Subject: [NEXTEL-1] Time Up For NextWave?

From: Marcel <[email-masked]>
Date: Thu, 20 Feb 2003 02:57:36 -0500

Time Up For NextWave?

February 19, 2003 2:01pm

Depending on whom you ask, renegade carrier NextWave Telecom either stands to be a front
runner in this
year's wireless business or is a hopelessly outdated company whose only assets are
spectrum holdings of
debatable value.

As 2003 progresses, events are converging in
the wireless industry that could mold its future
for the next five years. The FCC mandated in
November 2001 that spectrum caps for carriers
would end in January 2003. Additionally, the
commission is pushing a new wireless agenda
that would liberate spectrum in
already-allocated bandwidths through efficiency
and spectrum sharing. New technology is
coming that will make that possible.

These factors could drive wireless'-and
subsequently NextWave's-fortunes in the
coming months, say wireless industry analysts
and observers. In such an environment, the
Jan. 27 U.S. Supreme Court ruling that gave
NextWave a victory in its epic spectrum
license battle with the FCC solidified the
company's position for now, but questions
remain about its future.

NextWave, which has been under Chapter 11 bankruptcy protection from creditors for the
past five years,
could be in line for a big payoff–or it might land on skid row.

Show Me The Money

NextWave in its early days was buoyed by billions in potential investment capital from San
Diego, Calif.,
partners such as Qualcomm but plagued by questions about foreign investment from firms
such as Pohang
Steel and LG Information & Communications. Throughout, it maintained that it had no more
than a 25
percent foreign ownership.

It also had grand pre-launch plans to sell airtime to the likes of MCI WorldCom, which
agreed to buy 10
billion minutes. Qualcomm even stepped up with a plan to inject $300 million more into
NextWave in August
2001–along with a deal to support its network buildout–when it looked as if the company
was ready to settle
its dispute with the FCC and emerge from bankruptcy reorganization. But the company
exercised its right to
terminate the deal three months later when NextWave's settlement deal fell through and it
couldn't escape
Chapter 11. Around the same time, LCC International, another big NextWave investor, sold
off nearly 1.7
million NextWave shares after having had written off $40 million in debt due to NextWave.

While NextWave's initial plans as a wholesaler may have changed, its CEO and chairman has
remained
throughout. CEO Allen Salmasi is a former president of Qualcomm's Wireless
Telecommunications Division
and was instrumental in the launch of its CDMA and OmniTRACS satellite system technology.

It also had strong connections in Washington, D.C., to help guide it through the
regulatory and legal
processes. Its general counsel was Janice Obuchowski, an antitrust attorney who led the
National
Telecommunications & Information Administration in the late 1980s and worked at the FCC
under
then-chairman Charles Ferris in 1980. (President Bush recently appointed her the U.S.
Ambassador to the
2003 World Radio Communication Conference.)

Now, as part of its still-pending Chapter 11 case, NextWave is looking for new investors.
By some
estimates, the company will need several billion dollars to build a viable network. But
the new investors
likely won't be the usual suspects. Microsoft, AOL Time Warner and Earthlink represent the
most viable
sources of new revenue, even in a tight economy, says Andrew Seybold, head of the Andrew
Seybold
Group. Seybold maintains that content providers, in need of instant distribution channels
for their products,
should be high on the list of prospective investors. "There's tight and there's tight," he
says, indicating these
kinds of companies have money to spend strategically.

NextWave's initial buildout–the actual extent of which remains murky-must be beefed up
significantly if it is
to go forward as a competitive option. Yet industry observers say there probably will be a
tradeoff between
being a service provider and selling off some spectrum to stay afloat. The company expects
to file with the
bankruptcy court a new business plan within the next four to six months.

NextWave holds licenses in some of the largest markets in the United States, including New
York, Los
Angeles, Chicago, San Diego, Philadelphia and Washington, D.C. It has licenses in 95
markets nationwide,
some of which may be attractive to existing carriers. Yet carriers that were willing to
put down big bucks a
couple years ago may not be so inclined these days to make an expensive acquisition.

