The NextWave Fiasco

October 1, 2001
by Derek Kerton

Those who have read the KWR for a while know that I delight in soap-operatic business stories. In this class, the NextWave saga should be up for six daytime Emmys. 


NextWave is an enigma of a telco. Most telcos spend money and resources building out networks, providing service, and developing technology, but NextWave seems to spend all of its time and resources in the hallowed halls of justice. Originally, I believe that the company was operating under legitimate intentions to build out an advanced network, but more recently, it seems that they are merely posturing in order to extract money from the FCC and the US taxpayer. Here’s how the saga began: In 1996, the FCC auctioned off a batch of Block C, D, E, and F PCS licenses to companies who would provide wireless phone services in certain US markets. This particular auction was limited to smaller firms, a strategy the FCC uses to foster competition in the wireless industry. A new firm, NextWave, walked away from the auction about $4.7 Billion lighter, and with the rights to multiple licenses in key markets. Naturally, it is difficult for a new firm to bankroll a billion in cash out of pocket, so in the interest of fostering competition, the FCC finances the spectrum purchase with a down payment and ongoing payments.


Note: this wasn’t a “3G” auction, since this spectrum wasn’t specifically earmarked by the FCC for 3G traffic. When the FCC eventually holds a 3G auction, it signifies that the FCC requires that a 3G network be built on that spectrum. The Block licenses that NextWave won were auctioned as simply “PCS” spectrum. This means NextWave could use it for PCS, or go one better and use it for 3G.NextWave’s plans at the time were to acquire at least another $2 B in financing from equipment vendors, and build out a “new nationwide wireless network which will provide the first Internet Protocol, packet-switched, high-speed data and voice service via a wireless network.” NextWave would then become a “carrier’s carrier” OEM selling this efficient 3G-type data network to the other carriers so they could re-brand and sell it to their subscribers. This is a neat idea, and is more efficient that having each carrier build out its own 3G network with disparate technologies. NextWave was to do it cheaper and better, and with greater scale economies.


Unfortunately, the company was over-extended, and the money ran out before the network was built. There is disagreement on the issue, but it appears NextWave may have missed some of the payments it owed the FCC on the spectrum licenses it held. NextWave filed for bankruptcy protection in 1998, asking the court for protection while it reorganized its assets, rollout plans, and financing. Federal Bankruptcy Judge Adlai S. Hardin, Jr. awarded NextWave protection, believing that the troubled company could gather up its assets, re-finance, and still make a run of it.
Since the first bankruptcy hearing, it appears NextWave, its creditors, the FCC, and the court have been dancing around New York courthouses submitting, disapproving, and pointing fingers, but never getting any closure on the issue.


The FCC, after some time, got impatient with NextWave. Facing a shortage of spectrum for wireless companies that actually built networks and provided services, the FCC decided to cancel Nextwave’s licenses and put the licenses back up for auction. NextWave, of course, protested, but the FCC claimed it had a right to repossess the spectrum since NextWave allegedly defaulted on payments. Now I sympathize with the FCC, but I’ve got to clarify that this was a colossal mistake. When a US Federal bankruptcy court protects a firm’s assets, it is not wise to repossess them - even if you are the FCC. Meanwhile, the FCC announced it would appeal to the U.S. Supreme Court to clarify conflicts between the Communications Act and the federal bankruptcy code. The FCC wants the Justices to rule on whether the courts or the commission have jurisdiction over spectrum licenses.


The spectrum formerly allocated to NextWave was auctioned off early this year, and multiple companies bid and won portions of the licenses. Another interesting occurrence is that small companies like Alaska Native Wireless won some of NextWave’s former rights, since the FCC maintained the mandate that only small companies could bid on the auction, but most small companies were only thinly veiled as fronts for the giant telcos with strong financial interests in the “new” spectrum. A new round of legal wrangling ensued, with the result being a Federal court of appeals withholding NextWave’s rights to the spectrum. Now the FCC needs to ask politely for the likes of Alaska Native Wireless to kindly return the spectrum that they shouldn’t have sold. NextWave, of course, is seeking damages. With the request to return licenses, the likes of Alaska Native Wireless, Verizon Wireless and VoiceStream Wireless all questioned the validity of NextWave's re-organization plan, and demanded the FCC re-visit NextWave's eligibility to hold wireless licenses.


Some industry observers are now saying that NextWave has found a more lucrative line of business than communications; that being litigations. They are expected to try to milk this debacle for as much as possible, including reclaiming portions of the licenses, and reparations. A look at www.nextwavetel.com ‘s press section will reveal that this company certainly has a core competency in drawn-out legal battles. The most suspicious-minded observers think that any purported “build-out” plan at this point is merely posturing in order to garner as much in reparations as possible. The answer to how NextWave could milk the situation is ‘simple’ arithmetic. They bought the licenses for $4.7 Billion in 1996, and the FCC re-auction valued the same spectrum at some $16 Billion. A proposed settlement between the FCC and Nextwave would see the new bidders getting the Block C portion of the $16B worth of spectrum they thought they bought for $10 B. Five billion of the ten would go to NextWave as compensation, and they would still be able to keep the Block D, E, and F licenses. Basically, Nextwave becomes a big winner on the unofficial spectrum futures market. I would agree that NextWave is now playing the FCC for damages, but frankly, you can’t say they didn’t warn the FCC. I believe they truly want to build out a network, even though we have yet to see a complete, feasible plan. With an FCC-blunder windfall, the firm now looks more solvent than ever. They appear more able to pursue actual telco business as well as drama. Thickening the plot, the firm recently surprised the industry by announcing $5 Billion of new financing from a variety of mystery investors! The names of the sources are just now trickling out.


-Qualcomm offered $300 M, contingent (of course) on NextWave using Qualcomm’s proprietary CDMA 3G 1x and 1xEV technologies. I truly respect the way Qualcomm operates. They really know how to get their superior technology adopted in an unwelcoming world. (To me, Qualcomm is a lot like the tough guy in all the prison movies. He finds the weak, new inmates in the yard, and offers to help them. The new guy is in trouble, and he needs the help, but if he takes the help, he’s gonna be Qualcomm’s new girlfriend.)-Swiss Financier UBS Warburg committed $2.5 billion to NextWave and will act as financial advisor. This has added fuel to the legal fire, since the type of spectrum held by NextWave is limited to 25% foreign ownership. NextWave, as usual, is offering sketchy information, and won’t say what share of equity UBS Warburg will own.-There is speculation that some financing may come from Lucent, whose equipment will be used in a CDMA 3G build-out.

If you really want to know more, and can’t get enough of this real-life daytime drama, tune into these links:
New Investors:
<http://dailynews.yahoo.com/h/nm/20010816/tc/tech_qualcomm_dc_1.html>
Possible Windfall terms with FCC:
<http://www.wirelessweek.com/index.asp?layout=story&doc_id=47391&verticalID=33&vertical=Regulatory&industry=Spectrum+and+Licensingsettled>
<http://www.washingtonpost.com/wp-dyn/articles/A1232-2001Sep20.html>