eorge D. Crowley Jr., a longtime telecommunications entrepreneur, recalls the day last fall when an old friend contacted him about an intriguing opportunity. The friend represented SBC Communications. As Mr. Crowley knew, the Federal Communications Commission was preparing to begin an auction in December of wireless airwave frequencies that the largest telephone companies desperately needed.
But many of the licenses were being set aside for small companies like his, while others available to any buyer could be bought by such companies at a deep discount. What if, the friend proposed, SBC's wireless phone venture, Cingular Wireless, helped to bankroll him in the auction?
Within weeks, Mr. Crowley set up a new company, Salmon PCS, using $50 million of his own money and $285 million that Cingular paid for an 85 percent stake in Salmon. When the bidding ended Jan. 26, Salmon was a big winner in the auction, which was the largest ever conducted by the federal government.
Almost all of the nation's largest telephone companies struck similar alliances with small companies that were able to take advantage of the F.C.C.'s small-business preferences.
Now, some of the losing bidders are preparing legal challenges to the auction results. They and other critics, including the federal Small Business Administration, assert that Cingular and three of the nation's other largest wireless companies — AT&T Wireless, VoiceStream Wireless and Sprint PCS — took unfair advantage of the F.C.C. rules to win more than 90 percent of the licenses meant for small businesses. Three of those companies also benefited from hundreds of millions of dollars in government subsidies that were supposed to promote competition by helping tiny entrepreneurs, the critics say.
As an examination of the lobbying and deal-making behind the auction makes clear, the wireless licenses are the mineral rights of the information age: rights to a limited and enormously valuable natural resource that is essential for growth in popular cellular markets and expansion into promising new technologies like wireless Internet service.
The F.C.C. auction was planned and conducted under the supervision of appointees of the Clinton administration. Critics say the small-business provisions were revised under heavy lobbying pressure from the big companies that then took advantage of the rule changes.
So far, the commission under President Bush's new F.C.C. chairman, Michael K. Powell, has shown little interest in reconsidering the results. But the disputes are likely to end up in federal court.
"What these companies did is wrong and they know it," said Paul Posner, the founder of a small mobile paging and telecommunications company in Texas. He hoped to buy a license to begin a new type of local telephone service to compete with the Bell company in San Antonio, but was outbid by one of the two small companies that had alliances with AT&T Wireless.
"This was the single greatest business opportunity of my life," said Mr. Posner, who is preparing to challenge the auction with the F.C.C. and, if that fails, in court.
Executives for the partnerships say their businesses were carefully structured by lawyers to comply with the F.C.C. rules. They say that the small companies will manage their operations independently of their big partners.
"We feel our moves have been within the spirit and letter of the law," said Mark Bradner, director of acquisitions for AT&T Wireless.
Mr. Crowley, in a recent interview, said that Salmon had "completely de-coupled the economic interests from the management interests of the company. Cingular has an 85 percent economic interest. We control the management, policy and technology."
Salmon came away with 79 licenses, covering markets with a combined population of nearly 72 million people, at a cost of more than $2.3 billion. Cingular has offered to provide all the financing for any licenses won in the auction and for the building of the wireless networks.
The critics, however, say management autonomy by the small companies is a practical impossibility because the big companies hold the purse strings. They say it defies logic to think the big companies would finance companies that could become direct competitors.
"AT&T has had a cellular operation in San Antonio for the last 20 years," Mr. Posner said. "If you think AT&T would hand money to another company to go into competion with it in the same market, then you're really stupid."
Adding ammunition to the critics' assertion is the fact that Cingular and AT&T Wireless won no licenses in their own names; Cingular did not even make any solo bids. But they will gain commercial access to licenses in many major markets, covering more than 136 million potential customers and gaining major subsidies and other advantages through their smaller bidding partners.
In Cingular's case, the government will subsidize the purchases of the Salmon-Cingular partnership by providing bidding credits of more than $550 million. And in the case of AT&T Wireless, the winning bids by its small business partners could give the company access to licenses in Maine, North Carolina and Massachusetts that exceed the legal limits that are supposed to prevent one company from taking too much of the spectrum in any local market.
As their relationships with the big wireless companies have come under greater scrutiny, the small businesses have grown hesitant about describing both their intentions and their commitments to the bigger companies.
Alaska Native Wireless, for instance, a new company based in Anchorage that is the bidding partner of AT&T Wireless, won one of the three licenses issued for New York.
