By Mike Mills
Washington Post Staff Writer
Thursday, February 12, 1998; Page D01
The FCC tried to ensure that small businesses and entrepreneurs get an advantage in the bidding, through rules that allow qualified winners big discounts off their winning bids.
But an analysis of the list of bidders shows that the discounts will mostly benefit wealthy venture capitalists, as well as companies that already are well established in the business. Meanwhile, most of the small entrepreneurial companies that pushed hardest for a place at the auctions were shut out of the bidding because they could not borrow money to bid for licenses.
"The real money in the auction seems to be coming from investors and speculators rather than operating entities," said District-based auction consultant Taylor Simmons. "Plan though they may, it was really hard for the entrepreneur to get capital."
Among the companies getting the bidding preferences:
WNP Communications Inc., the biggest potential bidder after making a $100 million down payment to the FCC, will get a 45 percent discount off the licenses it wins. The bidding group is composed of seven venture capital funds. Many of those funds had invested money with entrepreneurs in previous auctions, but this time they are avoiding the middleman and bidding directly. They include former Virginia Senate candidate Mark Warner's Columbia Capital Corp., Chase Manhattan Venture Fund of New York and Providence Ventures of Rhode Island.
BCK/RIVGAM LLC, a group backed by Mario Gabelli, one of the world's biggest mutual fund managers, also gets to chop 45 percent off the price of its licenses.
Teligent Inc., a publicly traded wireless communications company with a market value of more than $1 billion, qualifies for a 35 percent discount off any licenses it wins. Founded by veterans of the cellular business whose collective worth easily tops $1 billion, Teligent earlier got dozens of similar licenses free of charge, before the FCC began auctions in 1994. Teligent is the Vienna company that hired former AT&T president Alex Mandl for salary and stock options worth hundreds of millions of dollars.
WinStar Communications Inc., another publicly traded wireless data firm, with hundreds of employees in Northern Virginia, gets a 25 percent bidding discount. Like Teligent, WinStar also received its initial licenses at no cost from the FCC.
All of these bidders are playing by the rules. They qualify for the "small business" discounts because the FCC now uses revenue -- instead of assets and revenue -- as the only yardstick for determining who is an entrepreneur. Despite their wealth, the start-up companies qualify because they do not yet have many paying customers.
Meanwhile, a half-dozen smaller companies that wanted to bid, including District-based WebCel Communications Inc., CellularVision USA Inc. of New York and Virginia-based Zip Communications Corp., failed to raise enough venture capital.
They tried to go to the venture capital markets, but most investors who were interested in the auctions simply decided to bid as a group or on their own behalf.
"It should concern the FCC that these guys talked to themselves and decided they didn't want to bid against each other," said Steven Zecola, founder of Zip Communications. "The smart money figured out a way around the process. And [the venture groups] are a lot smarter than the FCC."
Thomas Jones, a spokesman for WNP Communications, said his bidding group decided not to adopt any single entrepreneur's business plan because of the uncertain nature of how the airwaves up for auction can be used. Various bidders plan cable-like TV systems, while others want to provide telephone service or Internet access.
"There is a certain element of intelligent flexibility in making sure you don't commit yourself to a business plan," he said.
At least one of those left-out entrepreneurs sees an upside to letting venture capitalists bid. "I don't think it's a negative at all that they're involved," said CellularVision chief executive Shant Hovnanian, who helped pioneer the technology to be used with these airwaves. "They have to come back to people like us" to build a business, he said.
That well-financed companies such as WNP, Teligent and WinStar qualify for the bidding discounts -- while more struggling entrepreneurs can't even find funding -- is the latest example of the trouble the FCC has had in achieving Congress's 1993 mandate of using auctions to bring new blood into the telecommunications industry.
Democrats had long opposed FCC auctions on grounds that only "deep-pocketed" bidders would get valuable licenses. But with a need for revenue, the new Clinton administration ordered auctions to begin in 1994 -- with the proviso that the FCC make the auctions a tool to encourage minorities, women and small businesses to bid.
The FCC set an entire block of wireless telephone licenses aside for auction solely to those groups in 1995. But a broad Supreme Court ruling that severely limited federal minority preference programs forced the FCC to instead give bidding discounts in the "C Block" auctions to small businesses in general.
The FCC also offered installment payment plans to ease the burden on entrepreneurs. But that benefit, combined with the bidding discounts, led to highly inflated bids, which in turn led to bidders filing for bankruptcy, defaulting on license payments and in general finding trouble raising capital. The FCC is working out ways to restructure billions of dollars of debt to help cash-strapped entrepreneurs pay for their licenses.
Wary of repeating its mistakes, the FCC has eliminated installment payments. But, under pressure from entrepreneurs who had found it difficult to raise money, the agency also has loosened rules intended to prevent wealthy financial backers from setting up "shell" bidding groups masked as entrepreneurs.
So instead of using both revenue and assets to determine who gets the discounts, the FCC now uses the bidding company's revenue only.
The result, critics say, is that the venture capitalists themselves now are bypassing entrepreneurs entirely and bidding on licenses directly.
Under the new rules, a bidder gets a 45 percent credit if average sales over the past three years are less than $15 million. Revenue from $16 million to $39 million earns a 35 percent discount, while sales of $40 million to $75 million over three years yields a credit of 25 percent.
Not surprisingly, 121 of the 138 bidders qualify for the credits, with only eight bidding companies registering as women-owned and six as minority-owned.
FCC officials say they did all they could to encourage participation by entrepreneurs who want to start a new business but lack cash.
"At the end of the day, it's really the marketplace that makes decisions about who gets financing and who does not," said Kathleen O'Brien Ham, chief of the FCC wireless division.
Estimates for the auctions are all over the map. The Strategis Group, a consulting firm, says the airwaves being sold are worth roughly $4 billion. Other estimates put the bidding as low as $500 million.
THE WIRELESS BID LIST
Next Wednesday, the FCC will begin auctioning radio spectrum rights to Local Multipoint Distribution Systems, which are intended to create new Internet, video and phone services for consumers and businesses in every market. Bidders make upfront payments to establish eligibility for a certain number of markets.
Qualified bidders can receive discounts of 25 percent to 45 percent off the price they bid for the licenses they win.
The top five bidders, and their controlling owners:
Company Bidding Upfront (Owners) discount payment WNP Communications 45% $100 million (Madison Dearborn, Providence Ventures, Norwest Capital, ALPA Communications, Columbia Capital, Chase Manhattan Venture Fund, Centennial) NEXTBAND Communications 0% $50 million (Nextlink Inc., Nextel Communications Inc.) BCK/RIVGAM 45% $33 million (Mario Gabelli, Marie Balitsos, Nara Cadorin, Fortunet Communications) PCTV Gold 35% $20.25 million (People's Choice TV Corp.) Cortelyou Communications 0% $20 million (CoreComm Inc.) SOURCES: Federal Communications Commission, interviews
© Copyright 1998 The Washington Post Company