Missing Rooftop Transmitters Put Wireless Firm in FCC Crosshairsby
Straight Path Communications awaits decision on its licenses
Company says it can’t back up claims made in earlier filings
It was use-it-or-lose-it time: the wireless venture needed to show it was using its airwaves before its government-granted permission expired.
So the company, now known as Straight Path Communications Inc., assured the U.S. Federal Communications Commission in filings leading to license renewals in 2011 and 2012 that it was providing service over the designated frequencies with transmitters around the country, many of them at hotels.
But after an anonymous critic questioned those claims last year, Straight Path said it investigated and found no evidence that the equipment is still in place -- and that as a result it risks having its potentially lucrative airwaves rights revoked by the FCC. Its shares have tumbled.
“The market should be aware of the risks,” Straight Path Chief Executive Officer Davidi Jonas said in an interview. “Aside from this issue -- this obviously is a major issue we’re addressing -- we think the company is very well positioned.”
The company had come up with “different theories” for why the gear wasn’t where it was supposed to be, Jonas said. He declined to provide further details.
Straight Path’s shares dropped from a record high of $49.72 in October to $7.82 a month later, after analysts and critics questioned its strategy, and closed at $18.98 on Friday. The company has been named in shareholder lawsuits that allege mismanagement -- an accusation it rejects, saying the attacks are meant to depress its share price so traders can profit.
Straight Path calls itself a leader in providing high-frequency airwaves for carrying traffic that will grow as the so-called Internet of things blossoms, linking everything from automobiles to garage doors and medical equipment. The Glen Allen, Virginia-based company says its airwaves offer a cheaper alternative to the fiber lines that typically carry mobile traffic to and from the wired network.
Jonas’s venture is trying to profit from its airwaves as wireless usage booms. The task challenges well-capitalized players, let alone small concerns like Straight Path, which reported having seven employees in its most recent annual filings. Along the way, companies rely on engineers and lawyers to comply with requirements like the FCC’s demand that they show they are using the frequencies rather than hoarding them.
In the July 22 filing with securities regulators, Straight Path said it can’t back up claims it made in FCC filings ahead of its 2011 and 2012 license renewals to have equipment installed and service flowing. Investigators hired by the company “did not find any evidence” that equipment’s still in place, though it “was likely put in place for a short period of time,” the company said. Shares dropped 44 percent over two days.
Hotel managers in three states at addresses listed by Straight Path in its filings told Bloomberg News they knew of no communications equipment on their rooftops in interviews last month. In one instance, the company listed gear at 1135 Market Street in Redding California -- the address of a Deluxe Inn. A person who answered the phone there declined to give her name. She said the inn’s roof was new, and had no equipment.
In Knoxville, Tennessee, the place cited was the Hilton Knoxville, at 501 West Church Avenue. Asked if gear had been placed at the hotel, General Manager Paul Jordan replied, "Not to my knowledge.” And in Staunton, Virginia, the address provided in the filing was the Stonewall Jackson Hotel & Conference Center, at 24 South Market Street. There, General Manager Damon Strickland said he knew of no telecommunications gear installed.
Straight Path hasn’t offered a public explanation for how its equipment may have disappeared from the stated locations. The company is installing gear and has leased some airwaves, it told regulators last month.
Davidi Jonas, speaking of the broad outlines of the company’s investigation of the missing equipment, in the interview said “the weight of evidence concluded it was there for a short period of time.”
“One could certainly leave it to the imagination,” he said. “We’ve come up with different theories of how that happened. At this point we’re not going into details.”
Straight Path representatives met with FCC officials July 21, and “We plan to be cooperative,” Jonas said.
“We’re looking into it,” Neil Grace, an FCC spokesman, said in an interview.
“Now there’s a cloud hanging over the company, which is, what’s going to happen to the spectrum?" Jason Bernstein, an analyst with Odeon Capital Group LLC, said in an interview.
The FCC could impose a range of penalties such as fines or further requirements for the licenses, and “anything short of a revocation is going to be a big win for the company,” Bernstein said.
Straight Path is plying waters that have confounded savvy players before.
Investors seized control of what is now Ligado Networks LLC after financier Philip Falcone failed to persuade the U.S. to approve a new airwaves use; a former Verizon Communications Inc. chairman, Ivan Seidenberg, is trying to revive the plan, with backing from JP Morgan Chase & Co. and other investors. Dish Network Corp. Chairman Charlie Ergen has built a $50 billion airwaves portfolio that may now be worth more than his satellite-TV business, and has yet to outline a plan for using it, with a 2020 deadline approaching. Ergen last month told investors that, “we believe that we’ll build out into a business that’s good and we think we potentially will do that with others.” He didn’t offer details.
