1 FEDERAL COMMUNICATIONS COMMISSION PRESENTS EN BANC MEETING ON PCS ISSUES MONDAY, APRIL 11, 1994 2 PRESENT: Reed E. Hundt, Chairman Andrew C. Barrett, Commissioner TASK FORCE MEMBERS: Dr. Robert Pepper, Chief Office of Plans and Policy Don Gips, Deputy Chief Office of Plans and Policy Tom Stanley, Chief Engineer Office of Plans and Policy Michael Katz, Chief Economist Office of Plans and Policy Jerry Vaughn, Deputy Chief Common Carrier Bureau Ralph Haller, Chief Private Radio Bureau Nancy Peretsmall 3 Panel I - Dr. Robert Pepper Tom Stroup Personal Communications Industry Association Dave Twyber, President Wireless Systems Group Northern Telecom David Kerr BIS Strategic Decisions Mark Lowenstein, Director Wireless Mobile Communications Yankee Group Dan Trampush Ernst & Young National Director of Telecom Consulting Elliott Hamilton Vice president and Director U.S. Wireless Consulting MTA/EMCI Dr. C.J. Waylon, Executive Vice President Marketing and Business Development GTE Personal Communications Services Stan Besch Daniel Kelley Jerry Hausman Al Honston John Oxendine Herbert Wilkins Paul Rissman 4 P-R-O-C-E-E-D-I-N-G-S MR. HALLER: If we could get started, please. If we could have our panelists come on up to the table for the first panel. Good morning, and welcome to everyone. We hope that we have an exciting day in store for you with a considerable amount of spirited debate before the day is over. By way of background, these panel discussions are being held by the FCC's PCS Task Force. The Task Force was created by Chairman Hundt in response to over 60 petitions for reconsideration to the Commission's PCS decision last September. The petitions reached nearly every single aspect of that decision, including spectrum size, licensing areas, treatment of designated entities, and interrelationships to other services, such as mobile satellite. The Task Force members are Dr. Robert Pepper, Chief of the OPP -- Office of Plans and Policy; Don Gips, Deputy Chief, Office of Plans and Policy; Tom Stanley, Chief Engineer; Michael Katz, Chief 5 Economist; Jerry Vaughn, Deputy Chief, Common Carrier Bureau, and myself, Ralph Haller, Chief of the Private Radio Bureau. The function of the Task Force is to examine all aspects of the PCS decision and the auction procedures to assure consistency and to move the process forward. Contrary to some press reports, we view the task force as a way to assure a speedy decision-making process and not a delaying factor, but we must carefully consider the many, many issues and make sure that the next decision by the Commission is a very reasoned and very knowledgeable decision. In that regard, we've invited a number of experts in market forecasts, economics, the financial community, spectrum and technical issues. We've attempted to get representation on all sides of each issue, based on information that's already been filed in the record. Speaking of filing, we will accept additional comments for the record through the close of business on April 22nd. The comments may address specific issues that were brought up on this Panel. I would ask, if you have already filed a 6 position, that, since we know what that is, you need not re-file it, but if you have additional information that would help us make our decisions, then we urge you to file by close of business on April 22nd. The basic format of today's session is for each panelist to have five minutes to present his or her position. For the information of the panelists, there is blue and red light in front of me. When the blue light comes on -- could we have the blue light -- when that comes on, that's the four-minute mark; then when the red light comes on -- that's it -- and you'll also hear a bell (ringing of bell). [Laughter] Would you hold that bell up so they can see the size of it? We wanted to make sure everyone could hear this. VOICE: You finally found a use for your bell. MR. HALLER: That's right. We ask the panelists that, when you hear the bell ring, please complete the sentence that you're in, so that we can move onto the next panelist. We have a full day and we're going to be not very humorous about 7 extensions of time. After the presentations, we will then ask the Panel various questions and hopefully get some debate among them. No questions are going to be permitted directly from the audience. However, we encourage you, if you have a question, please write that question down and pass it up to us. We reserve the right to use it or not use it, but you may well cause us to ask a question that will be very helpful in these proceedings, so by all means feel free to pass those questions forward. These proceedings are being videotaped. Copies of the videotape can be purchased from the duplicating contractor, and the details of that are available at the table outside the back door. We plan to enter a tape in the official record of this document, and we also hope to have a transcript available to you electronically in the very near future. I would also like to express my appreciation to the three commissioners for their support of this Task Force and the support of today's panel. Unfortunately, Commissioner Quello could not be 8 with us today. He does have a statement, which Chairman Hundt will read. Without further delay, I would like to invite the Commissioners to offer any comments that they may have in these proceedings. Chairman Hundt? THE CHAIRMAN: Thank you very much, Ralph. Thank you, to everyone in attendance today and everyone who has participated but is not in attendance, and in advance to those who will continue to participate in our deliberations on PCS. As all of you know, more or less, we will taking up a PCS item on an average of once a month for probably most of the months that remain in this year because there are so many different kinds of PCS items. I won't detail all of them for you they're already well known to you. What I think is important is that we focus on the general event that is occurring, and that is that United States, through regulation but primarily through the private sector, is attempting to enter or to put our economy into a new venture, a new sector of our economy, a new dimension of mobile telephony and other mobile 9 services. This is very exciting. We are among the world's leaders in this respect. That's a good thing for us and a good thing for the world, and the businesses and other entities that are represented here today should claim that leadership, and should be telling us how we can so rule as to permit them to proceed on. It is, indeed, as Ralph mentioned, because of the intensity of comment that we've received in the nature of reconsideration and on other upcoming items, that we thought it was best for us and best for the public at large, if you all were willing to participate in this open meeting, or round table. I am greatly looking forward to the views that are expressed here today. I suppose it's a little bit like a game show where the answers are going to be given before the questions are asked. That's the way Ralph has structured it, and I think that that's actually very useful and, very literally, it is the case that you all will be providing the answers to the questions that are in my mind and in Andy's mind and in Jim's mind. You also are going to help us really frame those questions, so we are very, very 10 grateful. I would like to ask Commissioner Barrett if he has a statement, and then I will read Commissioner Quello's statement. Jim, unfortunately, is under the weather and will not be able to be in attendance, except possibly later as the session goes on. In any event, he and his staff will, of course, have available to them all of the information that is generated today and tomorrow. Do you want to comment? COMMISSIONER BARRETT: Just briefly, Mr. Chairman. I think you have pretty much covered my point of view. In looking around the room, I'm so glad that you and I don't have to serve with this five people to our right, because we'd probably be on the bottom in terms of knowledge, I think. I think that I, basically, Mr. Chairman, want to thank the staff. I think they've worked long, hard hours, and they've done a great deal of work, and there is a great deal, obviously, left to be done. Certainly, my interest in this item and in these matters is no minor one. 11 I also want to thank the participants who have taken time out of their busy schedule, I think, to further educate us. I jokingly told Dr. Robert Pepper last week, out of all the years I've known Roger, I've never known Roger to be on a panel. It's going to be interesting to see how Roger works with a Panel. I do want to thank all of you for taking time out of your busy schedule. I think that this is part of what I constantly hear our chairman talk about, and I think if we do this the right way it will, in fact, have some economic benefits towards economic development and certainly will create new providers. I certainly want to thank you once again for coming to educate us, and just really want to thank you, even though I may have disagreed with sometime on staff, for having done an excellent job, I think, of putting forth all of the parameters and all the important issues, I think, for the next day and a half that I think are important if we are to see this technology deployed and to see those, if, in fact, the demand is there, the beneficiaries of the action of this Commission and certainly under the leadership of this Chairman. 12 Thank you very kindly, Mr. Chairman. CHAIRMAN HUNDT: Let me read Jim's statement without editing it in any respect, I assure you. We'll make it available to you: "I wish to welcome the participants to these PCS Task Force Panel discussions and thank you in advance for your assistance in turning the vision of personal communication services into a reality. These Panel discussions do not constitute a meeting of the FCC. That is, no decision of the Commission will be taken at these meetings. They are, however, important to the Commission's decision-making process. The PCS Task Force has been charged with the responsibility of assisting the Commission in reviewing the issues on reconsideration. The presentations will be entered into the record of Docket No. 90-314, and therefore will become part of the basis for this Commission's decisions on reconsideration. These Panel discussions are the latest in a series of administrative proceedings by which the FCC has sought to bring the benefits of a family of advanced lower 13 cost, mobile communication services to the American public. Following an extensive notice and comment, administrative process, which included an en banc hearing, a Commission policy statement, seriatim, Notices of Proposed Rulemaking in this docket, and corollary proceedings and related dockets, and internal cross-bureau task forces, the FCC issued our decisions on the multitude of regulatory and technical issues engendered by the innovative family of mobile communication services, known collectively as PCS. The Commission acted in a timely and responsible manner to establish the regulatory parameters so that American entrepreneurs and manufacturers could bring the benefits of lower cost, ubiquitous, mobile, next generation communications to the public. The Commission's decision on interalia and appropriate spectrum allocation plan eligibility rules and licensing procedure, were driven by the overriding objective fulfilling our statutory mandate. The Commission devised an efficient allocation plan that drives providers toward the most advanced 14 technologies and provides the building blocks for economically viable categories of diverse competitors to assemble their spectrum needs, to fit their business plans, while providing incentives to associate with congressionally-directed new entrants. These complex and interrelated issues are now the subject of approximately 66 petitions for reconsideration. The Commission is acting responsibly by creating the PCS Task Force to assist us in resolving the issues on reconsideration and move with all deliberate speed to begin the licensing process. The Commission's PCS proceedings constitute a milestone for U.S. manufacturers and entrepreneurs wishing to provide the public with new personal communication services and for the American consumer who is always seeking more advanced, more efficient, and less expensive means of communicating. Demand studies suggest that if the FCC licenses new PCS providers during 1994, there could be well over 20 million new subscribers by 1997. The defining and significant feature of these new services is that they promise person-to-person rather 15 than location-to-location communications. They will be engineered to the individual user, not to a residence, business, automobile, or other similar physical location. The information will be transmitted by networks encompassing elements of wireless, fiber, and satellite systems that is technologically transparent to the user. This Commission has learned from the costly delays in uneconomic licensing processes used in other services. I am determined to move this process along as quickly as possible. We are striving to create a PCS marketplace that is open and competitive, one in which customers will be able to choose from among multiple service providers to obtain the best rate and service possible. New entrants and eligible current communications services providers should be allowed to compete to provide PCS services. I am especially interested in minimizing the regulatory burdens on what promises to be a vigorously- competitive wireless communications market. To assist the FCC in its task, I ask that you 16 address seriously the issues to be explored during the next day and one-half. Do not use this opportunity to merely restate your position; rather, engage each other in debate. I remain confident that the FCC can resolve the few remaining issues on reconsideration expeditiously. I look forward to the day in the near future when the American public enjoys the benefits of a robust personal communications services marketplace." Let me thank Jim for those comments. Without further ado, I turn the proceedings over to you, Ralph. MR. HALLER: We are about to embark on the final decisions in one of the most important proceedings this Commission will take up, probably in this decade. We have before us the potential of a technology that, in fact, will change people's lives, perhaps as important as the original development of the telephone or the beginning of broadcasting. So what we are doing, we look at as a very, very serious matter, but one that is going to improve not only the way of life but improve the economy, create jobs, and provide much greater universal access. 17 Radio can go where it's difficult to put wires, and that's one of our goals here. As we go through the proceedings today, I would ask the panelists to keep those basic goals in mind and tell us how we can make decisions that will make PCS economically viable and provide it in a very speedy manner to the American public because that's what we're all about here. With that charge, I will turn the first panel over to Dr. Robert Pepper, who will be moderator. Again, Dr. Pepper is the Chief of the Office of Plans and Policy. Bob. PANEL I DR. PEPPER: Thank you, Ralph. The first panel this morning is going to examine questions of demand for PCS services. We have seven panelists, each of whom have been involved in conducting studies, looking at several factors. The first question that we've asked them to address is: What services do you believe will be 18 encompassed by personal communication services? What are the services that you see evolving and being rolled out over time? Secondly, what is the overall demand for personal communication services, not only in total, for all wireless services, but also, if you've identified in your studies various segments of the wireless market, how do you see that evolving. Also, we would be very interested in hearing about how you conducted your studies. One of the interesting questions that we're always confronted with is, how do you know about something in advance of knowing about it? When you're rolling out new services, you're talking about the future, and it's always difficult to predict the future. We're interested in hearing about how you conducted the studies that you're going to report on today. We're very fortunate to have, as I mentioned, seven studies and seven experts here presenting to us. The first is Tom Stroup from the Personal Communications Industry Association. 