VENDORS STILL BULLISH ON LMDS DESPITE TEPID BIDS IN AUCTION

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The wireless-broadband sector last week remained a study in
contrasts, with the LMDS auction getting off to a tepid start amid a surge in vendor
support for the new technology that included Lucent Technologies Inc.

All but a handful of the major telecommunications players
passed on a chance to acquire licenses to the biggest block of spectrum ever offered by
the Federal Communications Commission. It was clear that the growing enthusiasm for the
potential of wireless broadband among vendors had not convinced most operating companies
that they could peg their future in local broadband communications to LMDS (local
multipoint distribution service).

Instead, after the first day's first round of bidding,
the overwhelming leader -- with $135.8 million bid on about 110 million 'POPs'
(units of population) -- was a nonoperating entity backed by major venture-capital firms
and former Providence Journal Co. president and chief operating officer Trygve Myrhen,
known as WNP Communications Inc.

U S West Communications -- one of two Baby Bells in the
running, along with SBC Communications Inc. -- was a distant second, with $7.9 million bid
on the 150-megahertz B-block spectrum, covering about 35 million POPs. SBC wasn't in
the top 10.

In all, the first round drew bids of $192.6 million, 89
percent of which went for the 1.15-gigahertz A-block segments. Continuing uncertainty
about the new technology was reflected in Comcast Corp.'s last-minute decision to
pass on the bidding after having initially filed as a potential participant.

'After looking further at the options, we were all
pretty well convinced that the technical capabilities were still to be determined,'
said Joe Waz, vice president of external affairs and public-policy counsel at Comcast.

While it's still early, it was clear that the bidding
had a long way to go if it was to live up to various projections suggesting that the
spectrum was worth as much as $4 billion.

For example, WNP was the top bidder for the 1.15-GHz
A-block in the top eight BTAs (basic trading areas), offering $1.23 per POP. But the
company with the most high bids -- Teligent LLC affiliate AUCO Inc. -- was first in 74
markets with total bids of only $2.9 million, representing only seven cents per POP.

While such numbers may not bode well for a big government
take, they don't necessarily spell trouble for LMDS, said Dan Ernst, analyst with The
Strategis Group. That company has been bullish on LMDS, with projections suggesting that
the sector could generate annual revenues of $7 billion by 2007, with cumulative capital
spending by that time of about $8 billion.

A press release issued by Strategis in October said total
bids for the 493 BTAs 'should bring in over $4 billion,' with dense urban
markets going for as much as $25 to $30 per POP. But Ernst insisted that the
company's research had only suggested that the value of the spectrum was $4 billion,
and not that $4 billion would be bid.

'The real success of LMDS will depend on whether the
markets get built out,' Ernst said. 'The less that's paid for spectrum, the
higher the probability is that this will happen.'

Moreover, Ernst noted, the real state of affairs won't
be clear until about two months after the auctions are completed and the winners begin to
form partnerships. Also, he said, it would take a while to determine the true ownership of
some participants, which could well turn out to be shell companies with major backing from
large telecommunications players.

This possibility was on the mind of FCC chairman William
Kennard. FCC rules bar local-exchange carriers and cable companies from holding more than
20 percent interest in A-block spectrum in their territories. But he's afraid that
those companies will find loopholes in the FCC's rules to wield power over how LMDS
licensees use the spectrum.

'If, for example, an incumbent [operator] holds 20
percent-ownership interest and, in exchange for financing an LMDS venture, it also holds
options to acquire additional equity of up to 80 percent more, the investor's ability
to affect the competitive nature of the venture would not be significantly different than
if it had direct control,' Kennard said.

A United States Telephone Association spokesman said the
group was leaning against appealing a federal appeals court decision upholding the ban.

But Mary McDermott, the USTA's vice president of legal
and regulatory affairs, noted that the group had circulated a letter among key members of
Congress in hopes of generating support for its position that those restrictions are not
consistent with the Telecommunications Act of 1996.

'We're resigned to the fact that where LMDS is
concerned, we're really out of it,' McDermott said. 'Our goal now is to
prevent this sort of thing from happening in the future.'

The emergence of Lucent as a system supplier in LMDS and
other wireless-broadband segments should help to ensure that LMDS systems will get built,
with or without big telecommunications players, Ernst said, noting that such suppliers
traditionally have supplied financing to their customers.

Gary Bonhan, a spokesman for Lucent, said such financing
was a possibility, depending on 'the particular situation.'

Lucent said it had agreed to acquire the LMDS wireless
business of Hewlett-Packard Co., and that it would launch a new
wireless-broadband-networks division in Milpitas, Calif.

'We're not ready to announce a product at this
point, but we expect to be able to meet market needs as they develop this year and
beyond,' Bonhan said.

Other vendors that have shown enthusiasm for wireless
broadband include Nortel, Ericsson Inc., Siemens Telecom Inc. and Bosch Telecom Inc.

Nortel, which recently acquired wireless-broadband
technology supplier Broadband Networks Inc., has taken an early lead in the market as the
end-to-end supplier for many of Teligent's 700 markets, in a deal valued at $700
million.

Sources said Teligent was seeking a second major supplier,
which was said to be a factor in Lucent's decision to jump into the market.

Also joining the supplier lineup last week was Ericsson,
which said that it decided to develop its own system, rather than acquiring someone
else's. Like the other suppliers, Ericsson said it was tapping the big breakthrough
in monolithic-microwave integrated-circuit radio design of the past two years that has
allowed developers to make very small solid-state transmitter/receivers for use in
transmitting interactive broadband signals on a point-to-multipoint basis over distances
of two to three miles.

Lucent -- also using the MMIC technology and, like many
others, relying on over-the-air adaptations of ATM (asynchronous transfer mode) as the
transport-and-access method -- will be able to quickly integrate the radio-access
technology into its other transport-and-switching components, Bonhan said.

'There's nothing that has to be invented here to
allow our customers to make use of all of the equipment that you need to build a complete
network,' he said.

Some smaller vendors were joining the field, as well,
including radar-systems supplier BEL-Tronics Ltd. of Mississauga, Ontario, and
PCS-wireless-systems (personal communications services) company Wytec Inc. of Santa Clara,
Calif. BEL-Tronics, which has been acquired by San Diego-based investment firm Akcess
Pacific Group, believes that it has found a way to deliver lower-cost transceivers than
other suppliers, said Drew Smith, a consultant to the company, who declined to go into
details.

Wytec, unlike most suppliers, is focusing its initial
product on one-way delivery of video services, while offering a migration path to two-way
later on, said Margarate Ralston, executive director for North American programs. The
company is also developing gear for other spectrum tiers all the way to 42 GHz, she said.

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