Earlier, wireless pioneer Craig McCaw built Clearwire Corp. on airwaves originally designated for educational purposes; the company at one point warned it may run out of money, and was eventually bought by Sprint Corp. In 2005, NextWave Telecom Inc. sold $3 billion of airwaves licenses to Verizon Communications Inc. to conclude a seven-year bankruptcy case.
But that hasn’t dimmed the appeal of building fast networks out of underused airwaves. Verizon last month won FCC approval to lease high-frequency airwaves, which Chief Executive Officer Lowell McAdam said could play a role in “game changer” deployment of fast networks.
Verizon’s deal, with XO Communications LLC, shows that Straight Path’s airwaves have significant value, said Odeon’s Bernstein.
Not everybody agrees. The airwaves don’t go far, and require a dense and costly deployment of antennas to be knitted into a network. In addition, there are “plenty of alternatives” so Straight Path’s frequencies could be “worth very little,” according to Tim Farrar, an analyst with Telecom Media Finance Associates.
Straight Path’s troubles follow a recent win at the FCC, which voted July 14 to let the company’s frequencies carry wireless traffic. That opened opportunities to cash in on the switch to mobile use that’s sweeping the communications industry. Shares gained as much as 12.1 percent as the agency was voting.
Straight Path holds 828 licenses for a type of airwaves little used today. It says it leases the frequencies to other wireless companies. For the year ended in July, it reported $426,000 in lease revenue. Another unit, which licenses patents, took in revenue of $12.8 million as the company reported a $2 million loss.
The airwaves were purchased in 2001 from Winstar Communications Inc., a wireless service provider that went bust at the tail end of the internet and telecommunications bubble. The buyer, IDT Corp., would spin off its spectrum holdings into the new company Straight Path a dozen years later.
The purchase was “an incredible deal. It might not top the Dutch settlers buying the Island of Manhattan for twenty four dollars, but it comes pretty close," IDT Chairman Howard Jonas said in a news release announcing the $55 million transaction in 2001. “I have a plan to make it a very profitable venture.”
Howard Jonas has retained control of Straight Path. In 2013, as IDT formed the company it named his son, Davidi Jonas, 26 years old at the time, as new chief executive officer.
In his inaugural conference call for investors, Davidi Jonas said Straight Path has airwaves rights “in all of the top 25 markets” and was “the only company to have nationwide coverage” for its type of airwaves.
The young CEO adopted a sometimes breezy style in quarterly calls with investors. In October, asked about what he feared, he quoted the flamboyant movie character Austin Powers, citing nuclear warheads and circus folk, before settling on an adverse airwaves ruling from the FCC.
Over two years through late 2015, Straight Path shares returned more than 700 percent on anticipation of business from the advanced wireless communications. But since late 2015 short traders -- those expecting to profit from a drop in a stock -- have assailed Straight Path. In October, Kerrisdale Capital Management said there’s an abundance rather than a shortage of airwaves for new wireless services.
Davidi Jonas told investors after the Kerrisdale report that “we will play a critical role in 5G,” a term for the fast network to follow today’s fourth-generation mobile service.
Meanwhile the equipment problems were brewing. At issue is a process demanded by the FCC, which auctions airwaves and wants to make sure they’re used rather held speculatively for resale later. The agency requires that companies show they’ve installed equipment.
IDT in 2008 asked the FCC to let it keep licenses even though it hadn’t constructed mobile links, saying it already had spent $366.5 million on administrative costs and efforts such as testing radio equipment, and tried but failed three times to finance its spectrum development. The agency said IDT hadn’t satisfied the requirement, and gave it until June 1, 2012 to do so.
In its ensuing filings, IDT said it was “moving forward expeditiously with construction” of its system. In each the company listed details of antenna performance and transmission strength, and provided maps showing what areas are covered.
The FCC, which doesn’t independently affirm the information, accepted the filings and renewed the licenses until 2020.
“The FCC typically would not go out and investigate,” Fred Campbell, a former wireless bureau chief at the agency, said in an interview. “They typically would rely on industry competitors to bird-dog these licenses, to tell them if there is an issue.”
“In general, substantial misrepresentations” could result in the FCC terminating licenses, Campbell said.
According to a shareholders’ lawsuit filed Nov. 13 in U.S. District Court in New Jersey, Straight Path’s equipment sites “were never constructed as represented, or if anything at all was constructed, the purported systems fell woefully short” of satisfying requirements. Straight Path asked the court to dismiss the suit, saying the allegations were based on assertions by “opportunistic short-sellers who spooked the market with public information about disclosed risks, nothing more.”
Davidi Jonas said he couldn’t discuss the equipment matter in detail.