When asked whether Alaska Native actually intends to build a wireless communications network in New York, a city that is perhaps the nation's most challenging wireless market, with its skyscrapers, dense population and fierce competition, Conrad Bagne, the company's main administrative officer, replied: "I can't tell you anything about that. All we want to do is maximize the returns on our investment."
Alaska Native agreed to pay $1.48 billion for that New York license, although most of that will be paid by its bidding partner, AT&T Wireless. (Of the $2.9 billion that Alaska Native will pay for all of its licenses, $2.6 billion will come from AT&T.)
Verizon Wireless, the industry leader and the only major telephone company not to have a small business partner, paid considerably more for its licenses — including more than $2 billion for each of two New York licenses it won.
In a recent interview, Ivan G. Seidenberg, co-chief executive of Verizon, said he and his colleagues carefully considered striking a partnership with a smaller company, but ruled it out because they thought working through another company would be too cumbersome. He said he did not think Verizon overpaid for its licenses, because he predicted his big-company rivals would have to spend considerably more money to eventually buy out their small business partners.
"In order to gain control over these assets over time, you have to pay a price," Mr. Seidenberg said. "We looked at this. We concluded it makes a lot of sense in the short term to buy the spectrum, get control of it, get out there quickly, not have bureaucracy and not deal with minority owners who don't have an interest other than flipping it."
The origins of the airwaves battle go back to 1993 and 1994, when Congress and regulators decided to reserve a new block of wireless frequencies exclusively for small entrepreneurs — companies that federal officials hoped might offer new technologies, while introducing competition into existing markets.
The resulting auction in 1996 proved disastrous for both the industry and the government. The big winner was NextWave Personal Communications, which went into bankruptcy after it was unable to make payments for 63 licenses it had won for $4.7 billion. Those licenses were back on the market in the most recent auction, along with additional new licenses.
The explosive growth of the cellular phone market since the mid-90's, and the need by wireless companies for more airwave frequencies for expanding their networks and adding new services like Internet access, created a great demand for the new licenses by the biggest wireless operators.
In January 2000, SBC Communications and some of the other large carriers asked the government to change the auction rules, asserting that the commission's decision to limit participation to small companies would result in another NextWave situation.
The F.C.C. responded in August by reconfiguring the auction to permit the big companies to participate. It split the spectrum licenses into smaller blocks so that they would be available to big companies that were already near the spectrum ownership limits in many local markets. The commission also granted a special exemption for Dobson PCS, which had grown too large to be considered a small business, so that it could bid in the small business portion of the auction. (Dobson subsequently formed a new small joint venture, DCC PSC, with AT&T Wireless, to take part in the auction.)
The F.C.C.'s moves drew criticism from other quarters of the government.
"It is hard to see how permitting existing companies to supplement their current spectrum holdings will increase competition," officials from the Small Business Administration wrote in October, calling the F.C.C.'s rationale "illogical and self-contradictory."
Even before the auction began on Dec. 12, F.C.C. officials knew of the formation of bidding partnerships. But they were still stinging from the NextWave debacle, and they also seemed sympathetic to the needs of the big companies. Despite many clear signs that the auction would be dominated by the big companies, the F.C.C. decided not to intervene.
Shortly before the bidding commenced, Salmon and Alaska Native Wireless, a partner of AT&T Wireless, each made up-front auction down payments of nearly $240 million — staggering sums, considering that to qualify for small-business status, a company could not have gross revenues of more than $125 million in each of the last two years.
A week before the bids opened, an executive at Cingular was quoted in a widely read trade publication, Communications Daily, seeming to acknowledge that Salmon was little more than a bidding vehicle for the larger wireless company. "We are going to be doing all our bidding through our designated entity, Salmon PCS," the Cingular spokesman said in the article. "That will allow us to bid on all eligible licenses, including a number of those set aside just for small businesses."
While the comment raised eyebrows at the F.C.C., the agency decided it would not intervene. Executives at Cingular Wireless recently declined to respond to questions about the auction.
By the end of the auction late last month, some F.C.C. officials were privately lamenting how the agency had struggled to reconcile the seemingly divergent public policies of selling licenses to the highest bidder while also finding room for small companies. The result, some acknowledged, had been the worst of both worlds, an outcome in which the nation's largest telephone companies would receive hundreds of millions of dollars in subsidies.
"We did the best we could under the circumstances," said one senior official who spoke on the condition of anonymity. "But this certainly does make us look like a bunch of idiots."
