Wireless Enron demonstrates privatization aches

by Andy Oram

Related link: http://www.nytimes.com/2002/10/09/business/09BIZC.html





Privatization was supposed to be easy. Give assets to a bunch of
entrepreneurs, loosen the old regulatory bonds, and away they go! But
in case after case, courts and regulators have had to stick around a
lot longer than they expected.




I like privatization in many instances. It promotes competition and
all kinds of innovation that were unimaginable before. But it can be
carried out only where real opportunities for competition exist--not
where there are historical or physical conditions that subtly enforce
monopoly.




It happens that one place where a natural monopoly exists is
spectrum. When Congress legislated the auctioning of
spectrum--arguments over the degree of scarcity in spectrum
notwithstanding--it was clearly dividing a finite resource among
numerous firms, each of which owned a monopoly on a piece of a
resource.




When two many pieces of a finite resource get tied up, it hurts.




Now on to the NextWave license case, which has just reached the
Supreme Court. It's big enough to merit news stories not only in tech
publications like
Wired
and
C|NET
but major news media outlets like the
New York Times
(cited at the top of this weblog).




What the news stories don't say--and what the lawyers might not be
telling the courts--is that NextWave is the Enron of the radio-magnetic
spectrum. Not that NextWave has been accused of illegal accounting
activities. But its business model, and the humiliating failure of
that model, mirror Enron's uncannily.




When Congress mandated a big auction of spectrum back in 1996,
NextWave was one of the biggest buyers. It promised a cool
4.7 billion dollars to buy up 63 licenses.




What kind of service could a small, unknown company
like NextWave possibly be planning to offer with 63 licenses? And
where did it plan to get the billions of dollars it promised to pay
the government?




Answer: a leveraged scheme like Enron. NextWave hoped to
sublet its licenses to other companies. As Enron did with electricity,
NextWave expected such a high demand for cellular phone service that
it would be able to pay back its debts and walk away with a cool
profit without actually creating value or putting anything into the
economy.




NextWave was humbled by the telecom bust (which to some extent
preceded the rest of the dot-com bust--and many cynics say the 3G
initiative was a bust from the start), but like arrogant CEOs in
so other companies with meritless business plans, they won't accept
their chastisement. To wit, they won't give up the licenses they're
sitting on like dogs in the manger.




So the FCC quite properly sued, and lower courts sided with it.
NextWave is hoping to bamboozle the Supreme Court into reversing the
decisions.




How could it succeed? I don't pretend to understand all the legal
complexities and precedents, but it is arguing that "licenses" can't
be revoked in a bankruptcy.




The fallacy in their argument is that possession of a spectrum is not
just a "license" like the license to drive a car or operate a hair
salon. The spectrum they're sitting on is a limited resource that
could--and should--be put to productive use by others. The New York
Times seems to think that the Supreme Court will reward these schemers
with the assets they are trying so hard to hold on to; other news
reports think the Court is more balanced.




What the NextWave scandal points up is the poor thinking that lay
behind Congress's spectrum auction in the first place. Dividing up a
resource that way has two consequences:







  • Only large, established companies (or those hoping for leveraged
    schemes like NextWave) can afford the large sums required to win the
    auction; promising young technologies like spread-spectrum are
    excluded.






  • The spectrum becomes artificially subdivided and fenced off. If a new
    application that can make efficient use of a large part of the
    spectrum emerges (spread-spectrum, once again), the resource cannot be
    reclaimed for that purpose.







But as I said, let's not give up on privatization. Let's just make it
authentic.




If there's a silver lining, it's a ruling being considered by the FCC to
allow
radio stations to broadcast digital content
.
Although this is being considered a modest innovation to broadcast
music with less distortion and a little bit of accompanying
information (rather like digital broadcasting on television) you know
what happens when a channel gets digitized. The whole world opens up
and becomes fair game. If you'd like an amusing projection of what
digital spectrum use could be like, see my skit

The Opening of the Channels
.




What's the best use for spectrum? Does anybody know?


2 Comments

jafager
2002-10-09 13:34:16
"Wireless Enron" is a grave insult
>NextWave is the Enron of the radio-
>magnetic spectrum. Not that NextWave has been
>accused of illegal accounting activities. But
>its business model, and the humiliating
>failure of that model, mirror Enron's
>uncannily.


So what? They had a flawed business model, and they failed. That's a *good* thing; it means the system is working properly.


The comparisons to Enron are insulting considering that the company has been accused of no wrong-doing.


>When Congress mandated a big auction of
>spectrum back in 1996, NextWave was one of the
>biggest buyers. It promised a cool 4.7 billion >dollars to buy up 63 licenses.


Promised? As in "I'll gladly pay you Tuesday for a hamburger today"? That's not a purchase, it's an investment on the part of the FCC.


I don't know what the terms of the deal with the FCC are; apparently they're somewhat nebulous, or the Supreme Court wouldn't be getting involved.


Spectrum rights should be bought and sold like any other asset; if the value of that asset increases through new technology, that reduces the ratio of return on that asset unless the holder can find some way to leverage the new technology, and you can bet that investors will notice that.


Say a small bank's branch office bought some paintings from a local artist for a thousand dollars. Ten years later, the artist becomes internationally famous and those original paintings are now worth millions of dollars. Is the bank going to leave those paintings on the wall in the Mayberry branch? Maybe, but it's more likely that they would sell them, or at least bring them to the main office and hang them up to impress clients.


If the bank were to go out of business and those paintings were hanging in the main branch, you can bet they would get auctioned off to the highest bidder. Why shouldn't a bankrupt company's spectrum rights get sold off in the same way? If the FCC insists on making itself a creditor in this situation (instead of letting the buyer find financing on its own), treat it like any other creditor -- give it a share of the assets.


Why do you want to give government the power to determine whether parts of the spectrum are under-utilized? I can think of no better way to ensure that the spectrum *is* under-utilized than to give control of it to a gang of glad-handers and their cronies.


jafager

anonymous2
2002-10-10 12:01:33
authentic privatization

Andy sez: "But as I said, let's not give up on privatization. Let's just make it authentic."


Good idea! What do we know about securing rights like life, liberty, and property? Hint: separation and balance of powers, federalism, Bill of Rights.



Authentic privatization: It's more about government structure and individual rights than about having a radio czar define (for today) property. See "Revolutionary Ideas for Radio Regulation" at http://www.galbithink.org