A Feast For Small Fry Or Dessert For The Big Guys?Mark Lewyn
As an investment banker, former Atlanta Mayor Maynard Jackson knows a good deal when he sees one. So when Congress last year O.K.'d the auction of licenses for a new wireless telephone service--with special breaks for minorities and some other bidders--Jackson decided to try his hand at telecommunications. "We're very excited about the potential," says Jackson, who plans to bid through a newly formed company, Jackmont Entermedia Inc.
He has good reason to be. As a "designated entity" (DE)--the Federal Communications Commission's term for qualifying minority-owned, women-owned, and small-business bidders--Jackson stands to get a 25% discount as well as financing and tax breaks (table) in the coming auction of licenses to operate personal communications systems (PCS). The potential is so great for PCS--a low-cost cellular format that could compete with wired local phone networks--that the FCC expects total bids to exceed $10 billion. The DE plan was dreamed up to get support for the auction legislation from rural lawmakers, backers of affirmative action, and small-business boosters. The bill includes preferences for rural phone companies.
Nearly half--986 out of 2,074 PCS licenses--will be set aside for DEs. The rationale: make sure the kind of entrepreneurs who made cellular a dynamic business get in. Also, lawmakers wanted to redress the underrepresentation of women and minorities in communications. "This has been such a lily-white, male industry for so long," says Donald Gipps, deputy chief of the FCC's Office of Plans & Policy.
Whether the DE program can achieve those goals is a matter of debate. "This could be a great example of the adage that the road to hell is paved with good intentions," says P. William Bane of Mercer Management Consulting Inc. Like other critics of the DE plan, he fears that the small fry won't survive bruising competition with entrenched cellular providers and other wireless carriers, making the whole exercise pointless. The FCC's position: Even if only a few DEs survive, there will still be greater competition and diversity.
For now, all sorts of people are stepping forward as DE wannabes--from former Manhattan Borough President Percy Sutton, who is looking to put together a consortium of African-American entrepreneurs, to Jorge Mas Canosa, a prominent Cuban-American contractor. He wants to run PCS systems across the U.S. but will probably focus "on licenses in the Sunbelt region such as Texas, Arizona, and California."
NO CLUE. For every savvy executive who wants to bid, however, "there are people who really don't have much of a clue," says consultant Janice Obuchowski, a Bush Administration communications aide who has decided to bid herself. Not long ago, Obuchowski got a call from a California lawyer who wanted to refer a client. When Obuchowski asked what she might bring to the table, the lawyer said, "well, she has three benefits: She's a minority, she's female, and she's paralyzed." Says Obuchowski: "I wonder what else she has going for her?"
Indeed, one of the FCC's big concerns is that the DEs won't get far without financial support and other assistance from major corporations. The license for Chicago, for example, could easily fetch $100 million, and it would take $200 million more to build the system. "It's impossible for a DE to go it alone," says Terrence McGarty, president of National PCS Consortium, who hopes to sell services such as billing to new licensees. "If they try, they'll get killed."
The FCC's solution: make it easy for big companies to back the upstarts--or, in essence, legalize fronting, a chronic issue in minority set-aside programs. Under the FCC's new rules, big companies can have up to 75% of the equity and can operate the PCS system, but they cannot have voting control of a DE. And no single corporate backer can hold more than 49.9% of a minority- or woman-owned DE or 25% of other DEs.
One rule--excluding any individual investor with a net worth of more than $100 million--could eliminate women and minorities with the greatest resources and business experience. Oprah Winfrey and Michael Jackson have been removed, and Robert L. Johnson, chairman of Black Entertainment Television Holdings Inc., says his plans could be stymied unless the rule is relaxed. "The government is all caught up in this complex sociological game," says Johnson. "They should just say this is a wealth-transfer program to women and minorities."
WINDFALLS? With an October deadline looming for the bidders in the first PCS auctions to identify their partners, the mating game is under way. "We've been contacted by somewhere between 40 and 60 DE groups," says Ameritech Corp. Vice-President Evan B. Richards. Ameritech and other cellular operators can use PCS partners to fill gaps in their coverage areas. Under FCC rules, cellular operators can't bid on large regional licenses if they already cover more than 10% of that population. But they can join up with designated entities that bid for smaller areas.
While the FCC smiles on such partnering, it's out to curb license-flipping. Following the the lottery for cellular licenses in 1980s, winners reaped huge windfalls by quickly selling to big companies. To avoid that, the agency has come up with elaborate restrictions on resale of PCS licenses by designated entities.
But critics say, no matter what, the DE rules will only delay, not prevent, the inevitable contraction of the industry. "Most of the new players will be gone in a few years as the market consolidates," says Dennis Patrick, president of Time Warner Telecommunications. Even so, Time-Warner has held discussions with potential DEs, including a company of Native Americans in Alaska. Being a DE may not be a shortcut to success in wireless, but owning one could be.
THE ABCS OF DES
WHAT A DE IS Congress ordered the FCC to give special breaks in the PCS auction to small businesses, minorities, women, and rural phone companies, collectively known as "designated entities." In all, 986 of the 2,074 licenses will be reserved for DEs.
WHAT A QUALIFIED DE GETS A discount of up to 25% off bids, tax certificates that defer capital gains on the sale of PCS licenses, and a 10-year payment plan--10% down and favorable interest rates.
WHAT DES NEED In a word, capital--from big companies, which can own up to 75% of a DE. But a single backer can't hold more than 49.9% in female- and minority-owned DEs and 25% of other DEs.
WHAT THE FCC WANTS TO AVOID To curb license-flipping, a DE can't sell for three years, and FCC rules favor sales to other DEs.