19 He will be followed by Dave Twyber, who is President of the Wireless Systems Group, from Northern Telecom; David Kerr from BIS Strategic Decisions will be next; Mark Lowenstein, who is the Director of Wireless Mobile Communications will be here. He's from the Yankee Group; Dan Trampush from Ernst & Young. Dan is the National Director of Telecom Consulting; Elliott Hamilton is a substitute for Ann Deroskow from EMCI, for those of you have the agenda that was out there; and then, Dr. C.J. Waylon, from GTE Personal Communications Services will wrap up the five-minute presentations, and then what we'll do is have questions and follow-ups. You will have an opportunity, also, to talk amongst yourselves. Tom, why don't you begin. I think you have some charts as well. TOM STROUP 20 PERSONAL COMMUNICATIONS INDUSTRY ASSOCIATION MR. STROUP: Thank you, Dr. Pepper, Chairman Hundt, Members of the Task Force. It is my pleasure to represent the Personal Communications Industry Association today and present our market demand forecasts for PCS. PCS is a broad range of both existing and new services. Because of the significant cross-elasticity of demand between various members of this family, all must be considered. For the purpose of our study, PCIA solicited information from representatives of the industry who are expected to build the networks. It describes the potential size of the market, assuming licensing in 1994. Statistical information was calculated using a delphi method of removing the high and low responses and averaging the remainder. My first chart summarizes the findings. New PCS, while the last entrant will grow sharply, 8-1/2 million subscriptions are predicted at the end of the first three years of service deployment. That number will grow by more than 250 percent between 1998 and 21 the year 2003, to 31 million subscriptions. At the same time, demand for cellular service will continue to grow dramatically, a 154 percent increase between 1993 and 1998, reaching 52 million subscriptions in the year 2003. Cellular will continue to hold by far the dominant share of the mobile voice market. ESMR deployment, which will occur before new PCS starts to become operational will experience steep initial growth, increasing by nearly 250 percent between 1993 and 1998. Growth will slow but still be substantial in the out years. The graphic on my next chart makes the projected growth of the various members of the PCS family a little clearer. The only conclusions to draw is that the introduction of new services will greatly expand the demand for all forms of PCS. In addition, there is historical evidence that the introduction of new spectrum and new service providers in the mobile marketplace will have this effect. As noted in my next chart, in 1982, the Commission doubled the amount of spectrum allocated to 22 paging services. The result was not bankruptcy for established carriers but, on the contrary, it resulted in substantially accelerated growth in subscriber numbers. Also, significantly, prices dropped dramatically during the same time period, a 50 percent reduction in consumer pricing between 1987 and 1992 alone. I'm glad to hear your comments regarding the delay and how this Panel is not intended to delay but actually expedite licensing, because there is historical evidence of the cost of regulatory delay. Twelve years ago the Commission experienced significant delay in licensing cellular telephone service. A 1991 study estimated the cost to the U.S. economy of that delay at $86 billion. The very strong and healthy market projections for new PCS documented and PCIA's market demand study will not be realized if these new services face similar regulatory delay. First, delayed deployment of new PCS will diminish demand for emerging services. A study conducted by DSS Research quantifies this effect. As noted on my next chart, according to that study, a delay of just one year, licensing in 1995 rather 23 than in 1994 would result in a 15 percent reduction in new PCS's market penetration. A delay of just two years would reduce the total market penetration for new PCS by one- third of what was predicted with 1994 licensing. It is significant to point out that DSS Research's study indicates that the total market for PCS, both existing and emerging forms, will be diminished if new PCS services are delayed. As the chart makes clear, the loss of new PCS penetration as a result of delay are greater than the gains realized by cellular and ESMR. This research is consistent with PCIA's original market demand forecast issued in 1992, which showed there would be 14 million fewer new PCS subscribers if licensing were conducted in 1997 instead of 1994. This reflects a 24 percent reduction in our original new PCS growth estimates. Delay in licensing new PCS also translates into less effective competitors once new services are introduced. Cellular carriers are adding new customers to their networks at the rate of 14,000 per day. ESMR is 24 also projected to achieve rapid market penetration as these new networks come on line in the coming months. Delay in licensing new PCS will result in substantially weaker competitors being forced to challenge more formidable and well-established incumbents. Delayed deployment also may mean the death toll for many potential new PCS entrants. Each day of delay in licensing means a delay in any return on the significant investment that new PCS hopefuls have already made in these new services. Any reduction in the size of the new PCS industry also translates into proportionate reductions in the benefits these new services are expected to bring to the American economy. That means a reduction in revenues generated, fewer new high technology jobs, and a loss in the productivity gains, which new PCS promises. If I may move to my conclusion -- I'm not sure that the lights are working. The increasing uncertainty over the form of the broad band PCS rules is a cloud growing over the industry. The delay, or perception of delay, in concluding the PCS 25 proceedings is starting to undermine investor confidence in the industry and jeopardizes the ability of the industry to raise the capital necessary to acquire licenses at auction and build their infrastructure. The wireless telecommunications industry knows it is on the brink of the next revolution in communications. We are now at the crucial point in determining whether it will be launched quickly and successfully or whether delays, for reasons however well intentioned, will hamper its start and diminish the promised benefits to consumers, the economy, and the nation's taxpayers. If new PCS growth is to meet the potential shown on my last chart, we cannot afford continued licensing delay. Today's hearing is an excellent opportunity to send a clear message to the industry and to Wall Street that uncertainty will be removed expeditiously. Thank you. MR. HALLER: Thank you, Tom. Mr. Twyber. DAVE TWYBER 26 WIRELESS SYSTEMS GROUP NORTHERN TELECOM MR. TWYBER: Good morning, Mr. Chairman, Commissioners, Members of the PCS Task Force, and Dr. Pepper. I'm Dave Twyber, President of Northern Telecom's Global Wireless Systems Organization, headquartered in Richardson, Texas. We believe strongly that there will be significant demand for PCS by consumers and businesses alike and, as a result, we are fully committed to the growth and development of the PCS industry. Northern Telecom is so convinced that PCS will fulfill unsatisfied consumer and business needs, that our Wireless Systems organization has already invested several hundred million dollars in U.S. research and development and employs over 1,000 people in PCS and wireless activities in the United States. Our Wireless organization is expected to at least double in the next two years, and we have plans to began manufacturing PCS equipment in North Carolina and in California as soon as the Commission's rules are 27 finalized. This is a working production PCS handset, operating at 1900 megahertz to a base station two blocks from here. Dr. Stanley joined us a couple of weeks ago to make real PCS calls under the experimental license that MCI and we are using to demonstrate this technology. I just use this as an example that the technology is here, the need is here, as Mr. Stroup pointed out, and we are ready to start with this new industry. We've derived our PCS demand projections from primary research, from market trials, and from ongoing dialogue with potential licensees and then customers. We've added our global experience with wired and wireless communication solutions and independent industry forecasts like those that will be presented by others on this panel. Our studies have shown that there is incredible demand for mobility. Currently, over 16 million people use cellular phones for vehicular and public mobility, and almost 50 percent of all homes have the convenience of cordless phones. Yet, our market research shows that over 50 28 percent of businesses which are utilizing existing products such as analog, cordless, SMR, paging, and cellular, to meet mobility needs in the office, have varying degrees of dissatisfaction based on functionality or price. We envision PCS initially offering high quality voice and data services, then migrating towards higher quality multimedia communications and advanced intelligent network services for all market segments. Northern Telecom anticipates significant demand in all PCS markets, enabled in the report, and order for all frequency blocks, in both the 1850, 1990, and 2130 to 2200 megahertz bands. We urge the Commission to retain the current channelization plan. To address the varying applications, Northern Telecom will introduce products for licensed PCS in all bands and for unlicensed PCS. We believe that there are significant opportunities for both licensed and unlicensed PCS. These services are complementary, yet address different applications. The licensed band will generally be more 29 conducive and cost-effective for public service offerings requiring wide area seamless coverage in a geographic area. This is due to the power differences between the two offerings. Licensed PCS will provide both in-building and wide area mobility. Northern Telecom believes licensed PCS applications in the 10 megahertz channels will take the form of innovative, low-power PCS services serving niche market segments. Northern Telecom believes the Commission can significantly impact the maximization of demand and utilization of the very important capabilities PCS will provide to consumers by focusing and taking action in the following areas. First, rule on the PCS reconsideration issue as expeditiously. Second: Increase base station power limits for licensed PCS. Third: Retain the current unlicensed PCS allocation in the likely loaded spectrum. Fourth: Adopt a complete win form etiquette for 30 unlicensed PCS. Fifth: Allow the industry to adopt standards for PCS where they are appropriate; and, Sixth: Eliminate the current build-out requirements for licensed PCS in the 10 megahertz channels. We have been an active participant in this PCS proceeding from its inception to the present, and we will continue to assist the Task Force and Commission in this important endeavor. DR. PEPPER: Thank you very much. Mr. Kerr. DAVID KERR BIS STRATEGIC DECISIONS MR. KERR: Thank you, Mr. Chairman, Commissioners, Members of the Task Force. It is a pleasure to be here this morning to contribute to the development of the emerging PCS industry. My name is David Kerr. I'm a senior industry analyst with BIS Strategic Decisions. BIS has been involved in tracking mobile and 31 wireless communications, technologies, regulatory environment, and the market environment for over 10 years, primarily through a range of syndicated information services serving North America, Europe, and Asia-Pacific. In the PCS market, our earliest analysis and demand studies date back to 1988, from PCN in the U.K. Our demand forecasts for the U.S. have been building over the last four or five years. Our studies have combined qualitative research with end-user business and consumer segments, focus group studies, end-user case studies. Those have been supplemented by quantitative research, primarily in the form of telephone interview programs over the last four or five years. The final element that feeds into our demand studies is trying to bring some realities to the demand, based on our continuing discussions with potential service providers, equipment vendors, and infrastructure suppliers. As we see the market today, PCS does, indeed, represent a tremendous opportunity and holds forth the vision of a rich and diverse range of products and 32 services to serve the American public. This vision, of course, is best represented by the anywhere, anytime, to anything vision. However, in the short-term, there's a considerable growth emerging between that vision and the realities of first generation PCS. As we see it, PCS will reach an installed base of 17 million subscribers after 10 years of operation, generating annual service revenues of approximately $6 billion. While this represents a strong PCS market, it does, in our opinion, represent an underachievement relative to its total potential. There are many reasons for this. Certainly, one of them in our opinion, is the fragment of market structure that is envisaged for PCS, one in which inevitably the larger allocation, the MTA licenses, will overshadow BTA licenses and the confusion created in the marketplace by the multiplicity of licenses, added by the fact that we will have different standards -- TDMA, CDMA, standards for PCS -- create a situation where it may indeed be economically unfeasible 33 to serve the consumer market, particularly in the smaller allocations, the 10 megahertz allocations. As we see it, first generation PCS will be dominated by the winners of the MTA licenses. Given the factors that I just mentioned, it would appear that the most economical segments to serve will be the business- wide area segment, typically classified as mobile professional, rather than trying to serve a mass market with revenue expectations, monthly revenue expectations of $25 to $30. What we envisage in the current format would be large players, primarily the regional Bell operating companies and the Inter-Exchange carriers, dominating the MTA license awards. The cellular mobile companies, inevitably, will win the 10 megahertz allocations. With extreme difficulty, in our opinion, for the small minorities and designated entities in achieving funding. Given potentially seven licenses, it would be very difficult for them: (A) To achieve funding; (B) To meet the build-out requirements. So, in this situation, first generation PCS is 34 likely to focus on serving mobile professionals with feature-rich integrated voice and data services, with consumer market, mass market demand being delayed for several years. Despite these factors, with 17 million subscribers projected for year 10, PCS, those remain an attractive industry. However, we believe that that level of demand is being inhibited given the current environment, and a more rationale approach, creating two or three strong competitors would increase the overall level of wireless adoption in the U.S. Essentially, as we see it, PCS will capture approximately 25 percent of the wireless industry revenue by year 10, which is a good performance but understates the potential that we see in this market. Thank you. MR. HALLER: Thank you. Mr. Lowenstein. MARK LOWENSTEIN DIRECTOR, WIRELESS MOBILE COMMUNICATIONS YANKEE GROUP MR. LOWENSTEIN: Good morning. Thank you, Mr. 35 Chairman, Commissioner, Members of the Task Force, and everybody else who is in overflow rooms and in this room listening to these proceedings. I'm Mark Lowenstein. I run the Yankee Group's Wireless and Mobile Communications Research Group. We're based in Boston. We actually define PCS very broadly and try not to segment PCS from the broad base of other wireless and mobile communications services perhaps as intricately as some of the others in the industry. We see PCS as a term encompassing a broad variety of wireless and mobile technologies, including cellular, paging, ESMR, mobile data; not really wireless LAN, actually, but mainly lower speed mobile data, at least in the next 10-year time frame, and office wireless systems, such as wireless PBX and Centrex, and also satellite-based systems. Our view is that it's important not to limit the definition of PCS to the newly-licensed spectrum but rather to recognize that this extra band width will allow a broader range of competitive wireless services to be offered by both incumbent service providers, such as 36 cellular providers and paging providers today, as well as new market entrants. It is also important to recognize, however, how PCS might be different. In order for it to be successful, we see that it will have to offer several elements of kind of substitutive or complementary capabilities, which we basically refer to as value-added over today's suite of wireless services that are available. So, for example, we'll have to have better localized or, let's say, microcellular type coverage in the voice arena, and building coverage, and better coverage in specific locations, whether they're sports stadiums, airports, shopping malls, et cetera. In the United States, compared to many other parts of the world where I have travelled and seen cellular, for example, we don't have very good in-building coverage of cellular. We also see that some elements of PCS are based on portable handsets more than the vehicular type of service, for more walk-around/neighborhood type of capability than we see today. The PCS network will have to be inherently 37 intelligent, featuring sophisticated levels of communication between both the wired and the wire line and the land line network. That will be an important element of PCS. We'll have to have both voice and data capabilities on PCS, and also rates between today's prevailing land line prices for regular phone calls and cellular prices. Our research shows that consumers and businesses are willing to pay a premium for mobility, but the premium they pay for mobility, for instance, on cellular today is too great to attract enterprise-wide cellular solutions as well as a broad mass market of consumers into a mobile service. Pricing plans will have to be flexible, so we have increasing pricing, depending on levels of mobility. The further you are away from a base station, for example, there will have to be incremental levels of pricing, given incremental levels of mobility. In terms of how we're forecasting the market, our demand is based on several survey mechanisms that we use. In addition to our ongoing discussions with industry leaders and primary research that we're doing in that 38 arena, we have the 1993 Mobile Professional Survey that we conducted of over 2,000 individuals of both business and personal use of wireless technologies and interest in wireless technologies, as well as a 10-year-old market segmentation scheme that we've developed, called the technologically advanced family. Some of the key issues that came up from the survey: First of all, with wireless technology, it's very important to recognize how wireless, whether it's cellular, paging, or portable computers, mix individual and business use of that technology more than many other technology areas or other types of consumer electronics. Also, that security was cited by cellular users that we talked to as the most important reason for purchasing a cellular phone, and that an increasing percentage of cellular bills are paid by individuals rather than employers, which is an important shift from when cellular first began about 10 years ago. We also asked noncellular users what it would take for them to purchase a cellular -- whether they were planning to purchase a cellular phone over the next year. 39 Of the total nonusers, 13 percent are considering a purchase, when 2 percent are definitely planning. But if you're looking at more specific segments of the market, mobile individuals, people who travel away from their primarily workplace a fair bit of the time, 35 percent of them are at least considering a cellular phone purchase in the next year. Portable PC users, about 30 percent of them are considering a cellular phone purchase over the next year. There's still significant pent-up demand for mobile services that aren't being met right now. Factors driving PCS: The most frequently experienced problem amongst cellular users is being out of coverage range; 46 percent experience it at least occasionally. Thirty-one percent of noncellular users site service costs -- not handset cost but service cost -- as the primary reason they haven't purchased cellular phones. Our market forecast for PCS at the present time is