Tomorrow the megabucks begin chasing the megahertz.
Sometime around noon in a post office building in Washington, ** after Vice President Gore and a host of lesser mortals orate about the glories of competition, the gavel will fall and 99 precious pieces of the sky will go on the auction bloc.
The prizes in the auction will be licenses to operate personal communications services (PCS), often described as a new generation of cellular phones but potentially much more, in 51 huge markets throughout the United States and its island territories. To believers, these licenses are the cornerstones of a new era of ubiquitous wireless communication. To skeptics, they are luxury-class tickets to bankruptcy court.
The seller of all this radio spectrum will be the Federal Communications Commission, acting as trustee for its debt-ridden Uncle Sam.
This is not the first spectrum auction but this is the big one. Where previous auctions sold off relatively narrow slices of the airwaves for specialized uses, this one involves the broadband building blocks that can be used to construct national wireless networks.
Experts in wireless communications admit that they have no idea how high the bidding will go over the next few weeks, though FCC officials are encouraged by the $1 billion raised in the earlier auctions.
"If the mob mentality maintains, it could raise $20 billion," said Herschel Shosteck, a Silver Spring-based market economist who tracks the cellular industry. "If there's a mass attack of sanity, it could raise only $2 billion."
"It's a crap shoot," said Alan Peyser, chief executive officer of Cable & Wireless Inc., a large provider of long-distance service to businesses.
Wrestling for the deeds to these sprawling 30-megahertz ranches will be many of the nation's largest telecommunications companies -- some going it alone and others teamed up in giant bidding alliances.
Mighty AT&T; will be there, with all the wireless expertise of its newly acquired jewel: McCaw Cellular Communications Corp. So will Craig McCaw, the cellular pioneer who sold the nation's largest wireless carrier to AT&T; and whose ALAACR Communications Inc. is now apparently acting in concert with AT&T.; Their FCC-required deposits, $78.4 million and $33 million respectively, are measures of the extent of their ambitions.
Sprint Corp., the nation's third largest long-distance company, is swashbuckling onto the scene in the company of the Three Musketeers of the cable TV industry -- Comcast Corp., Cox Cable Communications and Tele-Communications Inc. Their group, WirelessCo. L/P, has plunked down the largest deposit of all, $118.4 million, entitling the partners to duel for more licenses than any of their rivals.
All of the regional Bell companies will be there in one way or another.
Pacific Telesis will be flying solo, and its hefty $56 million deposit could signal ambitions that reach far beyond its California home.
Bell Atlantic, Nynex and U S West have teamed up with AirTouch, Pacific Telesis' cellular spinoff, to stitch together a nationwide network of cellular and PCS licenses. Together they've anted $54.7 million for bidding rights.
Ameritech, Southwestern Bell and BellSouth are approaching the auction more cautiously, seeking a limited number of licenses in selected markets. But GTE Corp., the nation's largest non-Bell local telephone company, has put up $50 million, signaling that it could be a significant national player.
These companies will be joined by a bevy of smaller players, ranging from substantial regional contenders to three companies that put down the smallest possible deposit, $28,200, to bid on the licenses for American Samoa.
MCI sits out
Gliding over the proceedings like a buzzard circling a battlefield will be MCI Communications Corp., the long-distance giant that decided -- by default or design -- to pass up a role as an active bidder.
Kevin Inda, an MCI spokesman, said the company plans to swing into action after the auction, offering nationwide service by leasing capacity in bulk from licensees and repackaging it. Another possibility is that MCI could end up buying licenses at a discount from bidders who overpay and end up in financial trouble.
The temptations to overpay will be hard to resist. The 1850-1990 megahertz band being sold for PCS has enormous potential.
PCS proponents point to the skyrocketing growth of the cellular industry as proof of the demand for additional wireless services. They note that the PCS frequency, much higher than that of traditional cellular service, will allow wireless phones to operate with much less power and longer battery life. And they say PCS will have more capacity than cellular systems, penetrate buildings better and offer digital quality from Day One.
"Our estimates are that this is going to be a huge market," said Bryant Hilton, manager of media relations for the Personal Communications Industry Association, a trade group. He estimated that PCS could attract 8.5 million subscribers by 1998 and could possibly replace wired phone service for some consumers.
These predictions are not lost on the prospective bidders, especially the local phone companies that could lose subscribers in any move from the wired network.
"We've said all along we're expecting to bid aggressively," said Nancy Stark, a spokeswoman for Bell Atlantic. "Our strategy and the strategy of the partners is to build a national footprint."
But skeptics contend that the footprints you see will be those of lemmings going over a cliff. The biggest losers could be the winners.
"We've been looking for three years and we still can't find a business case for me-too cellular," said Mr. Shosteck.
The main reason, he said, is that cellular companies have seen PCS coming and are already moving to lower their rates to stave off the expected competition.
Many future expenses
Winners also will find that their licenses are only the first of the costs they will incur before they see their first dime of revenue.
Not only will they face the cost of building the infrastructure for PCS systems -- an amount that will run into the tens of billions of dollars nationwide -- but they also will have to deal with the fact that the spectrum they've bought is already in use by railroads, fire departments, power companies and other private radio licensees.
In effect, the winners will be in the position of a real estate developer who buys an old apartment building intending to put up a shiny office tower but is obligated by law to persuade the current tenants to move. It's going to cost plenty.
Still, while winners could be damned if they do get licenses, losers could be doomed if they don't.
For instance, the Bells and GTE know that if AT&T; or Sprint win PCS licenses, they could use them to achieve their dream of bypassing the local exchange carriers that gobble up half their long-distance revenue.
"There's a little bit of 'I can't afford to play but I can't afford not to,' " said Rick Bean, associate partner in the telecommunications group of Andersen Consulting in Washington.
David Roddy, a vice president of Economics & Technology Inc. in Boston, said his detailed analysis of costs and anticipated revenues showed that the entire inventory of broadband PCS licenses -- including another round of licenses for smaller territories scheduled for next year -- is worth $5 billion to $8 billion compared with government estimates of $10 million.
But with $522 million on the table in deposits alone, it's not hard to imagine a scenario where bidders exceed $10 billion in this round of auctions alone. The bids in earlier auctions of narrow bands were about three times as high as expected.
Of course, the bidders in this round will be representing the giants of the industry, armed with the best research and analysis. Certainly they, of all people, will act rationally, some argue.
Don't count on it, said Mr. Shosteck. You don't have to look far back in history for examples of supposedly brilliant executives making ill-advised moves, he said, citing the savings and loan investments of the 1980s and corporate Japan's disastrous move into the American real estate industry.
One of the fiercest bidding wars could erupt over Baltimore-Washington, where one of the two broadband licenses was awarded to American Personal Communications Inc. of Brooklandville because of its role as a "pioneer" in PCS technology. AT&T;, the Sprint-cable group, Pacific Telesis and Continental Cablevision are among the companies that are signed up to bid for the single remaining license.
While there are no sure winners among the PCS bidders, ordinary Americans are virtually certain to benefit. As taxpayers they will get "painless" deficit reduction. As consumers, they will benefit from added competition for their telephone business.
"The consumer is going to have lots of choices," said Mr. Bean. "There is going to be a general improvement in the costs of air time. . . . There's speculation that they could drop by half."