NextWave War Rages
FCC Takes Battle to High Court While Industry Questions Auction Process
By Khali Henderson
Embattled would-be carrier’s carrier NextWave Telecom Inc. is facing another challenge to its claim on the 95 PCS licenses it won in May 1996 at an entrepreneur’s “C Block” auction. As a result of the years-long fight, many in the industry are calling for reforms in the spectrum auction process.
This summer a U.S. Appeals Court ruled the Federal Communications Commission (FCC) wrongfully seized the NextWave’s licenses when the carrier defaulted on payments after filing for bankruptcy protection in 1998. The FCC is seeking a stay of the ruling so that it can take its case to the U.S. Supreme Court, where it was expected to file Sept. 22, a writ of certiorari.
“High Court review will protect the integrity of the FCC’s auctions program, which Congress has chosen as the best method of assigning scarce and precious spectrum resources to those that will put them to their most productive use,” said FCC Chairman Michael Powell in a statement Aug. 6.
“Through this appeal, I also hope the court will clarify how the important public policy goals of the bankruptcy code should interact with the equally important public policy goal of ensuring that spectrum is used for the benefit of the American people,” he added.
The FCC’s suit follows pleas to the agency by NextWave’s future competitors, including the network operators that won the repossessed licenses at Auction No. 35 in January 2001.
The five wireless carriers urged the FCC to settle with NextWave by paying off the carrier and forgiving its auction liabilities in exchange for leaving the licenses in the hands of the winners of Auction No. 35. NextWave has refused to consider a settlement, saying the proposal is an “unfounded effort to stop a competitor from entering the marketplace.”
Days later three carriers — AT&T Wireless joint venture Alaska Native Wireless LLC, Verizon Wireless and VoiceStream Wireless Corp. — asked the FCC to audit NextWave’s eligibility to hold it licenses. The carriers question NextWave’s status as a designated
entity in the original auction, its ability to make future license payments and its foreign ownership.
NextWave asked the FCC to dismiss that petition. The company says carriers’ action is an attempt to stall NextWave’s rollout of its 3G digital wireless network.
“It’s clear that certain competitors are attempting to use administrative and legal ploys to delay our wireless network rollout,” said Michael Wack, NextWave’s deputy general counsel in a statement July 30. “The FCC must decide if it wants consumers to be denied the use of our digital 3G network while litigation continues.”
As to the foreign ownership allegations, the company contends that equity in the company held by foreign entities is below the 25-percent limit. Wack further asserts that NextWave has the financial resources and the technical know-how to put the spectrum to use.
On Aug. 6, NextWave filed a plan of reorganization with the U.S. Bankruptcy Court for the Southern District of New York, providing total financing of approximately $5 billion. The petition was pending at press time in late August. The company announced on Aug. 17, that Qualcomm Inc. would inject $300 million into the company contingent upon NextWave’s ability to carry out its reorganization. On Aug. 21, UBS Warburg Ltd. agreed to provide
Roy Berger, senior vice president of marketing for NextWave, told PHONE+ in late August that the company expects to announce more financing partners in the next few weeks.
The money will fund expansion of NextWave’s network, which already is under construction. NextWave is building a 3G network in its 95 PCS markets, pursuant to a June 2001 agreement with Lucent Technologies Inc. That agreement provides for deployment of voice and data service in Detroit and Madison, Wis., and data service in the company’s other 93 markets utilizing CDMA 1xRTT technology. Completion is scheduled for May 2002 with major market launches set for the end of the year, including Los Angeles, New York and Washington D.C.
Once operational, the network will be marketed to other carriers — the company’s business model since its formation in 1995. The reason for employing this strategy is very simple: “It makes good business sense,” says Berger.
