LMDS AUCTION BRINGS SURPRISES

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Nobody was more surprised at the outcome of the localmultipoint distribution service auction that ended last week than the companies that endedup with the most spectrum.

"WNP [Communications Inc.] now holds more spectrumthan any company in the U.S.," said Kevin Maroni, an investor in start-up WNP and ageneral partner in venture-capital firm Spectrum Equity Investors. "It's not ascale that we anticipated when WNP entered the auction."

After 128 rounds of bidding that began Feb. 18, WNP was thetop bidder for 39 A-block licenses offering 1.15 gigahertz of spectrum and one B-blockwith 150 megahertz, representing more than 91 percent of the units of population (POPs) inthe top 12 basic trading areas and two thirds of the POPs in the top 75 markets. Overall,the company won 41 percent of the POPs in the A block, including 11 of the top 12 markets,excluding only Los Angeles.

WNP's anticipation that the amounts that it was fundedto use in the bidding would not gain it such a large share of the licenses reflectedwidespread expectations that the largest allocation of spectrum ever made by the FederalCommunications Commission would generate a more competitive auction. The company won 24 ofits 39 A-block markets with the minimum required bid. Overall, 181 markets representing77.4 million POPs, or 32 percent of the population, were won with a single bid. Another109 markets representing 10 percent of the population received no bids at all.

FCC officials indicated that a later auction will be heldfor A- and B-block licenses that were not bid on this time.

Rather than the billions of dollars of revenue projected bysome analysts prior to the auction, the gross amount bid for all spectrum was only $834.2million -- which, after discounts to designated entities, including WNP's 45 percentdiscount, netted out at $578.7 million. Nonetheless, FCC officials hailed the results as asuccess.

"Today's results are very exciting," saidFCC chairman William Kennard, in a prepared statement. "The marketplace now has 104new LMDS players."

But where the A-block is concerned, licenses coveringtwo-thirds of the population were held by only three companies -- WNP, with a 41 percentshare of A-block POPs; NextBand Communications LLC, with 12 percent, including the LosAngeles BTA; and WinStar LMDS L.L.C. with 7 percent. No other bidder had over 5 percent.

Observers and participants pointed to a number of factorsthat contributed to the low level of competition, starting with the fact that after thedisastrously high bidding and subsequent financial collapses of many participants in thepersonal-communications-services C-block auctions, investors were extremely wary ofbacking speculative bidding on airwaves. In part, WNP succeeded in raising funds whereother entrepreneurial firms failed because CEO Thomas Jones' plan offered investorsprotection against the type of bidding that went on in the PCS auction, Maroni said.

"The government is better off getting close to $600million in revenues from people who can pay the money and deploy the technology than it isgetting billions of dollars in illusory sums that will never be spent," Maroni said.Backers of WNP include Chase Manhattan Venture Fund of New York, Providence Ventures ofRhode Island, Norwest Capital, Columbia Capital Corp., The Centennial Funds and MadisonDearborn Partners Inc.

Maroni and Jones dismissed assertions from some playersthat failed to raise capital for the auction that FCC rules undermined their efforts andled to a pooling of venture-capital money behind a single investor. "There's alot of money out there, so if people couldn't raise funds, you can't say thatit's because of a scarcity," Maroni said.

"The investors that Tom [Jones] attracted all talkedto other people," Maroni added. "Tom was the most compelling entrepreneur."

Because the scale of WNP's holdings is so much greaterthan anticipated, the firm must revise its business plan before it begins raising money tobuild out its far-flung empire, Jones said. "We've been totally focused on theauction, so we're just now beginning to work out our next steps," he added.

Perhaps the biggest factor in the low bidding was theabsence of participation by major telecommunications players, caused in part by theFCC's ban on in-territory participation in A-block licenses by local-exchangecarriers and cable companies, and in part by big players' uncertainties about thetechnology. "At a big company like AT&T [Corp., which looked at LMDS], somebodyhas to stand up and bet their career on the unknown and see the whole thing through, whichis not likely to happen," said one auction player, asking not to be named.

LMDS now has the support of the biggest telecommunicationssuppliers, including Lucent Technologies, Nortel, Alcatel Telecom, Ericsson Inc. and manyothers.

But most of these companies only got into the game in thelast few months, reflecting the sudden realization in telecommunications circles thatwireless-broadband technology had suddenly become a viable, low-cost competitor towireline options.

The rapid changes in LMDS technology, including fallingcosts and improvements in performance, are contributing to new thinking at WNP, Jonessaid, noting that the firm has yet to perform hands-on testing of any gear. While thesechanges might eventually lead to provision of services to a mass market, the initialbenefits that Jones sees are in WNP's ability to offer more services than might havebeen possible previously in competition with wireline providers of fiber broadbandservices to the business sector.

"Only a small number of buildings -- something on theorder of 5 percent or less -- are currently connected by fiber," Jones said. "Webelieve that the window of opportunity will be open for us for quite some time, given theamount of demand that's out there for higher-bandwidth services."

Under the FCC's liberal licensing rules for LMDS,providers have up to 10 years from the point of getting their licenses to be offering"substantial" amounts of service in their markets. While WNP believes thatfirst-to-market advantage is important, Jones said the firm will not be in a rush to buildinfrastructure, preferring instead to make sure that it chooses a technical platform thatwill not be outdated soon after it's built.

WNP must also raise money to build the infrastructure andto put together a full management and operations team, which Jones expects to do throughdirect hiring, rather than by partnering with outside entities. While the firm is likelyto seek vendor financing, it will also rely on other sources in order to avoid being toomuch under the sway of manufacturers, Maroni said. He and Jones declined to go intofurther detail about their plans or about the likely timing of initial networkdeployments.

As for the other top bidder, NextBand, its plans call forthe use of the spectrum in conjunction with the needs of the venture's two operatingbackers -- mobile wireless operator Nextel Communications Inc. and competitive LECNextLink Communications Inc., in which cellular pioneer Craig McCaw is the dominantshareholder. NextBand won 13 A-block licenses, which will be useful in its operations forpoint-to-multipoint connectivity, and 29 B-block licenses, which will be used to providebackhaul links for Nextel and to support point-to-point connections to NextLink customers,said Bob Ratliffe, a spokesman for the companies.

"We're not prepared to talk aboutour plans in any detail," Ratliffe said, noting that NextBand itself may not becomean operating entity, choosing instead to license its spectrum to its controlling partners.NextLink operates in 26 markets in eight states -- many of them in the same localitieswhere NextBand will have licenses -- while Nextel operates nationwide. 

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