Carrier Channel: What's Next for NextWave?

Posted: 3/2003

What's Next for NextWave?

By Khali Henderson

In late January, the U.S. Supreme Court ended five years of uncertainty and litigation as it ruled the FCC did not have authority to revoke the wireless licenses of NextWave Telecom Inc. because bankruptcy court law protected the company. The decision may have answered questions about ownership of the spectrum, but not the future of the would-be PCS carrier's carrier.

"Regaining control of the licenses in 2003 is a mixed blessing," says Dr. Judy Reed Smith, CEO of Atlantic-ACM, a Boston-based research firm. "Competition is rampant in the wireless world, investment dollars are scarce and mergers are likely among even the largest players. It is unclear whether NextWave will be able to pursue its original business model or will have to sell the spectrum off in pieces, where it may not be able to match its initial bid."

Although the FCC resold the spectrum for $15.8 billion in 2001 -- about three times NextWave's bid -- the market has suffered significant devaluation. Analysts now estimate the value of the licenses at between $4.5 billion and $7 billion.

NextWave, which has been immersed in court battles over the rights to the licenses for some five years, says the ruling clears the way for it to emerge from bankruptcy. In a 1996 auction, NextWave bid about $4.74 billion and was awarded the licenses. NextWave gave the FCC about $500 million and signed promissory notes for the balance. However, the company filed for bankruptcy court protection in 1998. The FCC subsequently revoked NextWave's licenses and resold them to Verizon Wireless and others for nearly $16 billion.

In summer 2001, the U.S. Appeals Court for the D.C. Circuit ruled the FCC had wrongfully seized the NextWave's licenses. A proposed settlement negotiated between the FCC, NextWave and the second auction winners also fell apart in December 2001, when Congress failed to act to authorize the deal. That's when the FCC took its case to the high court.

The Supreme Court disagreed with the FCC's argument that it had a right to revoke the licenses because, in part, the agency had a "valid regulatory motive." The high court ruled bankruptcy law protected NextWave.

NextWave general counsel Michael Wack told USA Today the company still plans to build a next-generation wireless network that it can lease to other carriers, now that it is assured that it can keep its licenses. To do, this the company will seek financing, Wack told the newspaper.

In October 2001, the court approved the retention of UBS Warburg as the company's financial advisor and approved the $2.5 billion UBS credit facility.

"It is unlikely that NextWave will go it alone, even if the financial backing which NextWave has lined up remains intact," says Mark Lowenstein, managing director, Mobile Ecosystem, a consulting firm covering the mobile communications industry. Lowenstein notes those partners could include the former re-auction winners.

"In another irony, the incumbent wireless carriers could come out as winners. It is likely that if NextWave enters 'partnership' agreements, the price of the spectrum will be significantly reduced from the 2001 re-auction," he says, citing Verizon Wireless' December 2002 acquisition of spectrum from Northcoast Communications LLC for $15 per 10 MHz population or potential subscribers late last year.

Lowenstein explains the 10-cents per-minute wireless voice pricing that was the hallmark of NextWave's business plan already is here, so NextWave could build an advanced CDMA2000 1X EV-DO (evolution-data only, provides data rates of about 2.4mbps), IP-based 3G network and syndicate it to wireless and nonwireless players alike.

"I'd like to see the residential broadband players get into the act, since they have zero solution for their customers when they leave home," he says.

Reed Smith says if NextWave is able to proceed as a carrier, its 3G network plan -- with data and enhanced service options -- could offer a strong set of applications for customers that want voice plus many enhancements.

"While history has shown that users are slow to adopt mobile data services -- a reality we have documented in our own wireless data studies -- NextWave's carrier's carrier approach could reach the small companies that have historically been successful in educating niche users to the benefits and adoption of innovative services," she says. "If the company does proceed along its original path, its best prospects for success lay in smart partnerships with niche-oriented marketing firms."