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HIGH WIRELESS ACT
MAY 7, 1996
TRANSCRIPT
An auction for small businesses entering the burgeoning wireless communications industry turned into a big win for foreign investors today. After an explanation of the high stakes involved, economics correspondent Paul Solman looks at the auction results and the implications for the future of the telecommunications industry.
PAUL SOLMAN: Well, to tell us what's happened to the FCC auction we're joined by David Roddy. He's the chief telecommunications economist with the Deloitte and Touche Consulting Group in Atlanta, Georgia. Mr. Roddy, thanks for joining us.
DAVID RODDY, Deloitte & Touche Consulting Group: (Atlanta) Good evening.
PAUL SOLMAN: Latest phase of the FCC auction concluded yesterday. What happened?
MR. RODDY: Basically, the FCC has finished auctioning off the third PCS license. Now PCS means Personal Communications Services. It's basically an enhanced cellular telephone system.
PAUL SOLMAN: Now, that's that little thing that I was using there back in December--that that woman was showing me, right? Looks like a cellular phone but it's even smaller and supposedly clearer.
MR. RODDY: That's exactly correct. And your signal will be dropped less. It'll be better clarity, and you'll be able to eventually have a lot more fancy services on the network. But the FCC has finished up the third auction which was designed for small entrepreneurs, so that makes five telephone companies in each major city who are offering wireless service to the public. Over the next six to twelve months they should be on-line.
PAUL SOLMAN: What was different about this auction, or this phase of the auction from the auction that we covered originally back whatever year and a half ago, whenever it was?
MR. RODDY: Yeah. A year ago in March there, they finished the A and B block, which was basically for large companies, AT&T and Sprint, and some of the cable companies and the regional Bell companies bought the licenses there.
PAUL SOLMAN: Same kind of licenses, though? I mean--
MR. RODDY: Exactly the same.
PAUL SOLMAN: So what's the difference this time?
MR. RODDY: In this case, the FCC, umm, following Congress's mandate tried to get small companies, women-owned companies and minority-owned companies involved.
PAUL SOLMAN: And that was the whole point of this. That's right. I remember that.
MR. RODDY: That's right. And the Supreme Court changed the affirmative action rules, so the FCC had then changed the rules to limit it just to small companies. Unfortunately--
PAUL SOLMAN: Wait. You mean, you couldn't do minorities or women, you couldn't give them the special 25 percent break or something like that?
MR. RODDY: That was what the FCC's interpretation of the Supreme Court ruling, that's correct.
PAUL SOLMAN: Okay. So then, so then the idea was okay, let's just do it for small companies, because at least they'll have a shot to go against the big companies?
MR. RODDY: That's right, but the difficulty is in order for them to compete against AT&T and Sprint and Bell Atlantic, NYNEX, and Air Touch, they had to have a lot of capital expenditures, a lot of advertising, a lot of customer care, so they needed financing, and so the FCC allowed a lot of big financial backers to help out these small owners. Some of those financial backers are from East Asia and some are from the United States.
PAUL SOLMAN: So I read Sony and big Korean firms--
MR. RODDY: Yeah. All of the top--the top four winners of licenses accounted for seven of the ten billion dollars that was closed off on Monday, and you do have Korean backers who hope to sell equipment in the U.S.. And in my theory, you also have a link where the U.S. company eventually wants to practice wireless telephone service here but then go into East Asia where there's huge economic growth, there's no telephones, and there's a lot of people, great opportunity for a wireless telephone company.
PAUL SOLMAN: How are the prices this time compared to the time we did it a year ago? I mean, we did that story a year ago.
MR. RODDY: True. The prices are double or triple what they paid a year ago.
PAUL SOLMAN: Double or triple?
MR. RODDY: Yeah. What you have to keep in mind is they do have an easy payment plan in terms of paying only interest for the first six years and then they have to start paying back the principle. But they also got the 25 percent discount.
PAUL SOLMAN: So is that the reason that the prices are so much higher?
MR. RODDY: Well, I think the reason is that over the last year or two years, people have discovered that one of the best industries to be in in the world is wireless telecommunications, particularly if you're going to do it on a global scale. The U.S. is growing at 40 percent per year, but the rest of the world in terms of wireless subscribers is growing at 70 to 80 percent per year.
PAUL SOLMAN: But they're buying in the U.S. Why are foreigners buying in the U.S. if the rest of the world is growing so fast and we're not?
MR. RODDY: Well, basically, the idea is that they're going to get their feet wet here and then treat it as a small first step in a larger investment project, and almost consider it a lost leader, if you will, because I think the profit margins in the U.S. are eventually going to be pretty slim.
PAUL SOLMAN: So this is--we're like a test market for the Europeans and the Japanese?
MR. RODDY: I think that's right. You run a couple of marathons first before you enter the Boston marathon and go for the real thing.
PAUL SOLMAN: How is PCS technology, by the way, doing in terms-- compared to cellular? Because we've seen them--it was hard to distinguish quite what the difference was between them.
MR. RODDY: Well, basically, PCS technology is entirely digital and the sound quality in systems that I've tested is really quite good, and it's going to offer better clarity, better coverage, better, umm, capability to carry you through a tunnel or under a bridge and so forth.
PAUL SOLMAN: So you don't get those cut-offs like when you get somebody calling you from a car phone and suddenly you can't hear them anymore?
MR. RODDY: That's exactly right. It's so frustrating because you feel you're paying by the minute and then you have to call 'em back or they have to call you back and so forth.
PAUL SOLMAN: It's particularly frustrating if they call you up and then you can't hear them.
MR. RODDY: That's exactly right. I think that brings up another point though that consumers are going to be the big beneficiaries of this not only in terms of saving money on their taxes being cut because the FCC has brought in the $20 billion but also with the five companies in every city, the two cellular and the three PCS, prices are going to drop pretty rapidly, and you're going to see a scheme where I have a flat rate plan so I don't have to pay by the minute in many areas.
PAUL SOLMAN: But that brings up a question that I have. Who needs five wireless options in addition to the line that comes into your house? I mean, I, I frankly am already overwhelmed by the number of long distance companies that are constantly seeking my business and trying to take it from each other, and that's like three or so.
MR. RODDY: That, that's right. Well, that's the key to the FCC's program because their key word is competition, which says let everybody in and how many ever shoe stores will survive in a city let it be. And some people will definitely lose money, and some people will make a lot of money. But you definitely will see a lot more advertising. If you think you've seen a lot of television advertising of telephone services so far, you just wait until all these PCS guys get on line. That will be a big factor.
PAUL SOLMAN: So what's life going to be like for the typical MacNeil-Lehrer--or the NewsHour viewer--sorry--five years from now say?
MR. RODDY: Well, I think you basically--if you choose to live that kind of a lifestyle, you'll always be able to make a phone call or receive a phone call. And you'll always--you'll never have to stay at home or stay at the office to wait for an important phone call. You won't be able to use that excuse anymore.
PAUL SOLMAN: All right. Well, thank you very much for joining us, Mr. Roddy.
MR. RODDY: My pleasure.
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