that there will be 25 million PCS subscribers by 1998 40 and falling into the following segments: There will be cellular PC end-subscribers which we see as users on the existing cellular spectrum, but using a PCS type service, such as the Bell Atlantic contact line for service, for example, we're defining as a PCS service. Other elements of PCS will include narrow band PCS. We see 8 million subscribers of narrow band PCS. Enhanced cordless telephony, which we see as the basic cordless phones, with enhanced coverage range beyond the base station that we see right now, that will be a significant element of PCS and we'll actually overlap with some of the newly-licensed 2 gigahertz type services that we'll see introduced. Newly licensed: We see about 2.5 million PCS subscribers in the time frame, and the other two principal segments, each of about 2 to 2.5 million in the 1998 time frame, are PCS mobile data from portable mobile computing devices, and something that we call PDA messaging, and I'll be happy to explore those segments in more detail in the questions. DR. PEPPER: Thank you very much. 41 Mr. Trampush. DAN TRAMPUSH NATIONAL DIRECTOR OF TELECOM CONSULTING ERNST & YOUNG MR. TRAMPUSH: Mr. Chairman, Commissioner, and Members of the Task Force, my name if Dan Trampush with Ernst & Young. Thank you for inviting me to comment on PCS demand in rural areas of the United States. My comments are being made on behalf of the Rural Telephone Coalition, which consists of the National Rural Telecom Association, the National Telephone Cooperative Association, and the Organization for the Advancement and Protection of Small Telephone Companies, referred to as OPASCO. My purpose will be to discuss the differences between the nationwide studies of PCS demand and the work we've done on PCS demand in rural areas. I think there are some important observations about rural PCS demand that have implications for the Commission's PCS policies. First: In the context of PCS and communications, generally, the critical characteristic of 42 rural areas is that there are relatively few people pre- iterative geography. That is, for the purpose of studying demand for communication services, rural means low population density. Rural is not a demographic definition, although some people think of rural incorrectly in demographic terms, such as income level, educational attainment, and employment type. Second: People in rural areas tend to use communication services at least as intensively as people in urban areas. Communication services are at least a partial solution to the relative isolation of rural areas. We see this consistently in studies for long distance calling in urban and rural areas. Also, we see robust demand for enhanced services and feature in rural areas. Third: Given similar types of PCS services and PCS prices, the probability of subscription to PCS should be no lower in rural than in urban areas. That is, we discern no difference in the intensity of demand for PCS among potential customers in urban and rural areas. The demand problem in rural areas is a problem of density, fewer potential customers per square mile, 43 rather than the probability of subscription or amount of usage per customer which are similar to urban areas. Fourth: These observations lead to several implications for PCS demand and rural areas. First, extended range cordless phones will be in high demand in rural areas. A 200-foot range may be fine in an urban apartment but not on a several hundred acre ranch or farm. Also, the greater distances of travel in rural areas will require that PCS provide higher-speed mobility than in dense urban areas where there's more foot traffic and congestion. Also, there are, of course, fewer potential customers per square mile than in urban areas, and these customers are not evenly distributed. Undoubtedly, there are concentrated pockets of PCS demand in rural areas defined by geography and terrain. Isolated pockets PCS demand may be the dominant pattern in mountainous or forested areas. These demand site implications lead me to make a few observations about how best to serve this rural PCS demand. 44 One: Relatively low customer density suggests that there may be greater economies of scope with existing communications networks in rural areas. By encouraging rural telephone companies to build out the PCS networks in their wireline service areas, rural customers may obtain benefits of PCS that would otherwise take years to bring to rural America. Further, by maximizing the inner-workability of rural PCS, cellular, and telephone networks, for example, network costs may be reduced in the range of wireless services enhanced. In this context, restrictions on ownership of cellular and PCS would be bad for customers in rural areas. Also, limitations on transmitter power and requirements for population coverage are important drivers of costs in rural areas because of the relatively low subscriber density. Relaxation of such requirements or adoption of policies which offset these requirements may bring more affordable PCS to rural areas. Bringing PCS to pockets of demand economically may also require creative use of technology, such as dual 45 mode, cellular, and PCS phones. Also, in order to increase subscribership to PCS, thereby reducing the average unit cost, the Commission may want to explore flexible ways to integrate PCS with wireline telephone systems. In summary, there is significant demand per rural citizen for the enhanced services promised by PCS. There's just less demand per unit of geography. The demand and supply characteristics for rural PCS suggest the need for regulatory policies tailored to rural areas. Thank you. DR. PEPPER: Thank you very much. Mr. Hamilton. ELLIOTT HAMILTON VICE PRESIDENT AND DIRECTOR U.S. WIRELESS CONSULTING MTA/EMCI 46 MR. HAMILTON: Thank you. My name is Elliott Hamilton. I'm the Vice President and Director of the U.S. Wireless Consulting at MTA/EMCI. Since 1987, EMCI has consulted to cellular paging, SMR, and mobile satellite carriers on the service technology demand and service issues. More recently, EMCI has consulted to cellular carriers, new PCS carriers, and other interested parties concerning PCS service definitions, market demands, strategic plans, and optimal system design. EMCI recently coauthored this year a 47-volume study with Moffitt, Larson, and Johnson, titled, "PCS Market Demand and System Engineering". EMCI projects that the total U.S. mobile telephone voice market will reach 87 million subscriptions by 2004. Our demand methodology is based on our ongoing research, including quarterly surveys of 1,000 consumers; focus groups, including quantitative techniques, such as conjoint analysis; studies of product diffusion curves based on other consumer products; nonlinear trending of mobile radio growth in existing mobile markets, and analysis of the cross-competitive nature of future markets 47 based upon evolving technologies and consumer preferences. Our forecasts are based upon several key assumptions and market developments. These include: Licensing of new PCS carriers by the end of 1994; limited use of PCS as a bypass technology in the first five years. The forecasts recognized the development of unlicensed applications but do not include counts of these users. The average monthly bill is assumed to fall between $40 and $50 per month. Usage is forecast to be somewhat higher than today's average usage levels, due to the impact of lower price levels and usage price elasticities. Of the 87 million voice subscribers, EMCI projects 57 percent to be on cellular systems, 32 percent to be on PCS systems, and 12 percent to be on digital SMR systems. There will be a likely significant overlap in the subscriptions, particularly between business purchase, mobile services and personal mobile services. One area of potential differentiation for new 48 PCS carriers is the marriage of the license and unlicensed applications. EMCI projects that a critical application of the unlicensed bands will be wireless PBX. The allocation of frequency for unlicensed applications, adjacent to the licensed PCS bands, will create the opportunity for multi-mode handsets, permitting both private and wireless PBX and public license operations. In survey research, EMCI finds that 7 percent of existing cellular users were definitely interested in having a wireless PBX at their place of work. This demands increases to 10 percent of cellular users if the system offered both private in-building wireless PBX and access to cellular on the same handset. While any technology should be able to offer combined wireless PBX, public wireless services, new PCS may have a unique advantage with this service concept due to the unlicensed bands allocated adjacent to the new PCS frequencies. In EMCI's recent study, PCS Market Demand and System Engineering, the economics of PCS licenses were analyzed in every MTA and BTA market. The highlights of the study are: While virtually 49 all MTA licenses appear voluble, there is tremendous variance of economic performance. The variance is related to the distribution and density of demand and local network design challenges due to the market's topography. Many 20 megahertz BTA licenses appear to be viable as a stand-alone, high mobility, PCS business, particularly in the large urban markets. A large majority of the 10 megahertz licenses do not appear to be viable without substantial support from subsidy from a related wireless enterprise. In conclusion, the wireless market should achieve 87 million voice subscribers by the year 2004. It will be additional messaging and unlicensed users. Delays in licensing PCS will have a negative impact. I will continue with the conclusions following the discussion. DR. PEPPER: Thank you very much. Dr. Waylon. DR. C.J. WAYLON EXECUTIVE VICE PRESIDENT MARKETING AND BUSINESS DEVELOPMENT GTE PERSONAL COMMUNICATIONS SERVICES 50 DR. WAYLON: I would like to thank the Commission for the opportunity to offer comment on such an important hearing. I'm Jerry Waylon, and I'm Executive Vice President, Marketing and Business Development, for GTE Personal Communications. I'm responsible for GTE's new wireless voice and data services, including our planning for PCS, using the new 2 gigahertz frequencies, as well as the PCS activities using existing cellular frequencies. Today I would like to discuss PCS demand within the context of GTE's extensive marketing field trial of PCS using cellular frequencies in Tampa. First, some general observations. We believe that PCS will attract users wanting an improved lifestyle. PCS offers something new: the ability to call a person and not a place. PCS and cellular might be considered part of a family of services, encompassing voice, data and imaging applications. By the year 2005, we expect total wireless services, including PCS and cellular, to reach some 30 percent of the population. 51 This translates into market penetration of approximately 70 percent of households. Our prediction falls well within the range that's narrowing of other PCS demand forecasts. However, it is important to point out that these projections are highly dependent upon the assumption that the services truly meet market needs. In large part, achieving these demand predictions will depend on the marketing savvy of GTE and its competitors, but it will be influenced substantially by the decisions of this Commission. GTE completed an extensive market trial late last year in which we attempted to establish better understanding of these market needs. For 18 months, our Telego trial sold 3,000 customers a wireless phone which operated as an enhanced cordless phone around the home and as a cellular home when using the local cellular system beyond this coverage. Importantly, the phones maintained the same telephone number regardless of the location. In conducting the trial, we encountered several significant hurdles. First: We found that residential market segment 52 users typically view cellular as costly and complex. Customers mainly want to be in touch from the local playgrounds, school, grocery store, or while traveling between home and these locations, and they want to receive the calls on the same phone number in these circumstances. Second: The Telegos telephone needed to be simple and user-friendly. To meet this need, we generate a dial tone at the handset, simulating a cordless telephone. We also enhanced the information displayed at the handset to tell the user when they were in the home zone and when they were in other zones where they might be charged a per-minute usage charge. Third: Telego pricing needs to be simple and uncomplicated. Our experience indicates that the PCS market is very price-elastic and demand is influenced more by price than by any other variable. Although each of the elements I have described need to be present to attract customers, price ultimately will be the major factor in determining market penetration. The results of our trial are very encouraging and certainly support our 30 percent penetration estimate, 53 but let me emphasize again this estimate assumes that the key elements of the service are understood, addressed, and brought into line with the customer's expectations. Ultimately, then, the issue before the Commission is not whether the inherent demand for PCS exists -- it does; rather, how can the FCC bring PCS to the public in the most time-efficient and cost-efficient manner without impeding the ability of any supplier to anticipate and meet those customer expectations. Obviously, the Commission should leave to individual companies the marketing, sales, and technology challenges. However, the FCC can do a great deal to speed innovation and deployment by establishing uniform rules and equal opportunities for all of the wireless participants. No company should be constrained in its ability to anticipate market needs and to try to meet them in a timely fashion. In this regard, the Commission is to be commended for taking an important first step in the regulatory parody decision. GTE looks forward to equal regulatory treatment of cellular, ESMR, and PCS-providers, all of whom serve a 54 single, very large market. Finally, the FCC has the opportunity to review important market structure issues which will affect the technology deployment and service pricing aspects so critical to serving its PCS market. We believe that the 2 30 megahertz licenses, defined by the Rand-Minally MTAs, are without question the most valuable. 30 megahertz, in our opinion, is very generous. In fact, 30 megahertz is so generous it may encourage some license winners to deploy spectrally- inefficient technologies. Finally, the MTA coverage both offers generously large geographic service area, which is both consistent with competing with the communities of interest and with the much smaller MSAs and RSAs that the cellular carriers and ESMR providers have. By contrast, we believe that the 10 megahertz licenses will be considerably lower in value. Indeed, perhaps of no value, in many smaller markets. The much smaller bandwidth will make it difficult to achieve a user base to cover fixed costs. While the BTA geography offers the advantage of being larger than cellular MSAs and RSAs, 55 it may be too small to permit effective competition against significantly larger 30 megahertz licensees. These differences between a 10 and 30 megahertz license are important, especially as they affect the provider's ability to meet the features and prices demanded by the marketplace. We, therefore, encourage the Commission to review its present PCS market structure and the recommendations submitted by GTE, the Cellular Telecommunications Industry Association, and others. All service providers must have the same flexibility and opportunity to respond to the customer needs. Uniform 20 megahertz allocations will best provide this opportunity and will ensure that the Commission's objectives for providing consumers timely and cost- efficient PCS are met. Thank you. DR. PEPPER: Thank you very much. PANEL DISCUSSION DR. PEPPER: One of the things that I think we are hearing among the presenters is that there is a lot of agreement but there are also some wide variances in terms 56 of predicted demand for these services, ranging from -- well, they all seem fairly high -- about a third of the persons -- 70 percent of the households -- we have 87 million voice customers; and then I think at one point -- Tom didn't talk about it, but in an earlier study submitted by PCIA, 167 million PCS subscribers. Could you maybe talk a little bit about where you see the differences in the demand or why there are these differences, and is it the result of different definitions of PCS? We also heard from Mr. Lowenstein that PCS is not a distinct market from the wireless market more generally, and yet we're hearing slightly different things from different panelists. Mark, you might want to start. MR. LOWENSTEIN: By that comment, I really meant that we see that there are currently PCS services available in the marketplace today. I think one can argue that elements of certain cellular services that are available, such as I mentioned the Bell Atlantic Contact Line service, for example, we would characterize as PCS. We would characterize some enhanced paging services that 57 are available today, as some of what is envisioned for some of the narrow band PCS services that are being proposed, and some of the new spectrum that's been allocated for narrow band PCS. We see that PCS is really kind of a complementary set of solutions for a lot of the existing wireless services that we are seeing out there today. We had forecast that there would be 25 million PCS subscribers by 1998, and not all of those -- that is not the total wireless universe. So, for example, we see approximately 15 percent of the cellular subscriber base that we forecast to be 32 million by 1998; 15 percent of those will be using what we would characterize, for example, as a PCS type service. That's more microcellular in nature, more follow-me in nature, as has been described, for instance, by Mr. Waylon, of the Telego type service. Now some of those services could be offered over the cellular spectrum, some of them could be offered over the newly-licensed PCS spectrum at 2 gigahertz. Also, it's important to recognize that there are elements of PCS that I think are very difficult to 58 predict, such as the more data-oriented PCS services that not a lot of us have really focussed on in the discussion so far. So, for example, if the market for PDAs -- or Personal Intelligent Communicators -- takes off, and they have wireless communications capabilities, they are going to require a network infrastructure over which to send the myriad wireless messages that the applications are being developed for. We see that there are a lot of kind of overlapping and complementary issues, and that's part of the way we forecast the market. We do have, of the 25 million number that we posited for 1998, a specific segment that is newly- licensed, voice-oriented PCS at 2 gig, which is about 2.6 million in 1998. DR. PEPPER: So about 10 percent of what you're predicting is the total market? MR. LOWENSTEIN: Of the total PCS market -- DR. PEPPER: The total PCS market. MR. LOWENSTEIN: -- is voice-oriented PCS services at 2 gigahertz. 