These Airwaves Are Hotter Than Anyone Thought

The federal government's late July auction of new paging licenses wasn't supposed to be much more than a practice run. After all, telecommunications giants had largely dismissed the event as little more than a warm-up for the big show: a December auction of 2,000 personal communication services licenses expected to net the federal government as much as $10 billion.

But for Paging Network Inc., the nation's No.1 paging company, the July event was a make-or-break opportunity to buy the spectrum it needs to become a bigger player in the fiercely competitive personal communications market.

That helps explain why, when the Federal Communications Commission brought down the gavel on July 29 after five grueling days of bidding, the Plano (Tex.) company had paid $197 million for three licenses--a full 31% of the government's $617 million take. The windfall surprised even the federal government. Experts had expected the paging auction to raise no more than $300 million.

"LOADED FOR BEAR." PageNet's bidding strategy helps explain how prices got so high--and why. The $400 million company desperately craved extra capacity to offer higher-margin services. For instance, winning new licenses at the auction would allow PageNet to deliver voice messages to customers. Currently, the company's clients can receive only brief text messages on their pagers.

The planning for PageNet's effort began long before the first bid. In January, the company began amassing a war chest with a $300 million debt offering to supplement a $100 million cash hoard and a $450 million line of credit. After making that sort of preparation, PageNet was determined not to leave empty-handed. "We came loaded for bear," acknowledges President Terry L. Scott.

After three months of intense preparations, including mock auctions, PageNet sent 11 top executives to Washington's Omni Shoreham Hotel where the auction was held. Also in the party: University of Maryland game theorist Peter C. Cramton. He rose at 4 a.m. daily to revise the company's strategy for the novel auction process, in which participants used computers to bid simultaneously on the 10 licenses.

PageNet executives quickly began to wonder if their effort was hexed: On the eve of the auction, as employees outfitted a "war room" with a copier, fax machine, paper shredder, two personal computers--and even a basketball hoop to relieve stress--the room lights dimmed under the heavy power strain, nearly crashing the personal computers that contained the company's bidding strategies.

Once bidding began Monday morning, a PageNet official says, the company deployed a "snake-in-the-grass" strategy to figure out the identity of the other bidders, who were known only by the four-digit codes the FCC had assigned them. On the sixth round of bidding on Monday, PageNet pounced. It offered $30 million for each of the five most attractive licenses, as much as 50% above previous offers. After this preemptive strike, fully half of the 25 rival bidders folded.

PLUNGING AHEAD. Despite its aggressive moves at the beginning of the week, by Thursday, PageNet had fallen behind in the bidding. Investors began to worry, and the company's stock plunged $3 a share, to $25.50.

PageNet plunged ahead. And on Friday, after the 46th round of bidding was completed, the FCC declared that PageNet had won two of the biggest licenses, having paid $80 million for each, as well as a more restricted license for $37 million. McCaw Cellular Communications Inc. also snared two high-capacity licenses, paying $80 million for each.

Some of their competitors think PageNet and McCaw went overboard. "They overpaid by about $30 million," sniffs one rival. But PageNet figures the price bought more than licenses: Minutes after the auction ended, the company disclosed that it will work jointly with Motorola Inc. to launch a new service next year called VoiceNow. The venture aims to turn a paging receiver into a portable answering machine that will receive and play back messages. "This service has the potential to double the size of this company," says John H. Adams, analyst for Dallas-based Principal Financial Securities Inc.

PageNet may have paid through the nose for its victories. But the paging company figures nearly any price is worth making sure it isn't left on the shoulder of the Information Highway.

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