“As a carriers’ carrier we can focus on building and operating our 3G network in the most cost effective way possible,” Berger explains. “At the same time, since our mobile virtual network operator (MVNO) partners are the ones that will be marketing our network services to business and consumer customers, we’ll avoid the costs associated with having to build our own retail brand and nationwide retail distribution channels. In short, we believe that the economics of operating as a carriers’ carrier are highly attractive.,”
Berger says NextWave is looking at MVNOs of all shapes and sizes. It is targeting existing wireless network operators that are interested in expanding their service footprint and/or need more network capacity; wireline telecommunication companies that want to include wireless in their product offering; national retailers; global media and entertainment companies that want to utilize the high-speed data capabilities of its 3G network to distribute their content (MP3 song files, interactive entertainment, video clips, etc.) directly to consumers; financial service companies; device manufacturers that want to package wireless service with their hardware; and ISP/software companies.
Berger says NextWave is in discussions with companies in each of these categories.
Whether NextWave actually will execute its plan remains in doubt as the specter of a Supreme Court hearing looms.
“Instead of supporting our efforts to build an advanced 3G network in the U.S. that will provide consumers with new and exciting wireless data services, the FCC has unfortunately announced that it would rather continue litigating and intends to ask the Supreme Court to hear the case,” Berger said.
Despite the FCC’s plan to file a writ of certiorari, the high court may deny a hearing, letting the previous court’s ruling stand, or it could remand the decision to a lower court.
At minimum, the FCC’s action ties up the spectrum for a few more months. Continued litigation could extend the uncertainty for years.
“This decision is a major gamble for the FCC as there is no guarantee of victory, or even that the Supreme Court will hear the case,” says analyst Eddie Hold, director of telecom services for Current Analysis Inc. “If so, the FCC has blown its best threat [for reaching a settlement with NextWave].”
In the meantime, NextWave says it will continue to build out its network. The risks for the carrier become much greater as it expands without a decision on its spectrum licenses, Hold says. He acknowledges that additional network will bolster its claim to the licenses.
Hold also suggests carriers that did not win licenses might consider backing NextWave’s cause. That is because, whatever the outcome, the NextWave case reveals inherent problems in the spectrum auction itself, observers say
“The current developments are just another indication that the FCC auction process, especially with its substantial breaks for supposedly small companies, is fundamentally broken,” says Roger Entner, an analyst covering wireless and mobile services for The Yankee Group.
Entner says the FCC needs to revamp the auction process. In particular, he questions how the FCC expects a company that qualifies for entrepreneur status to afford wireless licenses. To qualify as an entrepreneur, gross revenue for the two previous years must not exceed $125 million and assets must be less than $500 million.
“Again, how can anyone expect such a company to pay several billions for licenses without going into Chapter 11?” He asks.
Hold agrees, saying the FCC needs to take a long hard look at its overall spectrum policies.
“[The FCC] must address future spectrum requirements as well as removing the current spectrum cap in order to demonstrate that it is moving in a positive way toward a better spectrum management policy,” Hold says.
NextWave founded by telecom veterans including the former president of the wireless business at QUALCOMM Inc.
At C Block auctions, NextWave was the high bidder for 63 licenses costing $4.74 billion.
FCC issues the licenses to NextWave.
FCC temporarily suspended the payment obligations of
C Block licensees due to depressed values of spectrum
following subsequent auctions.
NextWave presells more than 35 billion minutes of use
NextWave expected to begin commercial service
in four markets.
FCC announces a proposed deal in the Pocket Communications bankruptcy that reduced by 40 percent the purchase price of Pocket’s licenses.
A bankruptcy court reduced GWI’s obligations to the FCC
by 80 percent.
June 8, 1998
NextWave’s files for bankruptcy protection.
June 8, 1998
Deadline for C Block licensees to elect one of the payment restructuring options.
July 31, 1998
Date FCC set for interest payments to resume with a 90-day grace period.
NextWave defaults on interest payment, but no cancellation notice sent from FCC.
After a lengthy trial, the bankruptcy court held that it had jurisdiction to consider NextWave’s avoidance claim, and avoided $3.7 billion of NextWave’s original $4.7 billion debt obligation.
August 10, 1999
The FCC signs a “term sheet” with Nextel providing that the radio spectrum licenses issued by the FCC to the NextWave debtors would be transferred directly to Nextel.
August 16, 1999
A federal bankruptcy court grants Nextwave a temporary restraining order and injunctive relief against Nextel.