Of course, NextWave would need to sell them at a price whereby it would make up for the
$4.7 billion it bid
in the 1997 FCC auction. The company made a 5 percent down payment at the close of that
auction and
another 5 percent when the licenses were "granted" in 1997. The remaining 90 percent was
to be paid in
installments over 10 years. According to court filings, NextWave executed promissory notes
for those
installments and security agreements giving the FCC liens on the licenses.

That means NextWave has paid $500 million for the licenses so far. It still is liable for
the remainder of
payments to the FCC but the company is protected by Chapter 11, the course of which has
been prolonged
by intervening years of litigation. In fact, the company literally put its business on
hold while it battled to
maintain ownership of the licenses after the commission's attempted seizure following
NextWave's 1998
bankruptcy.

In the meantime, the telecom sector has faced the roughest years in its history, as major
companies have
crashed and burned. Some of the conditions that existed at the time of NextWave's
struggles either have
re-emerged, such as a general capital drought in telecom, or have persisted to this day,
such as intense
competition for wireless subscribers.

Wireless has limped along, in better shape that the wireline side. Some analysts are
predicting this year
could mark the beginning of a recovery. "We may have hit bottom with the economic sector.
Wireless is
positioned to lead it out of its problems," says Phil Verveer, partner at Wilkie Farr &
Gallagher's
Washington, D.C., telecommunications practice. Verveer has represented such wireless
companies as
NextWave and Nextel Communications. "2002 was a period of stasis. 2003 will be more
fruitful than 2002,"
particularly for NextWave, he says.

For instance, NextWave could be positioned to take advantage of new technologies that
might use its
spectrum. "NextWave may well be positioned for the developing network," Verveer says. "I
can see early
adopters becoming very enthusiastic" about NextWave, which could employ CDMA packet data
technology–possibly a 1x EV-DV network– to allow high-speed wireless Internet access.
Demands for
similar capabilities will increase at other carriers, he says, and those carriers may be
looking for a quick
way to get the capacity.

Visions For Data

Other observers agree NextWave is in a good place, although not necessarily as an
acquisition target. After
the Supreme Court ruling backing the company's ownership of the spectrum, NextWave is
optimistic it can
make it as a data carrier. That's the primary game plan for it anyway, according to
NextWave senior vice
president and deputy general counsel Michael Wack.

The company said almost a year ago it had activated wireless networks in 60 of its 95
markets nationwide,
at a cost of $100 million. NextWave is awaiting findings from the FCC on the effectiveness
of those
buildouts. The company was required to build networks serving 33 percent of the customers
in areas where
it owns C-block spectrum and 25 percent of customers in its D-, E- and F-block licensed
markets. It filed
demonstrations of that effectiveness a year ago, according to Wack, but the FCC has yet to
respond. No
doubt, the intervening Supreme Court case has been a drag on the FCC's response.

NextWave, dogged by would-be competitors demanding to know what it has done to fulfill the
buildout
requirements, has declined to specify exactly what it has activated in those markets. A
primary opponent
has been NY Telecom, a company with ties to Eldorado Communications, which bid against
NextWave in
the 1996 PCS auction.

Some executives close to the company continue to insist the spectrum heavy, yet service
light, NextWave
is a good acquisition target. Officials within the company intimate, although are never
explicit about, their
wishes that the company be acquired. Rumors have been circulating for months that Verizon
Wireless was
in talks with the company about a merger or acquisition, although spectrum acquisitions
Verizon has made
in the meantime–notably Northcoast Communications–have sated some of its spectrum
appetite.