59 DR. PEPPER: Mr. Kerr, would you agree with that? MR. KERR: Overall, we see new PCS taking about a 25 percent market share, going at year 10, assuming a start date of '95, taking us to the year 2004. I think the real critical issue is there's a gap emerging between the technology vision of anywhere, anytime, to anything, personal number, accessible at all times, and the realities of what the consumer market are willing to pay for. A lot of our research has shown that the consumers want wireless pots. They don't want a lot of bells and whistles and, more importantly, they're not willing to pay for a lot of bells and whistles, at least initially. Part of the issue is, if I may, a customer on cellular today, for example, I'm typically not receiving a lot of calls because I'm scared to death to give my number out because my bill's going to shoot through the roof, which is just a fact of life of cellular today, or wireless today, not to pick on the cellular industry. But the consumer market is not receiving a lot of calls; they're not giving their phone numbers out, and 60 so essentially, if we look to the future, what they want is a more cost-effective, wireless voice solution. They're likely to adopt PCS for their convenience to make outgoing calls. The ability to receive calls is important. Don't get me wrong. That is a feature that they want, but most consumers that we spoke to are not envisaging receiving lots of calls. If you're not receiving lots of calls, you're not aware that you have a need for advance call screening, call management, default to voice mail, and so on. So we have this gap between high envision of intelligent network services and the consumer market, which wants a cheap voice service, and somewhere in between there new service providers have to find a way to profitably serve a segment with reasonable revenue lines while developing the consumer market awareness and, over time, second generation PCS, then we'll see demand for some of these advanced features. So I think it's important to focus in on the pricing, positioning, and marketing factors for PCS and not get too carried away with the technology side of the equation. 61 DR. PEPPER: So you're really seeing about within 10 years 2-1/2 million customers for PCS voice services, and you're looking at what projections for the cellular market for similar services at that time? MR. KERR: If we look out over that time frame, cellular will have a total of 30 million subscribers. Paging will be running in the 20 to 21 million range. And there is a lot of substitution or far gone growth in both cellular and paging, at least initially, so in the year 2004 cellular is still the largest market, with approximately a 60 percent share of revenues, PCS takes about 25 percent of revenues, and the balance, in our definition, coming from paging services. Now I have not addressed the unlicensed market opportunity, which we see as a discrete opportunity, at least initially. BIS is in the process of completing a demand study for the unlicensed industry on behalf of you, Tom, and that will be completed shortly. So this is just the licensed PCS market that we're addressing. DR. PEPPER: Does anybody want to comment on what Mr. Kerr said? 62 Yes. MR. TWYBER: I agree it's a matter of definition. Really, the only two markets that are defined now that you can go and ask intelligent questions about are cellular-like services and cordless-like services. All of the other anticipated and projected applications, it's very difficult to go out and find out an educated consumer base that could help you with those market forecasts. If you just look at those two, cellular-like services at 2 gigahertz, I think we show the same kind of numbers with others here. We're looking at about 8-1/2 million subscribers in 1998 versus 33 or so in the cellular industry at that time, so 20, 25 percent of cellular-like, high mobility, wide coverage subscribers will be at 2 gig. On the unlicensed side, where you can actually go and ask questions about how cordlessness would benefit users in offices and hospitals, and so on, we found a similar kind of number, about 9 million subscribers, by 1998, on about 8 percent of the PBXes in the U.S., we would find about 9 million subscribers. 63 So on top of that are all of the potential applications, and wireless access, wireless plots, PDAs, data, and so on. But, just given those two sets of numbers, on the well understood markets, I think it's a tremendous opportunity. MR. HALLER: Could I expand on that a little bit. You draw a big distinction between licensed and unlicensed services. I'm curious. Do you think that it would be economically feasible for someone on the unlicensed spectrum to provide a full feature PCS kind of service without having to have the same kinds of build-out as a license, the same obligations? Is it really possible to provide a competitive service on the unlicensed or is it truly complementary to the license? MR. TWYBER: I think it's largely complementary. I mean, you could envision an unlicensed service where the provider -- somebody put unlicensed PCS in their hospital, for example, or in their office building; was able to use that spectrum without anything more than the coordination 64 that you're expecting, and yet their users, their employees, could use that terminal home for cordless applications, perhaps with some converter boxes and wire and things. I don't think it's immediately obvious how you could provide a public kind of service with that technology, but you could certainly provide more than just residential cordless or office cordless. DR. PEPPER: Are there other questions from people? THE CHAIRMAN: Could I ask a question? DR. PEPPER: Sure. THE CHAIRMAN: This is just to focus my understanding a little bit. Mr. Hamilton, you said in your submission, and I think you had time before the bell or say orally, that you project the total U.S. mobile telephone voice market will reach 87 million subscriptions by the year 2004. MR. HAMILTON: That's correct. THE CHAIRMAN: That number included cellular SMR and PCS. Is that correct? MR. HAMILTON: That's correct. 65 THE CHAIRMAN: I think it was you, Mr. Kerr, who said that PCS represents a market that you would predict would support 17 million subscribers by the year 2004. Do I have that right? MR. KERR: Correct. THE CHAIRMAN: Now, just let me see if I have this right. Mr. Hamilton, you said that 32 percent of your 87 million, which my math says is 29 million, would be the PCS market. MR. HAMILTON: Yes. THE CHAIRMAN: Is that the right number to compare to your 17 million, Mr. Kerr? MR. KERR: Or 17 million is on a total base of 68 million users, including cellular paging and PCS. THE CHAIRMAN: Is it right to understand, you and Mr. Hamilton to be saying separately, 29 million PCS, 17 million PCS? MR. KERR: Correct. THE CHAIRMAN: Could both of you please comment on the reasons for the difference? MR. HAMILTON: Well, I would just like to add 66 that we see PCS having some unique advantages, which I would like to remark on. One of them will be the MTA license definitions. We believe the wide area -- starting out with a very wide area license -- will give them an advantage over some of the other industries, starting out. There's no need to aggregate a lot of licenses, like the cellular industry is still doing, trying to get that area needed, that consumers want, without having to do all of the roaming which we have seen to be a negative with the cellular industry. We also see the unlicensed PCS bands as really, again, being a real positive for the PCS. I agree with Dave Twyber, as far as we see it's a complementary service. We see the unlicensed and licensed operators getting together, having a marriage of services, and that will really be a critical difference between the cellular industry, the SMR industry, and even the paging industry. THE CHAIRMAN: Do I understand you to be saying these are perceptions of the future for PCS that you believe Mr. Kerr does not share, and that accounts for the 67 12 million extra subscribers in your prediction? MR. HAMILTON: I can't comment on his. THE CHAIRMAN: Are you saying you don't know why he's at 17 million? MR. HAMILTON: Yes. I mean, I absolutely don't know. THE CHAIRMAN: Do you know why you're at 17 million and he's at 29 million? MR. KERR: I know why I'm at 17 million. [Laughter] I guess our view of PCS, actually, the opportunity there has diminished over time as the market has developed. A large reason for our increased conservatism on PCS relates to the fact that we do not see how all of the allocations can be filled in all markets. Further, with such a potentially crowded environment, particularly in the top 10, 15 MTAs, it's going to be a very tough market to make money in. At the end of a day, despite looking at the range of services and the public good, people do not commit capital and deploy networks and run services if they're not going to get a return on that investment. 68 Part of our conservatism stems from the fact that we see a tremendous concentration in the top 10 or 15 MTAs, which will be hotly contested. Outside of that, we think it will be very difficult to raise capital in many markets. Some potential service providers who do not win the 30 meg allocations, are likely to sit back and wait until an inevitable consolidation happens and pick up the spectrum at cutaway prices. So what we see as a staged development, ultimately, we still think there's a tremendous opportunity for PCS, but what we see as an extension of a timeline. Because the market in which you have potentially seven allocations competing for a set of customers; on one hand you have consumers who have not demonstrated a willingness to pay significant premiums for enhanced features. On the other hand, you have the business market segment who everybody is going to be trying to focus on because of their highly monthly billings; it leads to a situation where the rate of adoption and the rate of inexpensive consumer market services will be slowed down. 69 That's the reasons behind our more conservative forecasts. THE CHAIRMAN: Do you -- and understand, please, I realize that both of these are a lot more than zero and both represent tremendous economic growth for our country, but still an interesting difference, unless you both agree that it's not interesting and can explain that to me as well. If I could follow up on this, Mr. Kerr. You say: "In its current format, PCS will not realize its full potential on a timely basis." I'm reading from your written submission. "And most importantly, the public will not be best served with the diverse range of cost- effective products and services." Would it be correct for me to infer that you, in effect, are saying that you might be closer to the 29 million projection if there were a different format? MR. KERR: That is correct. In fact, our baseline scenario we had drawn for PCS, and in an environment with two, or at most three, strong MTA competitors, would suggest a market potential up in the 30 70 million range -- 30 plus million. At the end of a day do I believe that PCS can attain 29, 30 million subscribers? Absolutely. My debate is when they will achieve that. THE CHAIRMAN: Well, I suppose everyone would agree the sooner the better. That's a fair statement, isn't it? MR. KERR: That is a fair standard, and the issue I guess, therefore, is what mix of regulatory and technological environments will get us there at a timely fashion. THE CHAIRMAN: Just to close this loop, has he given you any better insight on his 17 million? Did you want to comment on that? MR. HAMILTON: No, I really wouldn't want to comment on his forecast. I guess I just want to emphasize that of all the forecasts we've been hearing, even though there may be great ranges, as you mentioned, they are very higher -- greater than zero. I think that is really due to of the cellular, SMR, PCS, and even narrow band paging, they'll all have some equal capabilities, so there really will be a real 71 fight, and I think what's more clear is how big the numbers are versus which industries are going to get which, and that will be left to the competitive market. I do agree with some of the other comments, in that if you look at where the subscribers will have to come from to meet any of these demand projections, it will have to be on the consumer side. Our research has shown that 70 percent of the new cellular users are predominately personal users, and even 50 percent of the paging users today are using the pagers for personal use. Some of the other -- I think GTE has said that they have found price elasticities being the key, and we also see that. These consumers, they'll have a choice between a lot of different technologies to serve their basic needs, whether it be in a two-way paging or whether it be in a PCS or cellular or digital SMR. THE CHAIRMAN: Did you agree -- just as my last question -- do you agree with Mr. Kerr's statement that in its current format PCS will not realize its full potential on a timely basis? MR. HAMILTON: No. Again, if PCS is licensed in 1994 -- the end of '94 -- that'll be a key point. As far 72 as the seven licenses, we see it very rapidly consolidating between three and four. We don't see seven being out there on the market for long. So even thought there might be seven licensed, our predictions are based on three to four PCS providers in each market. THE CHAIRMAN: So you think that he's right, that that's the way to maximize the potential, but you think it will -- MR. HAMILTON: It will happen. THE CHAIRMAN: -- it will reduce to that quickly, anyhow? MR. HAMILTON: Yes. MR. LOWENSTEIN: Can I add something here? THE CHAIRMAN: Sure. MR. LOWENSTEIN: As the third kind of consultant, or market research-type on the panel here -- THE CHAIRMAN: I haven't run your calculation yet. 17, 29, and what number do you have? MR. LOWENSTEIN: The one point that I think is a little bit, a demarcation between these two speakers is, I think one is looking at ESMR as part of the mix and the other isn't, and I'm not remembering which one is and 73 which one isn't. I think that is a fairly key issue, particularly in terms of the business market opportunity. Business customers are largely unserved by wireless services right now, or the types of wireless services that they would like, as Mr. Twyber mentioned in his testimony. I think that the longer there is a delay in the allocation of licenses for PCS, the more of an opportunity it creates for digital SMR services, such as those being proposed by MCI Nextel to come in and offer enterprise- wide solutions that integrate voice data as well as paging technologies. I also think the one issue that hasn't been addressed today, and I think it's interesting to potentially explore, is the non-2 gigahertz PCS type services but extended range wireless services that will be offered by enhanced cordless phones. There's a lot of development work taking place by those who are manufacturing cordless phones right now that will significantly expand the range of today's cordless devices from 100 or 200 yards, out into the 1 to 3 mile range, from a home base station. 74 Clearly, even if that's not of the 2 gigahertz band, which it probably won't be, that has a significant potential for taking a part of what is the forecast for newly-licensed PCS as part of basically an enhanced cordless telephony service that has rates closer to land line rates and has a fairly broad appeal to consumers who are already very much used to. As we mentioned, 50 percent of households have cordless phones right now. They're used to that form factor, they're used to the structure, et cetera. So I think it's important to recognize that as well. I think we're all in general agreement here as to the size of the wireless opportunity. If you look out in the 5- to 10-year time frame, I think all of our numbers kind of converge upon somewhere around 30 to 40 percent of individuals having a wireless service and a fair approximation in terms of number of households, I think, where the disagreement is is in terms of where it will come from. DR. PEPPER: You've predicted, if I read this correctly, by '98 about 2.5 million new PCS voice customers? 75 MR. LOWENSTEIN: Yes. Just on the newly- licensed PCS. DR. PEPPER: All right. Then about 15 percent of the forecast base of 32 million from cellular. I guess one of the questions is: there seems to be distinctions being made between cellular and PCS and advanced paging services, extended cordless phone. Are those correct market segmentations going forward, to maintain? To what extent will cellular operators be able to provide and provide a full range? To what extent would a 30 megahertz PCS provider be able to provide the full range of services? One of the implications from what we're hearing, is that once a cellular operator has a customer, it appears that your assumption is that that customer is locked in, that they cannot move or be moved to one of the other new service providers? MR. LOWENSTEIN: Well, we think that the cellular companies are extremely well positioned to offer PCS-like services over the existing cellular spectrum, as the complementary set of services to what will emerge in the 2 gigahertz band. 76 As they digitize their network, as they put in more microcells, particularly some of the B side carriers, for example, that R-BOX subsidiaries, have already increasing levels of intelligence land line network to connect to and offer that fall and retype services, they're very well positioned to offer much of what we see as a PCS type of services. That's not to say that they're not interested in and will not bid for some of the licenses in the 2 gigahertz band, but we think that, given that market is not yet a certainty and it's a new market, that they will be continuing to deploy network infrastructure to facilitate competitive services over the cellular spectrum that are very much PCS-like in nature. That's one of the reasons why we have forecasted and segmented the market in the way we have. MR. HALLER: I'd like to get some expansion on that, if I could. Again, since we didn't give directions on how you had to present your charts, it's a little difficult to compare two people, but I'll just give you an example. I know that there's disagreement here, but I'm 77 curious as to why both of you feel that way. Mr. Stroup, you indicate that in the year 2003 that cellular will have about 17.4 percent penetration, whereas PCS is only going to be about 10.4, so it's not double but it's still highly balanced towards the cellular side. Mr. Hamilton, you have similar projections. Yours is 32 percent for PCS and 56 percent cellular. Others may have similar projections, but those are the two I happened to pick out. Why is that? I know, Mr. Lowenstein, you've indicated that cellular is already in there, they're well positioned. Are there things the Commission should be doing to assure that PCS, when it comes on line, is going to be an aggressive competitor to cellular? Anything we can do to make that balance a little different than 2:1, at the year 2003 or 2004? Tom, do you want to start? MR. STROUP: Sure, I'll jump in. I think a major factor that has to be considered, and that may explain some of the discrepancies that you've heard, is definitional. We deal with six services in our study. 