August 18, 1999
U.S District Court denies FCC’s application for stay of bankruptcy court ruling.
NextWave and Nextel agree to litigation stand-down.
August 31, 1999
NextWave creditors and investors vote to accept plan
December 16, 1999
Nextwave Telecom Announces $1.6 billion of financial investments and strategic partnerships. NextWave files modified plan of reorganization.
December 22, 1999
The Second Circuit reversed the bankruptcy court’s avoidance analysis saying the court did not have jurisdiction to reduce NextWave’s obligation to the FCC. The case was remanded back to the bankruptcy court.
January 11, 2000
NextWave offers to pay the government debt in full.
January 12, 2000
FCC rejects $4.3 billion payment from NextWave, seeks to put licenses up for reauction in July 2000.
January 18, 2000
A federal bankruptcy judge orders the FCC to show cause for revoking NextWave’s licenses.
January 24, 2000
U.S. Court of Appeals for the Second Circuit issues order denying FCC motion for a stay of NextWave bankruptcy proceedings.
January 31, 2000
A federal bankruptcy court invalidates the FCC’s attempted revocation of NextWave’s licenses.
February 4, 2000
NextWave seeks reconsideration of Dec. 22, 1999, Decision
of U.S. Court of Appeals for the Second Circuit.
February 10, 2000
NextWave Chief Operating Officer testifies on case before the Senate Budget Committee.
June 1, 2000
FCC proposes auction rule changes.
August 25, 2000
FCC Revises Rules for C and F Block auctions; defers auction to November 2000.
September 6, 2000
FCC denies NextWave petition for reconsideration of license cancellation.
September 26, 2000
NextWave asks the U.S. Court of Appeals for the District of Columbia Circuit to stay proposed Dec. 12 reauction.
October 10, 2000
U.S. Supreme Court refuses to review case.
October 16, 2000
NextWave’s reply regarding its motion for stay.
October 20, 2000
NextWave claims decision of U.S. Court of Appeals for the 5th Circuit in the GWI (Metro PCS) proceeding supports
November 3, 2000
NextWave asks U.S. Supreme Court for a rehearing based on conflicting ruling in GWI case.
November 13, 2000
U.S. Court of Appeals (D.C. Circuit) grants expedited
November 27, 2000
Supreme Court again declines to review case.
December 12, 2000
NextWave files opening brief with U.S. Court of Appeals for the District Of Columbia circuit.
December 12, 2000
FCC begins reauction of spectrum in Auction no. 35.
January 26, 2001
Auction concludes, raising more than $16 billion.
March 12, 2001
NextWave asks FCC to defer action on reauction
June 22, 2001
Court Of Appeals rules NextWave entitled to keep licenses under bankruptcy protection laws.
July 2, 2001
NextWave announces deal with Lucent to build out nationwide 3G network.
July 19, 2001
Verizon, VoiceSteam and Alaska Native Wireless petition the FCC to audit NextWave’s eligibility to hold C and F Block licenses.
July 25, 2001
Leaders of five reauction winners ask FCC to settle with NextWave and preserve Auction 35 results.
August 6, 2001
FCC Announces it will take its case to U.S. Supreme Court
August 7, 2001
NextWave announces reorganization plan.
August 21, 2001
NextWave receives $2.5 billion debt financing commitment from UBS Warburg.
August 31, 2001
FCC returns licenses subject to outcome of litigation.
September 12, 2001
Scheduled bankruptcy court hearing.
September 22, 2001
FCC to file Writ of Certiorari with the U.S. Supreme Court seeking relief from the June Court of Appeals ruling returning licenses to NextWave.
Alaska Native Wireless LLC
Current Analysis Inc. www.currentanalysis.com
Federal Communications Commission www.fcc.gov
NextWave Telecom Inc. www.nextwavetel.com
Qualcomm Inc. www.qualcomm.com
UBS Warburg Ltd. www.ubswarburg.com
Verizon Wireless www.verizonwireless.com
VoiceStream Wireless Corp. www.voicestream.com
The Yankee Group www.yankeegroup.com
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