New report claims wireless spectrum auction hurting economy. (First In/First Out).

Is the federal government's insistence that carriers meet their obligations for new licenses stifling wireless technology development? This is the contention of Verizon Wireless, the Cellular Telecommunications Industry Association, and other groups that are seeking to force the Federal Communications Commission (FCC) to release deposits made for spectrum space promised to Nextwave Communications, now in bankruptcy.

The complex but important issue goes back to the wireless spectrum licenses held by the FCC and auctioned from 19982001. In 1998, Nextwave Communications placed the winning bid ($5 billion) for a license to develop portions of the wireless spectrum that had been unavailable to commercial entities. When Nextwave declared bankruptcy, Verizon Wireless and several other carriers stepped in late in 2001 with bids of about $16 billion for the Nextwave licenses, which the FCC felt it could re-auction because Nextwave had defaulted on its required down payments. This re-auction is known as Auctions 35. The FCC then collected billions in down payments from the new auction winners.

Fast forward to January of this year. With the FCC and Nextwave embroiled in litigation, Verizon asked the FCC to return its down payment, since the spectrum space has not been released to the winning bidders. The FCC returned 85% of the down payments ($2.8 billion) but has not agreed to release Verizon from its obligations under the contract signed by the winning bidders:

"The Commission will maintain the pending status of the applications for these licenses: This action will give the bidders access to the bulk of their money while at the same time preserving the results and integrity of Auction No. 35."

Now, Verizon has commissioned a study which states that the "FCC's conduct regarding Auction 35 is stifling the economic recovery of the struggling wireless industry, delaying the roll-out of new wireless services, and impeding wireless investment that would increase U.S. GDP by between $19 billion and $52 billion." The study, by Greg Sidak of the pro-business American Enterprise Institute and Criterion Economics, also states that despite its inability to produce licenses to Auction 35 winners since the auction concluded in 2001, the FCC has refused to cancel the re-auction results, even though it has no spectrum to give the winners. According to the FCC's decision: "Winning bidders from Auction 35 have been forced to treat their obligations as contingent liabilities without deriving any benefit from the underlying asset."

The study also outlines the declining performance of the wireless industry since the end of Auction 35. Between January 2001 and July 2002, according to Sidak, the market capitalization of telecommunications firms with large wireless divisions and wireless equipment manufacturers fell by more than $850 billion, or 65%. Over the same period, wireless service providers and wireless equipment manufacturers laid off nearly a quarter of a million workers.

But the relationship between these developments and the Auctions 35 licensing issue is tenuous. The entire economy, not just the telecommunications sector, has been contracting for 18 months. Further, much of the telecom decline can be attributed to the implosions of long-haul carriers like WorldCom and Qwest (among others), not to the wireless industry. And even Verizon's own wireless actions belie Sidak's claims. The company rolled out the nation's first flat-fee, high-speed wireless Internet access network in June. It was followed by competitor Sprint in August, and other companies are expected to join in shortly.

Verizon's argument is not without merit; if the FCC is not going to release the spectrum for development, it should release the company's funds when this becomes certain. But, as the FCC says, Verizon knew (or should have known) the risks when it signed its contracts. By participating in the auction, the FCC says, "Verizon assumed a known risk of litigation-related delay and thus continues to be bound by the auction rules. Those rules require all bidders to pay their full bid in the event the commission is ultimately successful in its litigation and the licenses are issued."

Verizon may want its money back, but its reasons probably have more to do with its stock price than its wireless services.

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