NextWave, Cavalier highlight shadowy world of spectrum speculators

Mike Dano

The new FCC has made freeing up additional spectrum for broadband wireless services a key element of its agenda. However, some of the spectrum recently freed for just that purpose remains dormant. The reason? A small but active group of speculators are sitting on auctioned airwaves with the goal of either funding a network buildout or selling the spectrum to the highest bidder.

Of course, NextWave is the most well-known of these players. The company gained notoriety during the FCC's PCS auctions in the 1990s by bidding for spectrum it could not pay for. After years of court battles, the company finally sold much of its spectrum holdings to Verizon Wireless (NYSE:VZ) and others, and used the funds to parlay itself into an array of seemingly random businesses: WiMAX (via its acquisition of Cygnus), streaming multimedia (via its acquisition of PacketVideo), WiFi (via its acquisition of Go Networks) and so forth. The company also invested in additional spectrum, including purchasing 154 AWS licenses for around $115 million during the FCC's 2006 auction.

However, during the past few years NextWave has gradually managed to offload much of its once-sprawling operations. The company in 2008 sold off a wide swath of its spectrum holdings to the likes of T-Mobile USA, MetroPCS (NYSE:PCS) and others, in 2009 it ditched IPWireless for $1 million, and earlier this month NextWave sold its remaining stake in PacketVideo to DoCoMo for $111.6 million.

What does that leave NextWave with? "Our continuing operations are comprised of our strategic initiatives segment, which manages our portfolio of licensed wireless spectrum assets," NextWave reported in its latest quarterly filing with the Security and Exchange Commission. "Since we now operate in only one business, we no longer provide segment reporting."

NextWave officially has gone back to its roots: spectrum speculator.

"We continue to pursue the sale of our wireless spectrum holdings and any sale or transfer of the ownership of our wireless spectrum holdings is subject to regulatory approval," NextWave said in its filing. "We expect that we will be required to successfully monetize most of our wireless spectrum assets in order to retire our debt."

A NextWave representative declined to provide any further information.

According to government filings, NextWave in the United States owns WCS licenses covering 208 million POPs, EBS/BRS licenses covering 47 million POPs and AWS licenses covering 6 million POPs. The value of this spectrum is difficult to ascertain. As one executive told me, "beauty is in the eye of the beholder," meaning T-Mobile might suddenly need additional AWS airwaves if users begin piling onto its new HSPA+ network.

But NextWave isn't the only company out there actively shopping its spectrum holdings. I recently spoke with Wirt Yerger, head of Cavalier Wireless. Cavalier spent around $20 million on 30 licenses during the FCC's AWS auction in 2006, and $62 million on 35 licenses during the FCC's 700 MHz auction in 2008. Cavalier owns AWS and 700 MHz licenses covering around 47 million POPs, mainly in areas east of the Mississippi.

Yerger, who cut his teeth in the 1980s building out wireless networks under the now-defunct Cellular One brand, said Cavalier is evaluating all of its options, including building out a network using its spectrum holdings or selling the airwaves outright to another company. Such efforts have precedence: Sprint Nextel recently purchased 16 PCS spectrum licenses from Wirefree after Wirefree failed to find success selling wireless services to business users.

On researching this topic, I became curious about how the FCC views these companies; they are essentially sitting on airwaves intended to provide faster speeds and greater capacity to wireless users. Indeed, the FCC has promised to free up to 300 MHz in the next five years for mobile broadband to satiate the growing data demands of an increasingly mobile, tech-savvy population.

The answer I got surprised me: FCC spokesman Matthew Nodine said the agency doesn't really care what auction bidders do with the airwaves they win. While the FCC does maintain buildout requirements for the spectrum it auctions (for example, most AWS licensees must make a showing of "substantial service" in their license area by 2025), what licensees do in the interim is of no concern to the agency. The FCC's goal is to get those airwaves out into the market, and then let whatever happens, happen. (Let's ignore net neutrality for a moment.)

The alternative to this approach, of course, is the beauty contest, whereby companies attempt to convince an agency they would make the best use of available spectrum. While seemingly logical, the beauty contest method of allocating spectrum chafes even the most ambivalent capitalist.

Now, it's worth putting this whole topic into perspective: Spectrum speculators represent a relatively small part of the overall game. Larger operators such as T-Mobile, Verizon Wireless, AT&T Mobility (NYSE:T), Sprint (NYSE:S), MetroPCS and Leap Wireless (NASDAQ:LEAP) typically dominate FCC spectrum auctions. Further, smaller companies that win spectrum in auctions are not necessarily spectrum speculators: For instance, a handful of bidders in the PCS and AWS auctions have teamed under the "ClearTalk" brand to build out their spectrum holdings and offer services to end users. According to ClearTalk's Eric Steinmann, ClearTalk comprises companies including NTCH, Flat Wireless and others that have built out networks running on spectrum purchased through FCC auctions or through after-auction transactions.

The bottom line, I suppose, is that spectrum speculators like NextWave, Cavalier and others are a byproduct of the booming demand for wireless service. They're the corporate equivalent of people who bid on the contents of abandoned storage units--you never know exactly what you'll get until you buy it. --Mike