78 I think that one factor that has to be considered is the year of licensing, and that may explain the difference between 17 and 28 or 29 or ours of 31. The longer the Commission delays in getting onto licensing, the greater the advantage the incumbents have, whether they are cellular carriers or ESMR carriers. That's a very important factor, and that's a primary reason why cellular will continue to have a dominant market share, or a major market share, is that they are out there operating, adding 14,000 customers per day. I think it's extremely important that the Commission fashion rules that allow the new entrants to be able to provide a competitive service, but that they be able to do so quickly, because one of the comments that's already been made is that this is seen as opportunity that's slipping away. And that's absolutely right. We can debate the market structure, the number of licensees, the size of the spectrum grants for the next two years, and not have any better idea of what the right answer is. I think the advocates of each position have made 79 their points quite clear. The record is full of all of the arguments. I don't think that we're going to hear anything new, but it will be irrelevant if it takes two years to be able to answer those questions, because the opportunity will have slipped away. DR. PEPPER: I don't think anybody has suggested that it's going to take two years to answer those questions. In fact, we're moving quite rapidly. The purpose of this hearing -- these sets of round tables today and tomorrow -- is so that we can more efficiently collect information from the competing parties who usually come in on one on ones and do it much more efficiently so it can move much more rapidly. THE CHAIRMAN: Could I ask you, and you only need to take two minutes to answer this. "In its current format, PCS will not realize its full potential on a timely basis." That's Mr. Kerr's statement. Do you agree with that? MR. STROUP: No. I believe that the market will make corrections. I believe that if the Commission allows companies to aggregate the spectrum, that if there are inefficiencies that are made or incorrect decisions that 80 are made in the allocation, it will be corrected. I don't think that there is a system that will work well in the urban markets and in the rural markets. I don't think that there are areas of the country where I grew up where there are going to be seven new PCS licensees, in addition to two cellular and an ESMR license. However, in New York City, that may be a completely different situation. I think rather than continuing to debate that issue, the market will correct for any inefficiencies that occur in the licensing process. THE CHAIRMAN: Let me see if I have this right. What you're saying is, it may well be that Mr. Kerr is exactly right, but it doesn't really matter? MR. STROUP: I think that, again, if we let the debate go on, it won't. But, most importantly, we've found a couple of things, one is that the customer, the buyer, when we did our real market trial, and sold services to them, was interested in the value of what they got, and pricing did influence their buy decision substantially. 81 We -- we, in a four month period, penetrated 15 percent of our target market, and we clearly were able to influence that a great, great deal. So I think that we need to make sure we understand that the assessment of demand, very quantified, depends upon a set of assumptions, and we -- we're none of us are clairvoyant enough to know 10 years downstream what the real application will be. We see cellular, and PCS, and wireless data, and imaging, and other kinds of things all coming together, and being part of personal communications. We think the marketing will determine that more than will some of these other factors, although they're important, and they have -- they have to create an equal opportunity for the service provider to do it, ultimately, what the customer says, if it's met, we'll allow the penetration to be pretty much controlled, to be whatever depth we want it to be. MR. PEPPER: Can we pursue this pricing question ,for a moment. You talked about the importance of pricing and price sensitivity is really critical here. Could you pursue that in terms of the entry, the 82 -- the cost of the handset, and also then in terms of the monthly service charge, and the extent to which it goes back to a question asked earlier that the incumbent cellular operators have been able -- or, in your mind, are they being able to lock in customers, instead of migrating them or moving them to a new PCS service, as it's priced more aggressively, and if they can maintain and keep their customer base by lowering price, then, you know, what does that tell us today about the price of cellular service today. MR. WAYLAND: Well, I think you can get in to a commodity offering and lower price, and certainly that is the strategy that some may choose to use. That's not, I believe, the best strategy for providers to provide, to use. Providers should look to the market needs in developing a new an unfulfilled and under-fulfilled market need, and develop offerings to satisfy them, and charge the fair amount that the customer is willing to pay for that. What we found in our telego trial was that the customer doesn't want to put up that large one time cost 83 for the phone. They don't want to sign a one year term agreement. They don't want a large entry cost, but they are willing to pay some numbers of dollars per month as perceived as equal to the value of what we provided them. And we found what they were willing to pay, in our trials, was something under cellular monthly revenues, but certainly greater than what they pay today for the local exchange services, so there's a substantial amount of per-customer per-month revenues. And we could influence that a great deal by putting features, and characteristics, and functions into the offering that met their real needs. MR. PEPPER: Mr. Lowenstein, or Mr. Hulak, Mr. Hamilton, in terms of your market research study, what have you found on pricing service? MR. LOWENSTEIN: I would agree with what Mr. Wayland said with one thing, a very important caveat. Any wireless service that includes some sort of a wireless capability from inside the home, a cordless type capability inside the home, or near the home, that one could normally approximate with today's cordless phone or enhanced cordless phone, consumers are not willing to pay 84 more than traditional land line rates for that type of service. So, for example, we conducted the survey, and found that 33 percent of the respondents were either very or somewhat interested in the type of follow me type services where the terminal cost would be between $2 and $300, which we think is a fairly reasonable entry point for the type of premium levels of mobility that would be accessible from a follow me type service, and then in terms of the usage charges, they would be charged land line rates when they're in or around the home, they would be charged 25 land line, plus 25 percent when they're in kind of the neighborhood, a kind of five mile radius of their home or their office, and then when they're in a higher speed or wider -- wider levels of mobility, more approximating a cellular type services -- service, it would be a 50 percent land line, plus 50 percent. All of those rates for the wireless elements of that and for the mobility elements of that are about half of what today's cellular rates are. The average cellular call today, at peak time, you know, during the day, is approximately twice the equivalent cost of a land line 85 call. We think that PCS prices will have -- will have to settle in somewhere between typical land line prices and today's cellular prices to be attractive to that next wave of potential users. MR. PEPPER: Is it he next wave? So you're looking at attracting customers today who are not customers for wireless services like cellular, as opposed to trying to move people from a cellular to a new -- a new service provider? MR. LOWENSTEIN: Well, mainly -- mainly, yes. There will be some of the -- some migration, as well, to a more follow me type service because of the fact that that's not undertaken by cellular, but it is both -- it is the consumer market, but also the -- the business market, to the extent that companies implement a wide solution such as the type of solution Mr. Twyver mentioned, something that might be hanging on from the wireless PBX base, for example. So a business, an employee, can take their terminal, and they use it in their office, but then they can use it also when they leave the office, and connect on 86 to another -- to a wireless network and use it in their home, or while they're commuting to and from work, for example. MR. PEPPER: If a provider can offer that, maybe I'm missing something. I don't understand then why more customers wouldn't migrate from today's cellular service to a new service provider if cellular did not provide that kind of follow me service. The enterprise service, you're saying that they will be able to? MR. LOWENSTEIN: Yes, but -- but these services I'm talking about right now aren't really offered by cellular. MR. PEPPER: No, I understand that. Therefore, if they're desireable, why -- why will cellular maintain at least, depending upon which projection, at least a two to one penetration over any of the new entrants for the foreseeable future if the new entrants are going to provide the new kinds of services that you're talking about, as well as lower pricing, which we've heard is terribly important? MR. LOWENSTEIN: Because of the installed base, and because of the fact that a lot of users are business 87 users, and there's a little bit less price sensitivity in the business model than a consumer model, which is the next wave of adopters that we're looking at in terms of the new services, and also because of the fact that the cellular providers will probably lower their prices, as well, in response to their potential competitive service offerings of the new -- of the new entrants of the market and the new services. We do forecast that cellular prices will fall over time. They have already, and they will continue to do so. MR. PEPPER: Is the installed base issue, the customers' investment in their own equipment, I assume, what you're talking about? MR. LOWENSTEIN: Yes, and rate plans, and the fact that businesses are -- are starting to adopt cellular type solutions a little bit more aggressive for their employees. MR. PEPPER: So what you're saying is that there is a real head start advantage for cellular today with the customer -- their existing customer base? MR. LOWENSTEIN: There definitely is somewhat of a head start advantage for -- for cellular providers, 88 absolutely. MR. PEPPER: Can anybody quantify that, Mr. Hamilton? MR. HAMILTON: Well, as far as the -- talking about the installer base, and what that means to the competitive environment, it's much harder for the PCS providers to take away a customer from a -- if they're already on a system, cellular SMR paging, than competing for that customer as a new customer. It's not only related to price, it's related to things brand loyalty and education about the product. PCS is going to be growing out, and the consumers, it may be in a very confusing environment in the future. There will be, from all directions, advertisements about these new mobile services, however they're defined and promoted, and they're going to have to try to educate the consumer about what's different about their service and the services they already have. And I think that also goes back to the delay issue. Why is that so important? It's because if growth in the cellular and other mobile industries were very low or moderate at this time, delay will not mean as much, but 89 if you look at it over the past two years, both the cellular and paging industries have met with phenomenal growth. I mean, more growth in that two years in the cellular industry than in the previous seven years. So when we look at our demand forecasts, we see that -- if we look at demand as, you know, the traditional S curve, are you in the beginning, rising steep, or in the mature markets. The growth that we've seen over the next -- this last two years, have meant that we will reach that maturity at sooner levels, and that really impacts any delay that a new service provider has of getting into the market. MR. KATZ: This is a, I think, very powerful argument in favor of the FCC moving as fast as possible, and you would agree with that, also? Let me ask you if you also envision what Mr. Hulak was talking about, because I think, and you also Mr. Stroup, and that is the sort of devolution from seven to three to four entities. Does that process have in it any potential for delay or do you think not? MR. HAMILTON: We think the -- whatever the market structure or the FCC provides, as long as it allows 90 again for aggregation and no restrictions upon what you can do with your license, that consolidation will happen quickly. MR. KATZ: But do you think that the necessity to move through that consolidation is and element of delay that we should try to avoid, or, by contrast, do you feel that that's not the sort of delaying process that you would be concerned about? MR. HAMILTON: I would be concerned about it. I wouldn't -- if it meant delaying the licenses and trying to get a better scheme, in order to prevent some consolidation, no, then I'm against it. Go ahead with the licensing as it is in the market. MR. STROUP: If I could comment on this delay issue. I think that there was a widely held belief in the industry, approximately six months ago, that auctions would be commencing this summer. And, now, based on discussions that have taken place, the expectation, it's probably going to take place later this year or maybe even into 1995, and that's the delay that's being discussed. I'm delighted to hear the comments that have been made on planning now to move them forward quickly. 91 But bearing into the expectations of approximately six months ago, there -- there already is delay that is occurring. MR. HALLER: I would like to ask each of you to respond simply to a question. If we make no changes in the decision -- if the commission makes no changes in the decisions that were made previously, we avoid a recon cycle. If we make changes, then we wind up with another with another pleading cycle. Now, which is better, to try to make other decisions, assuming that there are some in the last decision that were incorrect, or could be changed for the better, or is it better simply to affirm the previous decision, given it wasn't an illegal decision, you know, it could be affirmed, just as it was. What is the better choice, to go forward, and affirm the last decision, or to try to refine it, and risk another pleading cycle? Let's start on this side. MR. TRAMPUSH: In terms of no changes in the decision -- I'm representing the rural telephone companies. No changes would basically preclude that segment of the industry's participation in the new 92 technology. The main rural companies that are interested in pioneering their own PCS serving area, and, in fact, they may be the only ones interested in providing that service. MR. VAUGHAN: Excuse me again. You're saying we should make the changes? MR. TRAMPUSH: I think you should make changes, yes, Mr. Vaughan, and the nature of the changes would include examining cellular ownership restrictions. There are many small companies that own more than 20 percent of rural cellular partnerships that have no control whatsoever over those partnerships, they're more of an investment. So if you want to foster competition between rural and PCS, one way to do that would be to look at relaxing those ownership restrictions. Another important thing to look at, which has been added here by the coalition is to allow partitioning of licenses. Small companies can't afford to buy BTAs and MTAs, yet they are interested in serving the wire line territories. That would also speed deployment of the service to rural areas quicker than it would under BTA and 93 MTA through a licensing scheme. The third area to look at would be the build-out restrictions in the rural areas if partitioning is allowed to make the economics work, so the service can be provided to customers as soon as possible. MR. VAUGHAN: Simply affirm the current decision. MR. WAYLAND: We believe a re-look at this is certainly in order. I believe that it's very, very important that the commission carefully examine the nature of meeting the consumers' needs, and time to meet those needs is part of it, but to be able -- MR. VAUGHAN: You're suggesting that, right now, the way the commission's order is written, that if the commission has to fix this, we need a full year to do so is because if the commission makes a major change, we're going to go back in to the recon again, and that's what you're saying. It's better for this commission to take another full year before it acts, based on what you've read in that order? MR. WAYLAND: Yes. I think it's much better to do the right thing than to do something that isn't 94 quickly. MR. LOWENSTEIN: Our view is -- is not necessarily advocating that you make a change, or not advocating that you make a change, but -- but more to the point of view that a six month to one year delay in PCS is not the end of the world. I think