more compelling for the FCC to actually do something with it.”

On issue of potential challenges to designated entity arrangements, Baca predicted “there’s a very high probability that this issue will be challenged on appeal. There’s a very low probability that it will be challenged successfully on appeal.” Baca said he would expect federal courts to defer to judgment of FCC, which balanced “highly capital intensive” auction dynamic against social policy goals of involving small business bidders.

“It’s not our issue, but I'm sure that there will be a lot of discussion about it” Leap Wireless Senior Vp Dan Pegg said of designated entity arrangement. “When everybody walked away from the compromise, they thought there was a clearer definition” of what constituted designated entity. Under FCC rules, to be able to bid as designated entity carrier must have gross revenue of less than $125 million in each of last 2 years and less than $500 million in total assets. Investors such as larger wireless carriers couldn’t have controlling interest in designated entity, which includes factors such as purview over day-to-day operations. Requirements were structured to allow more money “to flow in through affiliates that were able to compete as if they had the bankrolling of a big corporation behind them,” Pegg said. “We have gotten many of the markets that we wanted at the prices that we expected to pay,” he said. “Next battle” over wireless spectrum involving larger and smaller carriers is likely to be spectrum cap, Pegg said.

Several smaller carriers, including Allegheny Communications, have criticized bidding arrangements between DE’s and large carriers, saying designated entities have served as fronts in some cases to get around FCC rules. Among designated entities, SVC BidCo has 80% equity investment from Sprint and 20% from AirGate. Fourth largest bidder DCC PCS is arm of Dobson Communications, in which AT&T Wireless made $200 million investment in Nov. Cook Inlet/VS GSM, venture in which VoiceStream has noncontrolling stake, was 5th highest bidder. Cook Inlet Region Inc., Alaska Native regional corporation, has bidding agreement with VoiceStream. Black Crow Wireless, designated entity that was 8th highest bidder, has 85% backing from U.S. Cellular Corp., which is 8th largest U.S. wireless carrier. Tenth highest bidder Lafayette Communications is designated entity that has relationship with Triton PCS, which dropped out of auction earlier. Triton holds noncontrolling stake in Lafayette.

Companies such as Allegheny have pointed to Cingular’s 85% investment in Salmon as example of larger carriers’ backing shell company that qualified as designated entity. Salmon PCS Chmn. George Crowley last week defended arrangement with Cingular as “strictly” complying with FCC rules. “We have very carefully followed the control requirements that the FCC has imposed,” he told us, saying that voting interests were decoupled from economic interests. On management committee responsible for day-to-day operations, Crowley Digital Wireless has 3 of 5 seats, he said. Day-to-day management decisions on issues such as pricing and personnel are left to Crowley, although Cingular has minority shareholder protections such rights involving change in fundamental business plan, Crowley said. “There is no requirement that I sell to Cingular and that was a very important part of our negotiations,” he said. “We have the right but not the obligation to use the Cingular trademark.”

“Allegheny does believe the auction results, as they stand today, do bear out what we anticipated would happen -- that you would have sham enterprises that would dominate the bidding,” Dana Frix, attorney with O'Melveny & Myers who represents Allegheny, told us last week before auction closed. Just before start of auction, Allegheny unsuccessfully attempted to put brakes on bidding with request that U.S. Appeals Court, D.C., turned down. Allegheny questioned whether FCC adequately examined what constituted de facto control of designated entity bidders. Allegheny will wait until auction is wrapped up until it makes any decisions on future actions, such as whether it will challenge long forms filed by bidders at end of auction, Frix said. Allegheny filed original request for review with U.S. Appeals Court, D.C., based on concern that designated entities were being edged out of auction by larger carriers. “In fact, that is what has occurred,” Frix said.

“Rules are rules. People are obeying the rules,” CTIA Pres. Thomas Wheeler said at press lunch last week when asked about designated entity questions that had been raised. FCC managed “tough” balancing act between creating system for smaller carriers to still vie for spectrum with requisite financial backing needed to face larger competitors, he said. At close of auction, Wheeler said results bolstered CTIA’s call for FCC to lift spectrum cap. “This most recent auction demonstrated the value of spectrum in a spectrum-starved market,” he said.

Sen. Gregg (R-N.H.), chmn. of Appropriations subcommittee on commerce and justice, lauded auction results, saying NextWave originally bid more than $4 billion for some of licenses that were up for bids. “As the overseer of this publicly owned resource, the FCC conducted this auction in a fair and competitive manner,” Gregg said.

While it appeared larger companies might have played by designated entity rules, Allied Business Intelligence wireless analyst Larry Swasey said he could see both sides of argument. “It is a shame in the sense that the 1996 Telecommunications Act seems to not have been carried out in spirit, although that is [the case] in both the wireline world and the wireless world,” he said. “In the last 4 years we have seen nothing but consolidation. It would be foolish to believe that this wireless auction would be anything but an arena for the largest players to become even more powerful.”

Sprint said Fri. that through partnership with Airgate Wireless in SVC BidCo it won access to spectrum in 5 markets. Sprint already has 30 MHz of PCS spectrum in most markets and won additional blocks through swap with AT&T Wireless late last year, Sprint PCS COO Charles Levine said. Sprint PCS reiterated plan to spend up to $800 million to offer wireless high-speed packet data next year, which it characterized as “fraction” of amount spent for N.Y.C. licenses.