Some industry insiders believe the FCC's lifting of the spectrum cap probably will make
2003 a year of
consolidation. And regulatory officials might be more willing to let mega-carriers such as
Verizon Wireless
or T-Mobile acquire smaller secondary carriers such as NextWave than they would be in
allowing the big
carriers to swallow each other, Verveer says. "There's an awful lot of antitrust room" in
acquiring smaller
carriers, instead of large ones, he adds.

Others believe rumblings that NextWave is a great acquisition target are wishful thinking
on the company's
part. "A NextWave win at the Supreme Court can't leverage the company into a service
provider," says Rudy
Baca, vice president and global strategist at The Precursor Group, a Washington,
D.C.-based investment
research company. "NextWave wants to be bought by Verizon … Verizon won't pay what
NextWave
wants," he says.

Baca argues that NextWave is behind the curve of the FCC's analog maintenance rules, which
had required
large cellular carriers to keep analog spectrum to support cellular services. The FCC
recognized that analog
services were pretty much obsolete due to PCS and digital services and changed the analog
rules last
summer.

The simple rule change, according to Baca, essentially made NextWave's dream of being a
carriers' carrier
moot. Carriers no longer have to look elsewhere for digital capacity. They are converting
their previously
reserved analog cellular spectrum to digital.

NextWave's POV

Wack says acquisition and partnerships are "Plan B" for the carrier at this point. The
main plan is "going
out and finding the best opportunity for our creditors and investors. There are lots of
opportunity to deploy
data services," he says.

Salmasi holds more than 50 percent of NextWave voting shares; the remainder of stock is
held by a broad
collection of entities, including the Connecticut State Teachers Fund and California
Teachers pension fund.
Qualcomm also holds some stock. However, no one other than Salmasi owns more than 5
percent of the
company, Wack says.

Even if you believe NextWave will get bought up by a larger carrier, or will become a
viable service provider
on its own, the end of its five-year struggle isn't in sight. It will take more time for a
resolution to take shape.
For NextWave, the only thing that can be relied upon is change.

Sugrue Departs FCC For Other Pastures

Mark Rockwell

No doubt, Tom Sugrue will not miss some of the headaches that came to the FCC as a result
of NextWave
Telecom's bankruptcy proceedings.

After four years of tumultuous developments in the wireless world, the Wireless
Telecommunications
Bureau chief stepped down from the position on Feb. 1. He will work for several weeks in
an advisory role
while his replacement, John Muleta, takes over. Muleta served as president and chief
executive at software
developer Source 1 Technologies.

Sugrue left to pursue other interests, probably not far from his center of wireless
experience. Not being able
to help shape wireless policy would have gone against his grain as someone who has shaped
the wireless
bureau from almost the start.

The Harvard graduate was named chief of the wireless bureau in 1998, shortly after its
formation from pieces
of the private wireless bureau and some pieces of the common carrier bureau. He sought to
consolidate and
"make the trains run on time" with filings on wireless services that were piling up at the
other bureaus as
they sought to keep up with wireless' growth.

There were 60,000 licensing and other filings in the bureau's backlog when Sugrue became
bureau chief.
The backlog is gone, he says, even though the bureau deals with upwards of 65,000 license
issues every
year on average. "The backlog affected the credibility of the bureau," he says.

Sugrue can count a number of high profile efforts at the bureau as successes: the FCC's
groundbreaking
Spectrum Policy Task Force Report on the future of wireless spectrum, progress on 911
issues and the
reduction in backlogged wireless filings, to name a few. Sugrue counts the commission's
recent mobile
satellite service ruling that allows satellite companies to provide terrestrial services
as another highlight of
his tenure.

Outside FCC observers say Sugrue was scrupulous about ethical and professional issues as
he led the
bureau. The fact he had no job in mind as he left the FCC didn't surprise those who have
worked with him;
he wanted to avoid conflicts of interest, and he would have had to recuse himself from
wireless issues if
there were a job in the offing.

Sugrue has a general idea of where he wants to land, though. "I hope to stay in
communications law and
policy," he says. And you can bet he will land on his feet. —By Mark Rockwell

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