it's more important that this -- that this market be done right. I think it's important to visit the cellular experience, and recognize that there were errors made in the way the cellular market is rolled out, and the fact that we have no national cellular network right now, and are real patchwork in services, and that one can't use their phone when they travel from Boston to Washington without going through all sorts of complex registration procedures, which consumers are absolutely not going to want to have to go through with their PCS phones. I think it's important to recognize that those mistakes can't afford to be made again, if the market forecasts that has been made today by all of us in the industry are going to be realized. MR. HULAK: In terms of the issue of affirming 95 the current issue or going into recon, although the current poor scheme is not the best, we are aware of the limitations on PCS demand if we continue to get cellular and all the other wireless players time to prepare for it. So, in an imperfect situation, I guess we would affirm the decision, let the market forces correct. Our forecast reflects the fact that market forces were correct, but that it will lead to confusion, which will limit the short-term out-take PCS. MR. VAUGHAN: I'm sorry. Your answer is take the year or not take the year? MR. HULAK: Not take the year. MR. PEPPER: What happens if it was six months? The question is, what is in fact, what is delay? MR. HULAK: If we take -- if we say a year to reconsider, and then we'll go to the auction process, then that takes us beyond a year, and the question will become how long will it take to get through the auction process. MR. PEPPER: I guess the question then is, when do you -- when do you see it important that the auction process begin, and don't say as soon as possible. MR. HULAK: Delays of a matter of a couple of 96 months, while creating some of these, and giving the trade press something to write about, I don't think are going to be substantive. If we're talking delays of more than a year, then we're further undermining the confidence in the market and the ability to re-establish. MR. PEPPER: So you're saying if we can begin the auction process around the end of the year, that's different than having to begin an auction process in the summer of '95? MR. HULAK: Psychologically, I think that the impact of the delaying licensing into summer of '95 would be significant. MR. PEPPER: But, psychologically, beginning at the end of '94, beginning of '95 is significantly different? MR. HULAK: Pretty much everyone is expecting the licenses to be delayed until the end of '94, and, we, quite frankly, -- MR. PEPPER: What you're saying is that if we start at the end of '94, it's not a delay by definition? UNIDENTIFIED SPEAKER: It's already at six 97 months if we talk it up. UNIDENTIFIED SPEAKER: We've lost the six months. MR. HULAK: Right. You know, it depends how you define it. It's like calling it a deficit, you know. MR. PEPPER: Mr. Twyver. MR. TWYVER: We think that the commission can generally affirm the decisions they've been making, have taken, especially with spectrum and the allocations of licensing. We believe a couple technical corrections have to be made in terms of power level, to allow PCS to be cost effective competitor to the user of cellular, and we believe width etiquette would have to be corrected. Other than that, I think it's very good the way it is, and the sooner we have the options the better. MR. PEPPER: I guess one of the questions, again, more for the general counsel's office is how the implication that those kind of tweaks or minor adjustments do not trigger a new recon of pleading cycle, whereas, you know, other adjustments do. MR. TWYVER: They were part of the original 98 proposed rule making, so presumably they could be fixed without recon. I don't know what the legal implications are. MR. STROUP: I concur that there are technical rules that should be changed. Beyond that, I would suggest affirming the decision, and I would also note the commission consider the incentives of the people that are urging you to take the time. MR. PEPPER: Mr. Barrett, any questions? MR. BARRETT: Yes. Mr. Wayland, one of the problems you have is that we -- we were watching this in our offices, and I just ran in there because you had talked about doing this the right way. What do you call the right way? MR. WAYLAND: I think it's very important that we recognize that the cellular providers today are going to continue to evolve the offerings that they make to the consumer to serve what those evolving needs are. I've heard a lot of discussion today about cellular carriers having to drop price, and lose customers, and that they would retain a status quo in their offerings, and I don't believe that to be the case. 99 No one is currently in any bettered position to serve the wireless needs of the customer in their locations than the cellular carriers, but they need to have the opportunity to do that, and to evolve to serve those needs in a fair and equitable way with any others who come into the market place. MR. BARRETT: Let me ask you this, have you achieved those goals that you just described, or would you be suggesting that we probably -- I think it was in reference to what you asked here maybe a year, two years, whatever it was, and do it the right way, would you have been still suggesting that? MR. WAYLAND: I'm sorry. Could you ask again -- MR. BARRETT: Is it the configurations you have difficulties with, or is it in-service or out of service problems you have? MR. WAYLAND: Well, for example, the -- the bandwidth of the allocations, we believe, as I said in -- in my testimony, that 20 mega-hertz represents a very good bandwidth to be provided for all users. We believe that - - MR. BARRETT: Is that in addition to the mega- hertz, the amount that the cellular user is already -- how 100 many you all have? MR. WAYLAND: The cellular carriers today have in the order of 25 mega-hertz. However, -- MR. BARRETT: You ought to be able to get one of the 20s and have 45? MR. WAYLAND: I didn't say that. I do believe that the cellular carriers ought to have the opportunity to be freed up from some of these restrictions on 10 percent and 20 percent ownership, but I do also believe that the best interests of the consumer is served by allowing the best provider to have the opportunity to serve that customer need. MR. BARRETT: Would they also be better served if they had somebody to compete against the cellular in terms of pricing and quality of service? MR. WAYLAND: Absolutely. We are very much pro- competitive, and I believe the cellular industry in general is pro-competitive. MR. BARRETT: And I accept that as your description. Then let me ask you this, you, with your already present 25, would also want an additional 20, and other people would have 20, and you would have 45? 101 MR. WAYLAND: No. I believe it's important for us to take a look at what we really have right now, Commissioner. We have 25 mega-hertz, as a cellular provider, in selected locations, and the assignments are on the basis of SMAs and RSAs -- MR. BARRETT: I understand. MR. WAYLAND: Smaller than the BTAs or MTAs. We also have implemented the voice solutions with analog technology, which is what was available at the time. We are -- we need to evolve to digital technology in order to be able to get anywhere near the kind of capacity that someone could get in even a 10, let alone a 20 mega-hertz new spectrum allocation, which would be implemented as digital to start with. So looking at those things, I that think we need to free the -- the -- all the players up, to compete for the market segment on the basis of marketing and sales, and technology innovation on an equal footing and an equal basis. MR. BARRETT: Well, what would be your perception or your description, rather, of an equal basis where we would not have to wait a year, four years, or 102 whatever? MR. WAYLAND: Well, I can't address how much time it would take, but I -- I -- I've always underestimated the time it takes to do these things. I would like to think -- MR. BARRETT: So your four years could be two years? MR. WAYLAND: I would like to think that the commission could take the necessary steps within the next six, plus, maybe 12 months. I'm not in a position to estimate it very specifically, though, in terms of number of months. MR. BARRETT: Mr. Twyver, you talked about the allocations that we've already made are okay. MR. TWYVER: Yes. MR. BARRETT: Under those allocations, why do you think Mr. Wayland wants to change those allocations and -- MR. TWYVER: Well, some of my best customers are cellular operators -- MR. BARRETT: Some of my best friends are, too. MR. TWYVER: I think that just to be clear here, that cellular operators have a tremendous advantage in 103 this coming competition. They've got an install base, they've got quite wide coverage, they've made their investments, they didn't have to pay for their spectrum, they got the brand name, the marketing, administrative systems all set up. There is nothing that we're talking about doing with PCS that can't be done at 800 mega-hertz in a cellular spectrum. I absolutely believe that the cellular operators will be very aggressive and innovative in the services and the pricing that they bring to the market, and they'll be worthy competition of the new folks. I think it's even more important, therefore, to make sure that the new entrants have a level playing field, have the spectrum, the 30 meg, and the MTAs that they need to avoid the incumbent microwave users initially, and build up the capacity to match the cellular operators, have the power and the transmitted -- have the transmitters they need to get the same coverage at lower propagation to engage and so on and so forth. I think the challenge here is going to be to create this level playing field, to allow the new entrants 104 to overcome the starting advantage that the cellular operators have, in order to get anything like a third or 40 percent of the market that we see happening in the next year. MR. BARRETT: So you don't see any problems with the present allocation in terms of technical feasibility or other impossibility of -- not impossibility, any disadvantage, if I may, in attracting capital? MR. TWYVER: No. It's clearly a compromise, but everything is. The 30 meg MTAs -- MR. BARRETT: Our decision was a compromise? MR. TWYVER: Well, you'll have to talk, sir, but it appeared that it was. The 30 meg MTAs are attractive enough to attract capital, are big enough to allow current technologies to get a start, and avoid the incumbent microwave users for a period of time, and are big enough to allow businesses to build out broad and diverse services in those MTAs. So I think the 10 meg chunks are attractive for an innovative new players. They are attractive for low power local services, for wireless local loops, and for data access. 105 MR. BARRETT: Are the 10s that significant standing alone, only able to aggregate three of the 10s? MR. TWYVER: I think, as others have said here, market forces -- MR. BARRETT: No, no, no. I'm asking what do you think. MR. TWYVER: In terms of the technical -- MR. BARRETT: You said they were okay technically and otherwise, and then you also referred to the tri-caper. Would they be that at the four 10s, or remain by themselves, or only if one was usable aggregate three of the 10? MR. TWYVER: I think aggregation is a powerful market force, and I think -- MR. BARRETT: I understand that. But my question is, whether or not you accept them standing alone, or are they only powerful and attractive if you're -- with the ability to aggregate three of the four 10s? MR. WAYLAND: They're valuable alone. They're potentially more valuable in some markets with aggregation. MR. BARRETT: Let me ask you this, if they're 106 valuable alone, without the ability to aggregate, are there difficulties with manufacturers providing the 20 in the lower band, or the one 10 standing alone? MR. WAYLAND: Aggregating a 10 with a 20, or 10 with a 30, poses technical challenges that are really cost challenges, that probably won't be met for five years or more. MR. BARRETT: Do you want to finish, Mr. Wayland, and then I want to ask Tom a question. MR. WAYLAND: Well, as I said in my written testimony, there are certainly -- the technology issues, and we haven't addressed those very thoroughly this morning, there is another panel to do that. MR. BARRETT: I do understand that. MR. WAYLAND: But there certainly is a reason to think that the 10 mega-hertz allocations are substantially disadvantaged as compared to the 30 mega-hertz MBAs, which are at the lower end of the bank. It's -- I think it's very, very important, though, that we continue to not just be focused upon the specific details of assumptions that lead to projections, and assumptions about -- 107 MR. BARRETT: Tell me, what does that mean, assumptions that lead to projections. MR. WAYLAND: The assumptions that we use in projecting the market share that one provider or another provider will have in the future. MR. BARRETT: All right. But that should not be government's role. We shouldn't be involved in whether or not there's demand. We ought to do what we ought to do in terms of allocating in the most reasonable and timely fashion whether this technology will be deployed, and let you determine whether or not there is a market out there. You either make money or you lose your money. My concern is, under -- under what circumstances can we provide the best allocations that we can bring to the public the kind of services that you all suggest that you can bring, voice video, imaging, or data transmission. MR. WAYLAND: Yes, sir, and I agree entirely with the statement that you made about leaving those to -- those things to -- MR. BARRETT: I'm not in the market myself, obviously, and I'm not sure, you know, you're speaking -- MR. WAYLAND: But I believe some of the comments 108 that have been made concerning not delaying have been driven more by these abilities to capture immediate market share, and comparing that with traditional assumptions of applications, rather than looking to the future and what the opportunities are. Personal communications, in our view, represents a whole collection of services, and not just voice. It's a range of voice, different kinds of applications that support voice needs, in different regions and different areas, it's faded its imaging, its paging. It's the merging of those, and we must have sufficient bandwidth in the hands of the people who can do it in order to be able to. MR. BARRETT: Let me ask the question that I asked Mr. Twyver, and, that is, that if, in fact, you have four 10s there, and one has the ability to aggregate three of the 10s to make it a 30, is that 10 capable of providing the voice data? Obviously, it's capable of providing voice, but is it capable of providing video and imaging or data services in a -- in a quality way? MR. WAYLAND: Technology has two very, very 109 important factors. Technologically, one can do that. Assuming that you can clear the bands, you can do that. The cost associated with doing that -- MR. BARRETT: A quality -- a quality transmission can be provided by the 10. MR. WAYLAND: Yes, absolutely so. The cost of doing that is going to be determined, to a very great extent, on the size of the market that supports the unit cost of the devices that are sold, and that's going to be the fundamental difference between doing there and doing it somewhere else. If the somewhere else has an attractive feature, such as frequency adjacency and pre-existing technology. MR. BARRETT: Let me ask one other question, and I've taken too much of your time, Bob. You see no technical difficulties in the aggregation of three of those 10s, and then having that 10 stand alone in terms of quality transmission, be it voice, they are -- obviously, won't have that much problem transmitting voice, but clearly data and imaging may be a different ball game. You see no technical problems from a manufacture's standpoint? 