After a relative calm following the last U.S. spectrum auction, the Federal Communications Commission is once again on every wireless operator's dartboard.
An appeals court decision reversed an earlier ruling that stripped NextWave of their rights to utilize spectrum in several attractive U.S. markets. While this certainly isn't the final word on the litigation over spectrum rights, the decision will add months of headache to resolve the problem.
Another aspect of the case that has the FCC spinning is the possible reduction in value of the spectrum licenses. The bankruptcy court procedures that Nextwave has been involved in the last few years concluded that the licenses reduced in value between the time they were purchased and the time they were actually granted. Initially paying $4.7 billion, the licenses were not granted until some 5 months later, at which point the bankruptcy court ruled they were worth substantially less. Nextwave was therefore not obligated to pay the original amount.
To add further sting, another winner in the 1996 spectrum auctions, GWI Wireless, scored a victory when the U.S. Supreme Court refused to hear a FCC appeal on the case. As in the case of NextWave, the FCC was seeking to reclaim the GWI's licenses for resale. Similar to Nextwave, GWI had used the FCC "installment plan" method of payment and went into bankruptcy before a network could be built and final payments could be made.
To add more salt to the FCC wound, the payment for the licenses held by GWI, now operating as Metro PCS, were reduced from $1.06 billion to a mere $166 million.
What has led to the spectrum fiasco in the U.S. is a lack of clear understanding about the functions of the FCC. The key aspect of both rulings in the appeals court was that the FCC was indeed acting as a creditor to NextWave and other companies by specifying terms for the payment of fees. The FCC has always maintained that its function was purely regulatory and was therefore exempt from bankruptcy laws, which NextWave has evoked through Chapter 11. The recent decisions have even prompted FCC Chairman Michael Powell to concur that their process for auctions has been compromised through these rulings.
In stinging refute, court conclusions have come down to state that the FCC must abide by all federal laws, not just the ones they are responsible for guiding as a regulatory agency. What this means is that the FCC does not hold power over the bankruptcy laws that come into play when accepting payment for licenses.
Like all other private creditors acting in the United States, the FCC is subject to bad debt and the inevitable write-downs that come along with customers unwilling or unable to make payments. I guess stealing the "we get paid no matter what" concept from the Internal Revenue Service playbook doesn't fly in a market that is supposedly deregulated.
The sobering aspect of this dilemma of course is how it impacts the wireless market in the U.S. Anyone who still questions how the United States is behind the rest of the world in wireless services doesn't have to look much farther than this. Wireless spectrum that was portioned out over 5 years ago still sits idle while current operators can't support their current users with decent quality. While the process is much improved from the absolute stalemates occurring in the early years of cellular in the U.S., it's still not speeding up the introduction of services today.
It's interesting to note that while a recent FCC report to congress concluded that competition and growth in the wireless market is thriving in the U.S., the quality of services is an area of concern. Major limitations identified in current networks include lack of coverage and frequent dropped calls. On one hand, the FCC is telling the industry they need to boost service quality, while on the other they continue to frustrate access to the number one cure to these ills; more spectrum.
On the losing end of this stick sits the wireless network operators that bid nearly $17 billion dollars for many of the same licenses that Nextwave still apparently holds. The highest bidder, Verizon Wireless, seems to harbor the most concern. With the largest subscriber base in the U.S., Verizon really needs spectrum to continue their growth. Also, in what seems almost too serendipitous, Verizon prides itself on the quality of their services. All this has led to further pleas to simplify the wireless industry.
Can't we all just get along?
Capping off a several months of speculation about Verizon Wireless' migration to next generation services, CEO Dennis Strigl used a conference in London to implore the talented engineers of the wireless world to reach a truce and unite competing 3G standards (cdma2000 and WCDMA). While his statements did not confirm any rumored strain between Vodaphone and Verizon Communications, it definitely showed their frustration of being out of step with a world that is largely going WCDMA.
An interesting aspect of the discussion was Strigl's feelings that multi-mode handsets were but a short-term solution. He places more importance on providing flexibility on the network side, where it is invisible to the consumer. This was a rare and early departure from support for multi-mode phones and software-defined radios, which many in the industry were hoping would cure the incompatibility woes.
Maybe Strigl and Verizon have realized that the cost of producing such handsets will relegate them to the consumer acceptance level of satellite phones.
In any case, Verizon's position has demonstrated that they are not gung-ho supporters of the cdma2000 technology that currently isolates them from much of Europe and Asia. While it doesn't detract from the capabilities of the technology, it does speak volumes about the necessity of adopting a technology that is strongly supported by partners.
Dave Mock is a freelance writer covering mobile technologies and markets. He's published papers to educate investors in wireless markets that are available through Amazon.com and BarnesandNoble.com. He also speaks at seminars and provides training to corporate clients. His first hardcover book on investing in wireless will be published with McGraw-Hill in Spring 2002.