November 7, 1994 Volume 144, No. 19

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BATTLING FOR A SLICE OF THIN AIR

Giant firms are racing toward wireless - but wireless what, exactly?

BY PHILIP ELMER-DEWITT

It was an extraordinary display of last-minute dealmaking, even for an industry
that has seen more than its share of shotgun weddings and broken marriages. For
the past few weeks, the giants of the telecommunications industry have engaged
in a high-stakes game of corporate musical beds that left some of the most
eligible partners sleeping alone and created some awfully strange bedfellows.

The immediate cause of all this was an obscure bit of rulemaking from the
Federal Communications Commission. The FCC for the past four months has been
selling off slices of the broadcast spectrum - the radio bands used for
everything from dispatching taxis to broadcasting Rush Limbaugh's belly laughs.
And in preparation for a big auction scheduled to begin in December, the agency
required that all companies seeking to bid on this latest piece of
electromagnetic real estate disclose the names of their business partners by
last Friday.

The deadline triggered a frenzy of late-night telephone calls among local phone
companies (the so-called Baby Bells), the major long-distance phone companies,
the big cable-TV operators and a bunch of cellular-phone start-ups. When the
dust settled, the biggest player on the field - the partnership of AT&T and
McCaw Cellular Communications - was being challenged by two other behemoths: a
joint venture formed by Sprint and a trio of cable TV operators; and a foursome
of Baby Bells made up of Bell Atlantic, NYNEX, US West and the cellular
spin-off of Pacific Telesis. After being wooed and spurned by a variety of
players, MCI, the second largest long-distance carrier, decided to go it alone.

Why so much interest in what is, after all, only a slice of thin air? Because
that thin air has been set aside to create "personal communication services"
that may someday connect everybody to everybody else - like the phone system
does today, but without those constricting telephone wires. Through streams of
digital data, pcs providers could deliver all kinds of exotic services, from
smart cars that call for help when they've been stolen to vending machines that
order their own refills. They could be the foundation for a wireless
electronic-mail network - a kind of information highway of the airwaves -
through which people could send and receive messages anywhere, anytime. In
futuristic scenarios, these networks would be populated by software "agents"
that look after their owners' interests, calling them up when a stock plummets,
a flight is canceled or a spouse is running late.

It was clear last week, however, that the companies maneuvering for position in
the upcoming PCS auction had a much more mundane use in mind. Each major
bidder, for its own reason, was focused on what is known in the business as
pots - plain old telephone service, or in this case, plain old wireless
telephone service. The Baby Bells want to use wireless PCS phones to extend
their reach outside their local regions. The long-distance carriers want to use
them to connect to customers without having to pay monopoly rates (45 cents on
every dollar) to the Baby Bells. And the cable-TV operators need the revenues
from wireless telephone to defray the cost of turning aging, one-way cable
systems into modern, switched two-way networks. Said Tele-Communications Inc.
CEO John Malone last week: "In effect, we are starting a new national telephone
company."

That's easier said than done. Most states still prohibit cable operators from
offering dial tones, or long-distance companies from providing local phone
service. There is also a lot of infrastructure to build: PCS phones, being
smaller and lower-powered, need even more antennas than cellular systems, and
the cellular companies have already planted their own in the best spots.
Finally, there is a chance - given that all these companies are vicious
competitors in one market or another - that the marriages of convenience could
fall apart.

None of this seems to have cooled the ambition of the players, however. In an
auction for a separate, much narrower band of frequencies last week, some of
the same companies whipped the first day's bidding to a dizzying $297 million.
The December auction, which will be the biggest yet by far, could bring in
anywhere from $10 billion to $22 billion.

That's a lot of money. Too much, perhaps. If, as the Clinton Administration
argues, the so-called information infrastructure is the highway that will lead
the U.S. to new prosperity, then driving up the cost of that infrastructure may
be counterproductive. Granting licenses to the highest bidders is not always
the best way to encourage ingenuity. In fact, says telecommunications analyst
Mark Stahlman, president of New Media Associates, "the behemoths who can afford
to bid are the least likely to be innovative."

Some critics question the wisdom of licensing frequencies at all. George
Gilder, writing in Forbes ASAP last April, issued a plea to FCC Chairman Reed
Hundt to call off the auctions altogether. Gilder is enamored of a technology
called spread spectrum, which uses smart, computerized antennas to change
frequencies on the fly, monitoring the airwaves for unused bandwidth and
sending signals like "Wee Willie" Keeler sent baseballs - hitting them where
they ain't. According to Gilder, there is no need to parcel out radio bands,
because future improvements in computers will ensure that there are plenty to
go around. The FCC, he says, is stuck with the old model of airwave scarcity
and, as he puts it, is "auctioning off beach-front property ... while the tide
pours in."

This is not a theoretical argument. A handful of entrepreneurs are already
manufacturing equipment that uses spread-spectrum techniques to pump data
through unlicensed frequencies now set aside for such things as microwave ovens
and amateur radios. These spread-spectrum modems have found favor with Internet
aficionados who use them to send and receive E-mail without racking up
phone-line charges - or using phone lines at all. Some of the wireless cowboys
were in an uproar last week over a new FCC plan to sell those unlicensed
frequencies. In a series of impassioned electronic messages, Colorado activist
Dave Hughes urged Internet users to "get off your cursors and start hammering
Congress and the FCC!"

The Administration appears to have heard. White House aide Thomas Kalil
answered Hughes on the Internet, assuring that "the Administration supports
unlicensed data services." It's too late to call off the current auctions and
too soon to say what wireless technologies will eventually prevail. But this
may be the right time to set aside some of the spectrum as an unlicensed
wilderness area, where entrepreneurs can play and the best ideas can win.

Reported by Richard Woodbury/Denver

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