110 MR. WAYLAND: I'm not a manufacturer. From the standpoint of a service provider who uses technology, though, I do not see a problem with that, with the critical assumption that the incumbent user, the microwave users, can be timely cleared. MR. BARRETT: Thank you very much. I'm sorry for all the -- MR. PEPPER: Oh, no, that's okay. MR. BARRETT: Mr. Wayland, I heard him on the television, and I had to jump up and run in here. Thank you. MR. PEPPER: Mr. Twyver, you are a manufacturer. MR. TWYVER: That's right. MR. PEPPER: Could you comment on Dr. Wayland's last response? MR. TWYVER: There is no technical problem in providing any of these services at 2100 mega-hertz versus 19. MR. PEPPER: At what cost and over what period of time? MR. TWYVER: There is two cost issues. One is, because it's a slightly higher frequency, the technology 111 is slightly tougher, and propagation is slightly shorter, but the driving factor will always be the volume of production that you produce, that you can get to meet that market, so that's going to be manufacture for any of these applications. MR. PEPPER: Well, in terms of aggregation which you said you see as a way out of, you know, a box, what happens in terms of product development if, in some markets, you've had the aggregation of three 10s to a 30, as we're talking about, and in other markets it's only two, and in other markets is a 10 stand alone? MR. TWYVER: That's absolutely no problem. As you know, the cellular spectrum now is divided in half, with a couple of extended chunks. Cellular equipment is agile across those frequencies. I don't see any problem, technical problem at all, in accommodating any combination of 10s, and 20s, and 30s, and that type of thing. MR. PEPPER: We talked a lot about -- or you talked a lot about the 30s and the 10s. Nobody has mentioned the 20 mega-hertz block in the lower band. Could you -- somebody address the demand for that, and what you see as occurring with that band, or 112 with that block, the C block. Mr. Lowenstein or -- MR. LOWENSTEIN: We -- we see that there is some demand, but with the forecast that we have developed for PCS is focused mainly on broad band, on the broad band part of the spectrum and the license spectrum. Although we see a lot of demand, particularly on some of the surveys we conducted for data and messengering oriented services, some of which will be served by the paging market place -- MR. PEPPER: You're talking about the 900 mega- hertz. I'm talking about the 20 mega-hertz C block, the two 30s. Mr. Hulak? MR. HULAK: I guess looking at it from a point of view of who will bid on what blocks, there is no doubt that everybody's first priority in a virgin market, and by a virgin market, I mean one where you don't have any wireless interest today, no exclusions applied, everyone is going to go for the A and B blocks, those that decide they're going to bid for it. The 10 mega-hertz allocations, the existing cellular companies will get them, regardless of whether they're going to turn short-term -- or be short-term 113 returns or not. The C block, therefore, would appear to be a default position for some of the larger carriers buying in on a minority share. Realistically, I can see a fragmented picture where in some markets -- MR. PEPPER: Is the 20 at risk of being orphaned, because it's not 30? I mean, what -- in terms of that lower band, in terms of some of the markets you're talking about. MR. HULAK: Yes. It's not so much that it's because it's not 30, it's because it's surrounded by so much else, you know, other allocations. It creates a very confused environment in the market place. At some point people are going to have to place their bets as to where they want to go, and we know that the larger players will go to the A and B blocks, the cellulars are simply -- they're going to bid on the -- cellular companies will bid on the 10 mega-hertz. So, the question is, if everybody gets their wish list, that leaves a very small community of interest for the C block. MR. PEPPER: I guess the question is, when you 114 leave the current plan alone, and just to move forward, what do you see happening to that C block? Is it going to be bypassed, there's not going to be competition for it, is it going to receive any capital for build out? MR. HULAK: Yes and no. In certain markets, yes, it will, it will receive capital, and there will be competition for it. Pretty much if you look at the top MBAs, everyone is eyeing those markets very greedily, so - -people in New York and LA and Chicago. So we would expect that all the allocations would be filled in those types of markets. You go down into some of the smaller markets, I think it could well be bypassed. MR. PEPPER: Mr. Lowenstein, you had indicated that we should take time to fix, you know, any difficulties or problems that you see in the allocation plan. Was that the kind of thing you were thinking of or are you thinking of -- MR. LOWENSTEIN: No. I misunderstood the question you asked just a moment ago. Now that I'm focused on it, I think actually that, although there will be a lot of emphasis on the A and the B blocks, because 115 those are the most attractive, I think that there is still significant potential for the C block. There will be players who would very much like to be part of the PCS game that might not be winners of the A and B block spectrum, but will still have to try to find a way to play, and outside of the top 10 or 20 markets that we are focused on, there are a tremendous demand in many secondary markets, and, as Mr. Wayland had mentioned, there is plenty of potential to offer a very robust service with that amount of spectrum, so we see that -- we see the C block being very active. What we see is more likely tends to be orphaned, so to speak, would be some of the 10 mega-hertz licenses as stand alones, non-aggregated on parts of the spectrum. In terms of the comment of, if we need to wait for a few months, or maybe even up to a year to do it properly, I think one of the important points to recognize, in one of our survey data reports, and I think if you really look at some of the results of the PCS trials that have been run by the folks at GTE or Bell Atlantic or Pactel is that the willingness to pay a premium for mobility really comes as some sort of a follow 116 me service where there are not the kind of islands of coverage that might be limited by CT-2 type service, which is a possibility of one of the types of PCS services that we're seeing. We see one of the key frustrations among cellular users is the fact that they have areas where they are covered by cellular areas, where they're not, either because of lack of coverage from a geography standpoint, or because of the way cellular licenses are handed out, and there aren't normally frequencies from one cellular region to another. So we really see that the most important thing to recognize -- among the most important things to recognize with PCS is to not make sure we don't create islands of coverage, because that will be very frustrating, particularly to consumers, and we don't also have just islands of service, and that we also try to focus on the --what would have the greatest potential for creating a general purpose device that would support both voice and data, so we don't have what we call the anti- group, and obviously a mobile device glut, that the average traveller had to carry around a cellular phone, a 117 pager, a portable computer, an electronic organizer, and a PDA. We want some sort of a form factor that will perhaps enable an aggregation of devices. MR. PEPPER: Mr. Vaughan, did you want to -- MR. VAUGHAN: Actually, I wanted to ask a question about rural service, and coming back to Mr. Twyver. Do people view PCS as the best vehicle for providing wireless service to rural communities, or are the economics there for doing that, or is NSS service or some other service a better way of doing it? MR. TWYVER: Potentially, PC wireless technology could be used in between wired service and better type service where PCS type of solution would reach traditional customers at a lower cost than the other type service. It could be used to completely expand the universality of the basic. MR. PEPPER: What about the satellite services. We're hearing a lot and reading a lot these days about satellites providing service to low density areas, and you made the point earlier that it's not a demographic, it's the density issue. 118 MR. TWYVER: Potentially, Dr. Pepper, it extends the material like the original service. Well, the handsets are $3,000, so it depends on which service and what application. There's certainly applications, but you won't see them broadcast on direct tv. MR. PEPPER: Can you make the statement that 800 mega-hertz cellular is basically throughout all the PCS type of services right now? MR. TWYVER: It's meeting a lot of the needs here. I think there is a lot of other applications in rural -- rural America. MR. PEPPER: It's capable, but it's -- MR. TWYVER: I think other applications are being provided by cellular that would be provided by another competitive entry. MR. PEPPER: Nothing would prevent cellular from providing -- MR. TWYVER: No, I don't think so. MR. PEPPER: I just have one question for you. In terms of your statistics, if you got perhaps 51, now we're talking below that, would cellular spectrum fully meet the needs and the demands, in your studies, that came 119 up with 87,000,000, 27,000,000, what have you, dropped below. I understand Los Angeles and I understand Chicago and New York. Once you get below that, would the existing 50 mega-hertz cellular, and numerous channels of EMSR, would that provide enough -- more than enough spectrum for you to go for them, or are you supposed to be above that? MR. LOWENSTEIN: For those in the top 50 markets, more than enough spectrum. It's not a question of spectrum. It's a question of pricing the systems. MR. TWYVER: And it's a question of how to use that spectrum. I mean, we had mentioned major new services using the two ban spectrum. It would be a shame to prevent those devices and those services from these being deployed in -- in less dense areas, because it was the wrong frequency. MR. LOWENSTEIN: I certainly believe that the 800 mega-hertz channels available in the existing spectrum is sufficient to serve those needs, as they're understood today, with visual technology implemented as they're understood by the prognosticators who base future on the 120 present and the fact. But I think it's very important that we look forward to saying what about imaging, what about all the other features that data capabilities, the applications that people will want a decade from now is a huge amount of time with the rapid movement of technology. And I believe that it would be risky to say that there would be sufficient spectrum to do all the things that one might want to do, even below the 50, the top 50. That's a long ways down the list, and I recognize that, but I still believe that there -- those frequencies would be put to good use for market needs at some point in time, maybe not as early in the larger market. MR. PEPPER: We have about 10 minutes or eight minutes left, and I want to give people an opportunity for very short thoughts that you may have as a result of the discussion, so why don't we start around the room, and let's get another question. Tom, did you have a follow up. MR. WAYLAND: I just had a follow up on the 20 mega-hertz question. I heard the responses, in effect, 121 really addressed the geographic area as not the magnitude spectrum. Let's suppose that were something like the MTA level mark. Would two 30s and a 20 be a stable arrangement, would that go largely unused in, say, outside the first, say, your top 50 markets. Could you comment on that particular arrangement? MR. LOWENSTEIN: I would suppose some of the unit cost arguments that have been used for beyond the top 50 markets. I think it's important to recognize that the top 50 markets -- beyond the top 50 markets, it would devote a much smaller market than that. For example, it would be difficult to justify in the unit spaces a micro cellular type of network where you have micro cells every 200 meters, like would be supported very easily, for example, by one or more providers in a New York or Los Angeles or whatever. So I think those come down to some of the geography and demographic issues. I recognize that beyond the top 50, there is not the same population density that people would tend to use a vehicle base service a little bit more readily than in a 122 densely populated urban area, for example, and that those markets might be very well served by a -- would be better served by a wide area type service such as a cellular service such as a ESMR service, and perhaps some niche type PCS services that are, for example, data oriented, or enhanced paging oriented, for example. MR. PEPPER: I'll start on this end here with Mr. Trampush. MR. TRAMPUSH: Well, I think I had an opportunity to make most of the points I wanted to make, but I do want to reiterate that equal opportunity for all of the participants in the market represents the right thing to do to serve the consumer, and to get services into the consumers hands in a timely and a cost efficient fashion. There are many providers of wireless services today who are very, very well positioned to do that, and anything which would inhibit their ability to do it would not serve the interests of the public. We -- we believe there is an opportunity here to do some of the things that people have talked about over the last few years about the evolution fm wireless to 123 serve all sorts of needs that only our imagination can understand, and I would like to be part of that, with the commission's making the opportunity available as this -- the ultimate result of this hearing, and the ultimate licenses and allocations evolve. MR. PEPPER: Mr. Hamilton. MR. HAMILTON: Let me reaffirm that I believe that the licensing process should not be delayed due to revisions of the current rules. The FCC should not guarantee success in the market place by guaranteeing, through our knowledge today, what will succeed. They should allow the chance for success. Our own companies have been -- have been something with a lot of entrepreneurial type of individuals, smaller individuals, who want to -- who wants that chance to be in the market place. They're not asking for a guarantee of success. They are looking for that chance, and I believe the entrepreneurial spirit in the United States will overcome what -- if there's any obstacles that the FCC licensing process has now has. MR. PEPPER: Mr. Twyver. 124 MR. TWYVER: Yes. Just a brief comment. I would hope that seven years from now, we're looking back, and services are deployed beyond our imagination, and we're not -- we're not doing studies or debating or considering how we did this in rural America. It's already happened. That's all I have to say. MR. PEPPER: Mr. Lowenstein. MR. LOWENSTEIN: In the ideal world, we wouldn't have a debate, and we'd beginning the spectrum options tomorrow, and I think at the same time it's important to recognize that this must be done -- that this must be done right in the interests of the people who would be potential users of the service, particularly those who are not currently wireless users who would like to be wireless users. For instance, lower prices for their service because of the high -- relatively high price of cellular has perhaps kept them away to date, the worry of being out of coverage range, the fact that we have islands of coverage being a fairly significant concern. I think it's an environment where we have many new competitors in the market place is a very positive 125 one. If you look at England, for example, and the mercury one to one PCM service that's been developed, it's not only created demands for their own service, but it's stimulated demands for all its types of wireless service and all the wireless providers such as in London from the instruction of that type of service. But, it's also, at the same time, important to recognize the strengths of the incumbents in terms of having built wireless market in the first 10 years, particulary in the cellular arena, and the fact that they have bought a very sophisticated network has been deployed, and it's getting more sophisticated all the time, and that they will, too, be able to participate in the PCS, as well. MR. PEPPER: Thank you. Mr. Hulak. MR. HULAK: PCS represents a strong opportunity, despite some of the potential barriers and obstacles that have been raised today. Seventeen million subscribers and $6 billion in service revenues is still a healthy market. In the ideal world, perhaps things should have been done differently with respect to -- the realities are, there are only two or three strong vehicles survive 126 at the end of the day, in our opinion. That said, it's better, we think, to keep this market off and get it rolling. Those who really want to delay, I suggest, need to question why they want to delay. So, reluctantly, I say we should move forward with the currently licensing fee. MR. PEPPER: Mr. Twyver. MR. TWYVER: I think it's obvious with 5,000,000 new cellular subscribers last year and cellular tariffs that the consumers are ready. It's obvious the potential licensees are ready by their efforts in discussions with you and planning for the licenses. The products are ready. Northern telecom recommends that the present order be reaffirmed with some minor technical corrections and we get on with the licensing. MR. PEPPER: Mr. Stroup. MR. STROUP: We certainly covered more than just demand forecastS in our session today, and one point that you made is that we are dealing with an auction environment. Companies will have the opportunity to evaluate 127 whether they're going to bid on a 10, 20 mega-hertz system and adjust their prices accordingly. Capital investment for a 20 or a 10 is likely to be less than for a 30 mega- hertz system. I think all of the forecasts you've heard today has shown that the industry has tremendous potential. From the industry prospective, we're already shown six months behind schedule. I think that it would be not only a shame but have tremendous impact on the competitiveness of the industry going forward if we were to delay it another six months. So I guess my urging to the commission would be to continue to move forward. As I noted earlier, I'm delighted to hear that this is intended to expedite the process. Thank you. MR. PEPPER: Thank you. I think that -- thank all the panelists, because it's been very informative. We have aired a lot of issues beyond just demand, because, of course, demand is based upon a lot of assumptions, we had to delve into some of those assumptions. I think it's quite correct, and I think 128 everybody here would agree, and the commissioners would agree that moving as rapidly as possible is in the public's interests, but getting it right is in the public's interests, as well. I guess personally I'm not clear why the industry thought that we'd actually be holding, you know, the auctions this summer. I don't see anything that we're doing is delaying the roll out of the service. I think the expectation for the service are quite substantial. I think that whether it's 17,000,000 or 29,000,000, at the end of the day we're going to have millions and millions of new customers for a new billion dollar industry that's going to be based primarily upon U.S. engineering and technology. I think that this afternoon we're going to hear from a panel of economists who will talk about competitive questions. We're also going to hear from a panel of investors from Wall Street investment bankers, a big Wall Street firm, in terms of the importance of what we do in terms of attracting capital, so that we can have a rapid roll out in the market place. We've been focusing a little bit, I think, too 129 much here about the internal FCC processes, and one month, one direction or another, strikes me as what we've been looking at internally is that the big costs are not going to be for -- spectrum big costs are going to be investing in infrastructure. The big question of timing are going to be how fast the companies can attract capital, how fast the companies can deploy networks, how fast companies can clear incumbents, and many of those issues -- on many of those issues, the industries are moving forward quite quickly. Ralph, do you want to say anything? MR. HALLER: Yes. I'll just conclude this session. I would also offer that, in the course of the discussions up here, I would urge you not to draw any -- any real conclusions as to anything as far as delay, or anything like that. We've often asked questions or to draw out people's detailed views. As I started out this session, it is the intent of this task force, and I -- we've also heard from the commissioners, it is our intent to move forward as expeditiously as possible. 