FCC Changes to LMDS Auction Come Under Fire

3/15/1998 7:00 PM Eastern

At a mere $568.8 million in projected net revenues from
bids on the largest block of spectrum ever allocated in the United States, the LMDS
auctions appeared to be running out of steam last week, amid rising concern on Capitol
Hill over the commission's handling of the proceedings.

Many companies that had expected to participate in the
local multipoint distribution service bidding, but that couldn't because of lack of
funding, asserted that loopholes in the financial-qualification rules had opened the door
to speculators, resulting in less competition and lower revenues for the government. The
possibility that Federal Communications Commission rules -- including last-minute changes
and clarifications that were key to bidder funding -- undermined entrepreneurial
participation and led to lower-than-anticipated bidding amounts was under scrutiny in
Congress, sources said.

"Obviously, we're concerned," said a
spokesman for House Commerce Committee chairman Tom Bliley (R-Va.). "But we're
not going to comment on any action that we might take until the auction is

In mid-February, Bliley blasted the FCC for rules governing
the LMDS auction that used revenues, but not assets, as a basis for determining which
entities were qualified for the 25 percent to 45 percent bidding discounts that were
established to ensure participation by small firms. Incensed over the commission's
denial of a 45 percent discount to Virginia Polytechnic Institute and State University
when such discounts were accorded to "huge for-profits," Bliley said, "It
is unclear why the FCC abandoned its earlier, two-pronged test, where both assets and
revenues were taken into account."

Bliley added: "It may be time to review the

At press time, the bidder with the most high bids
representing the most "POPs" (units of population) was WNP Communications Inc.,
with 40 high bids for 105 POPs in basic trading areas that included top bids for A-block
spectrum (1.15 gigahertz) in New York, Chicago, Philadelphia, Detroit, Dallas-Fort Worth
(Texas) and Boston. WNP, which qualified for a 45 percent discount on its bids, is backed
by Chase Manhattan Venture Fund of New York, Providence Ventures of Rhode Island, Norwest
Capital and others.

While the auction will go on until there are no more bids
-- which could take several more weeks, FCC officials said -- the overall net-revenue
figures, posted daily by the commission, were inching up at only a few hundredths of a
percent per day last week, with round 65, the last at press time, up 0.12 of a percentage
point over round 64. "It could go on for some time, but it's probably true that
the increments will be small," said a commission official, speaking on background.

The A-block had garnered $414 million after 65 rounds of
bidding that began Feb. 18. These net-revenue figures include the 25 percent to 45-percent
discounts on actual amounts bid, which, in the case of the A-block, meant that based on
the results of round 65, the government could anticipate garnering $1.85 per POP for
markets where there was at least one bid.

"Effectively, we've sold 94 percent of the
POPs," the FCC official said, incorporating both the A-block and the 150-megahertz
B-block in that accounting. The official said 122 licenses had not been bid on.

The official disputed assertions that the auction take fell
below commission expectations. "We never set a figure," she said, adding that a
statement by WebCel Communications Inc. in a recent filing -- asserting that commission
staff had set $2.4 billion as the threshold below which the auction would be considered a
failure -- was not true.

Nonparticipants such as WebCel, CellularVision USA Inc.,
U.S. Wavelink Inc. and JATO Communications Corp. -- which had been the among the prominent
players working with vendors in preparations for the auction -- were now hoping that they
could arrange management or sublicensing deals with spectrum winners. "WebCel is
considering multiple options, including assisting licensees with their build-outs and the
possibility of entering into bidding if there's a re-auction," said WebCel
president David Mallof.

Brian Gast, CEO of Denver-based JATO, said his firm was
exploring similar possibilities. He noted that some of the venture-capital firms now
directly pursuing licenses had first learned about LMDS through JATO's efforts to
raise capital.

Under the eligibility rules set for LMDS discounts, the
investment companies realized that they could qualify for discounts without incurring the
expense of middlemen, Gast noted.

"[A total of] 20 percent to 25 percent of the capital
behind WNP is represented by investors common to JATO," Gast said. "FCC rules
are imperfect, but it appears that the WNP guys are following the rules."

Further making things difficult for entrepreneurs was the
fact that the FCC made last-minute changes in financial rules, and it did not clarify
important issues that were essential to funding until after the initial bidding deposits
were due, noted Jason Priest, president of U.S. Wavelink, which is participating with LMDS
vendor Bosch Telecom in a demonstration of the technology in Dallas starting next month.
"The commission undermined the preparations of a lot of people by changing its rules
at the last minute," Priest said.

Top 10 LMDS Bidders, Round 65

Bidder Net Bids High Bids Population Covered
WNP Communications Inc.$186,868,13240105,074,661
Nextband Communications$136,504,0754598,601,089
WinStar LMDS L.L.C.$41,899,2001114,812,338
Baker Creek Communications$26,007,33623292,251,624
Cortelyou Communications Co.$24,862,1331410,474,161
BTA Associates$16,996,50073,663,936
Alta Wireless Inc.$15,029,50046,846,284
Eclipse Communications Corp.$12,427,2504411,404,821
CoServ L.L.C.$10,161,75057,370,025
U S West Communications$9,999,00097,265,722

Source: FCC Auctions Division

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