FCC auction draws repeat entrepreneurs

A handful of people who bid in the disastrous C-Block PCS auction in 1996 plan to participate in the upcoming 700MHz contest, despite warning signs indicating the potential for similar troubles.
Like the earlier auction, the 700MHz auction is set to occur in a faltering economy, presenting challenges to license hopefuls needing cash. Yet, just like that ill-fated auction more than 10 years ago, an oddball collection of participants plan to bid, this time including the Missouri Farmers' Union, the Roman Catholic Diocese of Brooklyn and Disney.

The C-Block PCS auction was infamous because it was designed not just for companies with access to billions of dollars, but for entrepreneurs interested in getting into the wireless industry. Postal carriers, lawyers and doctors quit their day jobs and invested their savings, confident that U.S. Federal Communications Commission incentives would help them make it big.

But the auction turned into a debacle. Of the original 255 bidders, 89 emerged with licenses and only a handful of them actually started businesses. The rest went bankrupt, sold their licenses for pennies on the dollar or returned them to the FCC in an amnesty program.

Take Vince McBride, an approved bidder for the upcoming 700MHz auction who lives in San Diego and has won and lost in several auctions. "There are ups and downs but I keep trying," he said.

McBride was a postal carrier who sunk his life savings into the PCS auction in 1996. A series of lawsuits delayed the auction and then the award of licenses. During that time, Wall Street soured on the wireless market and license winners, who bid prices sky high based on attractive payment terms set by the FCC, struggled to finance their wins. McBride got lucky and returned his licenses to the FCC for little loss.

Then the FCC reauctioned licenses and McBride won a new one, which he managed to sell for a nice profit. But in a subsequent reauction he won another license that was later repossessed by the FCC, which was forced to give it back to the original winner after a series of lawsuits.

McBride's sometime partner Scott Reiter, an emergency room physician who splits his time between Santa Monica and the Philippines, has had a similar series of wins and losses in FCC auctions. He too plans to bid in the upcoming auction. Reiter won a few licenses back in 1996 and shortly after got a few good offers from operators interested in buying them.

"I got greedy, basically," he said. He held out for better offers, which didn't come, and eventually had to sell his licenses at a loss.

Reiter was undeterred, though. He entered the 2002 auctions for 700MHz licenses, back before there was a solid deadline for when TV broadcasters had to vacate the spectrum. He bought licenses in three markets, later selling the spectrum for a nice profit to AT&T.

"When I bought that spectrum, it went up in value like crazy," Reiter said. McBride also won 700MHz licenses then, later selling them to AT&T. They both agreed with AT&T not to disclose the purchase price.

Bidders are currently in a quiet period during which the FCC forbids them to discuss their plans for the upcoming auction. But some of them say that because this time around there is a fixed date for when the spectrum will be available to buyers -- 2009, after the TV broadcasters must vacate it -- the value is easier to gauge than in the previous 700MHz auction. However, it may be difficult for some bidders to get credit these days, which could help keep prices down, they say.

While many of the individual bidders insist they intend to build networks if they win the spectrum, many likely have other plans. "I think many of them want to buy and resell it," said Nadine Manjaro, a senior analyst with ABI Research. A look at the result of the earlier 700MHz auctions, which distributed what's thought to be less valuable portions of the band, could be spurring big dreams for bidders.

Aloha Partners, one of the biggest winners in those auctions, sold its licenses to AT&T for US$2.5 billion late last year. Aloha spent over $40 million at the auctions but also later bought licenses from other companies for undisclosed amounts. It is thought to have made a handsome profit.

While much attention has been focused on the billions that big companies like Google had to put up to enter the 700MHz auction, some of the licenses could go for quite cheap, which could be attracting some of the individuals hoping to turn around and sell the licenses for a profit. Some licenses in small markets require as little as $10,000 in an up-front payment, Manjaro said.

Still, for bidders with bigger aspirations, the sinking economy will likely harm their efforts, unless they already have secured funding. The recent collapse of Frontline Wireless, a company created by luminaries in the wireless industry to win 700MHz licenses, has raised concern among other bidders. "They had a really strong team of players and for them to not be able to secure the money shows the impact of the economy," Manjaro said.

One difference in the rules for this 700MHz auction compared to previous contests that could affect individuals who participate is that bidders will be anonymous. That could cut back on potential collusion, a problem that many have said plagued previous auctions.

Another auction change, however, likely works against the smaller players. This time, license winners have just four years to build out a portion of their networks. That's a relatively short amount of time for smaller winners to raise money and build a network.

A number of other license winners from the C-Block PCS auction are also approved to bid in the upcoming auction. Bill McKell, CEO for Horizon Chillicothe Telecom, an Ohio telecommunications provider, is on the list. His company was one of the first winners from the C-Block PCS auction to launch a network, but later it returned the licenses to the FCC.

These previous bidders seem prepared to go ahead with this auction despite warning signs that the market might not work in their favor, just like in the PCS auction from 1996. FCC Chairman Kevin Martin recently acknowledged that poor economic conditions could impact the auction because bidders might struggle to raise capital.

But these smaller bidders must be gamblers. "Sometimes you get lucky," McBride said.