UNDER NEW RULES, SALMON EYES LEASING PACT WITH CINGULAR WIRELESS

Salmon, which bid $1.7 billion in the FCC’s 2001 NextWave re-auction, said the Commission needed to clarify how those new secondary market rules applied to designated entities (DEs), such as Salmon. In a filing, Salmon said its primary business would shift from wholesale or retail operations to leasing under a spectrum manager lease under consideration in which: (1) Cingular would lease “substantially all” of Salmon’s spectrum capacity and assume “front-line” responsibility for designing and building facilities. (2) Salmon would rely on facilities built by Cingular to meet PCS build-out requirements. (3) Crowley Digital would retain de jure control over Salmon. Cingular has an 85% noncontrolling interest in Salmon, which is a designated entity (DE) run by wireless industry veteran George Crowley. (4) Crowley Digital and Salmon would keep de facto control over the spectrum leasing business under traditional criteria set in the Intermountain Microwave case. (5) Salmon would meet new de facto control criteria in the FCC’s spectrum leasing rules.

While prior FCC approval of a spectrum manager lease isn’t required, Salmon told the Commission that because the secondary markets rules were so new, the company was unsure how they would be applied. “There is sufficient uncertainty regarding the application of the new leasing rules to DEs -- particularly whether the Intermountain Microwave criteria apply only to the DE’s leasing operations or also to the underlying operations of the facilities -- to make further guidance appropriate,” it said. Salmon stressed the need for a quick decision, saying it couldn’t afford to spend time and money on a lease agreement that “languishes unapproved.” It said: “The lease arrangement that makes sense today could be vastly different than the arrangement that will make sense months from now when many more markets have been brought on line.”

Salmon told the FCC in a meeting at the Commission with Cingular officials that it was interested in leasing because the new FCC rules provided more flexibility in that area. Because court decisions resulted in the return of PCS spectrum to NextWave, Salmon said it couldn’t secure 34 of 79 licenses on which it had bid highest in the NextWave re- auction. “A spectrum manager leasing arrangement is a potentially attractive alternative for Salmon which now holds licenses in 45 relatively small and dispersed markets,” it said.

The FCC adopted the spectrum leasing rules to remove barriers stemming from the 40-year-old Intermountain case, which had been interpreted to mean licensees must keep tight hands-on control of leased property. The rules crafted 2 mechanisms for spectrum leasing, depending on how much responsibility lessors maintained: (1) Spectrum manager leasing in which parties could enter leasing agreements without FCC approval beforehand as long as the licensee kept de jure control of the license and de facto control of the leased spectrum. (2) De facto transfer leasing, in which a licensee kept de jure control of the license while the lessee assumed de facto control for the term of the license. Several commenters told the FCC in response to a further notice that it should clarify how DEs were covered by the new rules. Salmon said that by keeping the prior de facto control standard covered by Intermountain Microwave for assessing DE eligibility in other contexts, “the Commission effectively precludes DEs from benefiting from the new flexibility.” The FCC rules stipulated the new de facto control standard was confined to leasing and the Intermountain standard remained otherwise.

If consummated, a Salmon-Cingular spectrum leasing deal would involve licenses for 45 markets with about 12 million people. Salmon said it had built and was running commercial systems in multiple markets and would roll out commercial service in additional markets by 2006. Separately, Cingular Wireless signed a $1.4 billion deal with NextWave last year for portions of 34 PCS licenses.

Cingular Vp-Federal Relations Brian Fontes said the meeting at the FCC was held at the request of Salmon, which was examining options on a lease arrangement. “It’s being explored right now,” he said, but it was too early to know the decision timeline.

“There does seem to be some tension in the order regarding what designated entities can and cannot do under a spectrum manager lease,” said Salmon’s Washington attorney Carl Northrop. “As a consequence, what we are doing now is trying to get some guidance from the Commission regarding what is in the realm of the possible.” Northrop said Salmon’s believed its lease plans were permissible, but Crowley didn’t want to put the carrier’s DE status at risk.

The filing by Salmon cited “sufficient uncertainty” on how the new lease rules would be applied to DEs, particularly whether the Intermountain standards apply only to the DE’s leasing operations or also to underlying operations of the facilities. Salmon said it would meet the de facto control criteria in the new FCC rules, in part because it would be responsible for Cingular’s compliance with FCC rules and the agreement would include reporting requirements that would give Salmon “working knowledge” of activities related to the licenses.

“It would further cement what has been the existing relationship between them,” Precursor Group analyst Rudy Baca said. While Cingular has been a major backer of Salmon, such a deal would give it greater control over the spectrum and the ability to move into other areas it doesn’t serve, he said. Baca said the talks were part of a trend in which other carriers were likely to take advantage of secondary markets by signing such leasing pacts. Wireless local number portability (LNP), which took effect in the top 100 markets Nov. 24, also is exerting pressure on carriers to broaden coverage, he said. In May, LNP takes effect in remaining markets. “The advent of number portability into the rural areas is going to provide incentives for the larger national providers to move into those areas, either by acquiring spectrum or from other sources, such as the NextWave licenses,” he said.