130 I don't think there is anything we're going to do, as far as the delay in auction and licencing process. We are with our goal of moving forward, and getting PCS out there and competitively absolutely quickly as we possibly can. With that, I will remind you, we reconvene at 1:00, and we have a full afternoon, so we'll see you back here at 1:00. (Thereupon, at 12:00 o'clock, p.m., a lunch recess was taken.) * * * * * 131 MR. HALLER: I recognize that an hour was short time for lunch, but we have a considerable mount of ground to cover this afternoon so we want o get started right away. For those of you that looked at the chedule and said four hours is an awfully long ime without a break, we actually will be probably reaking somewhere between 2:30 and 2:45 and then esuming the second panel this afternoon at 3:00. So there will be a little break in here. It is not quite as bad as you might have hought it would be. I can see our panelists are -- okay. his afternoon our first panel will deal with the conomic issues associated with PCS, and then the econd panel this afternoon will look at financial erspectives on PCS. The first panel will be moderated -- or ctually your program is incorrect. Dr. Pepper ill also moderate the first panel this afternoon. ob? MR. PEPPER: Thank you. There has been 132 ne other change. There has been one additional hange. Unfortunately because of a death of a very lose friend, Tom Hasewood (phonetic) is not able o join us this afternoon. So we have a very distinguished panel of hree instead of a very distinguished panel of four conomists. Dan Kelley, who had been at the ommission and then MCI is now with Hatfield ssociates. Stan Besen who has been with the ommission and then with Rann Corporation phonetic), and is now with Charles River ssociates. And Jerry Hausman who is with MIT. We are going to have a slightly different ormat for the first panel this afternoon. We are oing to dispense with the opening five-minute resentation and begin to get right into answering uestions. But each of the panelists was asked to ddress four questions. And what we would like to 133 o is start with the first and focus on that one irectly before we move onto the other. The four questions are -- there is really asically two questions: What market structure ill promote investment, innovation, and efficient ricing? And the second is how can the Commission romote such a market structure? And then there are some subsidiary uestions to that. So if we could begin perhaps ith Professor Hausman on the market structure uestion, what market structure will promote nvestment, innovation, efficient pricing in terms f variables such as the number of competitors, the ost drivers, and the market structure, demand side actors and so on. And then Professor Katz will help in the uestioning. MR. HAUSMAN: I give my oral exam today. MR. PEPPER: That's right. MR. HAUSMAN: We will start with in terms f what market structure. To my way of thinking he FCC has already done the most important thing. 134 nd that is decided to hold an auction so that the arket is going to get to decide this rather than y administrative fiat, or as I sometimes refer to ast FCC actions, by the great handicapper general n the sky who should decide what the rules are. So to the greatest extent possible I ertainly hope that the minimal amount of screwing round with the market via the auction will need to ake place and that the market and bidding process ill determine the market structure. In terms of the particular questions, the irst was the number of the competitors. I said -- r I believe that the absolute number of ompetitors is not of great importance so long as he market structure does not permit the exercise f market power. Either unilaterally by a single firm ithholding output or by a coordinated interaction mong firms. So what I mean by this is this morning he question was asked should the Commission be orried about aggregation, you know, should we be 135 orried about absolutely getting it right the first ime. And to my way of thinking, it is unlikely hat anyone has enough knowledge to get it right he first time. But so long as aggregation within he limits of making sure that market power is not xercised can take place, then the market should be llowed to sort it out. So I guess it is my view that the ommission should not be sitting back and saying ow many competitors should we be aiming for at the nd of the process, but instead -- I put forward he plan before that I believe that starting off ith six 20s megahertz would allow this type of ggregation to take place. I think a more important factor than the umber of competitors gets to the second point hough in Professor Katz' question, and that is hat are the cost drivers of the market structure. I think the important factor here is you ant to make sure that firms can participate who ill potentially have a low cost basis to provide 136 CS because so long as you have competition, low osts are going to lead to low prices which benefit onsumers and leads to greater output. So in particular the OPP of Dr. Pepper's, r. Ried (phonetic) put out a report about a year nd a half ago and was talking about economies of cope and identified the identified the cable ompanies, the LEX, and the cellular companies all s having important economies of scope. I agree with him. And to the extent that hat will give them a lower cost basis we certainly ant to do everything we can to make sure they articipate because they'll have lower costs and hat will lead to lower prices. So therefore I sometimes have heard it aid that in fact those people have too much of a isadvantage, and somehow they need to be andicapped or it won't be fair for the new articipants. I just agree -- I disagree by a hundred nd eighty degrees. I couldn't disagree more. hat you want is to allow everybody to come in, 137 dvantages, no advantages, and whatever. And so ong as you have competition people with lower osts should be able to offer lower price ervices. From what we heard this morning, there is fairly high demand elasticity that comes out of he survey. This will be especially important then or building up PCS demand and making it a uccessful group of services. Then the last thing that Professor Katz sked was about demand side factors. And this s -- the other factor of course besides cost you hould take account of is this old saying by George ernard Shaw that you can teach a parrot to be an conomist by teaching it to say supply and demand. So I have just done the supply or the ost factors. Now I'm going to move onto the emand factors which is the last part of the uestion. Here I think that what we want to do gain is to make sure that firms can participate hich can offer differentiated services which 138 onsumers will value. There was some talk this morning about o-called niche offerings. And to an economist I ake that to mean differentiated product fferings. The reason that economists are in favor f this type of activity is that new or different ypes of services will lead to an outward shift of he demand curve and this will also lead to greater enefit to consumers and greater output. So I really see the cost drivers and the emand side factors to be much more important than he -- not the absolute number of competitors. What we want is to be able to have people ho -- excuse me -- companies that come in who will e able to offer low cost, slash, low price ervices and also have companies that can offer ifferentiated products which consumers may value nd consumers may not be being offered them given urrent technology. MR. PEPPER: Thank you. Stan. MR. BESEN: Let me say at the outset that 139 think the most important thing that will come out f this proceeding almost no matter what ecisions -- almost without regard to the articulars of the decision the Commission ltimately takes is that there will be a ignificant change in the structure of the mobile elecommunication market in the next few years. The change is partly the result of echnological change, partly the result of egulatory developments. But the entry of the SMR and probably ost importantly the entry of some number of ompetitors as a result of this proceeding are oing to change the structure of this industry arkedly and presumably forever. I agree with Jerry that the Commission as done one very important thing here, the doption of the auction mechanism for allocating icenses to begin with which is certainly a step in he right direction, an important change that conomists as you know have been advocating for any years. 140 I think it is an equally important aspect f this proceeding that the Commission has done hat should not go unrecognized, and that is the road way in which PCS services have been defined s a critically important aspect of the ommission's decision. Whereas in the past the spectrum llocation plans would have defined the services hat licensees could offer with great particularly nd leading to considerable difficulties or arriers to reallocations in the face of changes in echnology or demands. The Commission has allowed the licensees nder this -- in this proceeding to offer in the nd whatever services turn out to be least costly o provide or most desired by consumers. That is n incredibly important improvement in what the -- ver past Commission spectrum allocation policies. Now, this flexibility in use is I think s as I said critically important, but it has a ort of corollary proposition which is that because here is going to be considerable flexibility in 141 he way spectrum is going to be used and because hese services are not well-defined, no one ncluding the Commission can know with any articularity precisely -- the precise market tructure and the precise identity of the firms hat are likely to be best able to serve consumer eeds. As a consequence within, I would argue, a ery, very wide parameters transfers of spectrum, ombinations, and something that wasn't really alked about this morning, subdivisions of spectrum ught to be permitted and encouraged to the -- and imited only to the extent that they raise issues f anti-competitive concerns. And I would argue -- and we have resented evidence and calculations in this roceeding that make the point the parameters are n fact quite wide, and that any of a wide variety f market structures is consist with a relatively n-concentrated market for personal communications ervices. And this would be true even if one takes nto account just PCS. And the argument is further 142 trengthened by the entry of the SMR. Now, the question -- the issue over what hould the Commission do under these circumstances, hat sort of market structure should it try to romote. It is tempting to say that it ought to aximize the number of firms that provide the ervices. And some people from time to time come lose to saying that. I think that would be an incorrect osition to pursue because there are going to be conomies of scale or scope of the kind that Jerry as already eluded to, and simply because some irms just turn out to be better than others at roviding services, and therefore may end up with rowing shares of the market. Those kinds of market structures that in act involve more than the largest possible -- xcuse me -- end up with fewer than the largest ossible number of firms, those market structures hould not be discouraged unless in fact they lead o concentration that leads to concerns about ompetition. 143 And I would argue that the range -- the arameters, the range of possibilities within which he Commission can operate is really quite large. Let me just stop here. MR. KELLEY: I'm going to start first by iscussing the question and then try to talk about nswering the question a little bit. What market structure will promote nvestment, innovation, and efficient pricing? And y first point is is that is exactly -- that nvestment, innovation, and efficient pricing are he goals the Commission should adopt, so we are sking the right question here. My basic answer to that is that a market tructure that is as competitive as possible given ngineering costs and demand factors is the one hat is going to maximize those goals of nvestment, innovation, and efficient pricing. But prior to that, I think the key uestion for the Commission -- and I was very leased with the discussion this morning -- the key uestion -- the key point here is you can't have 144 ny investment, innovation, or pricing efficient or therwise unless the spectrum gets out in the arket and people start using it. So I was very pleased with the discourse his morning which indicated that the reason we are eeting for today is to accelerate this process ecause it is a way to sort out the issues and the econsiderations so we can move more quickly to get he spectrum allocated. And that is the number one oal that I see. My second comment on the question is we re asking what market structure will promote nvestment, innovation, and efficient pricing. We ave to talk about what kind of markets are we nterested in. There isn't just one market to orry about. It seems to me there are at least three ind of markets we ought to be worried about when e are making decisions about the structure of CS. There is the local telephone market. PCS as been discussed as an entry point into a market 145 hat is 80, 90 billion dollars, that it might be he first point of entry into bringing some real ompetition to the local exchange market. So we should be worried about that. We hould be thinking about that when we were making hese PCS allocations decisions. The second kind of market we are worried bout is -- let's call it the existing cellular obile radio market which right now consists of the wo cellular incumbents in each local market and SMR on the horizon. The third kind of market we are going to alk about, and we heard a little bit about this his morning is I guess what some people have eferred to as PCS light. That the PCS spectrum ight go to providers who want to give businesses ireless lands to have wireless tails behind PBXs r to suppliers who might want to provide something ike mobile phone booths, CT two top applications hich may not have the full power range of existing ellular and mobile radio applications. Depending on which of those three you are 146 orried about you get a different answer as to what he right structure is, I think. A fractured industry with lots of small ompetitors might promote competition within the CS light arena which I talked about. But it may be that you need a smaller umber of larger competitors to allow PCS to be ffective in meeting the goals of bring competition o the local telephone market or bringing ompetition to the existing cellular and mobile arrier. So there is a trade-off there. I would say you are better off licensing situation in which carriers can come in and be ffective in the wireless loop market, if you want o call it a market, or be effective in cellular obile from the beginning because so those carriers ill also have the incentive given enough spectrum nd given the band and given the cost haracteristics and the technology to provide the ther services that people are talking about as ell. Two final points, the nationwide 147 tructure of the industry matters -- and I think we ill probably get to this under Number 2 as well, ut I think the Commission should be looking at rying to increase diversity within the nationwide tructure of wireless market to bring new players n, to bring players that might have new approaches o the cellular business, new approaches to the ireless business. Finally on the issue of economies of cale and scope which goes the questions that r. Katz asked, I agree with Dr. Hausman that ellular carriers may bring economies of scope to CS. Cable companies may do that as well. The ECs may do that as well. Existing paging ompanies might do that. Long distance carriers ight do that. There are a lot of companies that can ring economies of scale. There are a lot of ompanies that can bring marketing expertise to CS. If you look at who is marketing PCS right ow, it is not necessarily the cellular companies 148 irectly, it is all the little guys who are selling he telephones out there. I know in the cellular market in which I ive you see very little advertising from the nderlying carriers. And you see a lot of dvertising for cellular from the guys who are elling the phones. So even those guys can bring ome economies to the market if you will. The key point I want to make is that ellular is already on the market. We heard that his morning. The cellular carriers have the apability to provide the services we are talking bout PCS providing. They are upgrading their networks. They re digitalizing. There is more capacity coming to hem as they do that. So they are already in the arket. And those kinds of economies can -- are eing and will be realized. So I'll stop there. MR. KATZ: I would like to ask one uestion in the risk of making it sound like it is n oral exam. 149 And that is particularly with Stan and erry talking about relying on the market to get hings right rather than the Commission trying to o that. And I want to ask the following question, nd this is the part where it will sound like an ral exam: Is whether either of you or all three f you would be concerned about the Commission's otentially issuing too many licenses if -- and his is where I want to separate things out -- if ou could just keep having more licenses of a given ize? Now, obviously as a practical matter if ou have more licenses there is less spectrum per icense. But since we are economists we can assume e have enough spectrum to deal with this problem. Would you be concerned if somehow too any licenses were issued that that would lead to roblems, or do you think that the market could ort that out? Certainly other people have raised hose concerns. MR. HAUSMAN: Well, I'll get to this ext. I think if you started passing out at lot of 150 ive megahertz licenses or perhaps even 10 egahertz licenses that could create a problem. Of ourse I'm on record as saying I think 20 megahertz s the place to go. In that situation I don't think the ommission could pass out or allow it to be bid -- hich is really the way to think about it -- too any licenses. Because of course we know that nder free entry we get the best of all possible orlds unless you just have overwhelming economies f scale. And nobody has argued, even tried to rgue that this is a natural monopoly situation here we have overwhelming economies of scale. So I think in that situation if there ere no limitations on spectrum we would end up in ree entry like 95 percent of the other industries re in the U.S. And the whole problem I see here is that he FCC has only a certain amount of spectrum to be sed. But, you know, within that frame work, I'm eally not worried. The market will decide. 151 If a possible goal of the U.S. Government ere to maximize the amount of money they got from he auction process then there would be different onsiderations. But it is my understanding that hat was not one of the goals of Congress. And so to the extent that you are not rying to maximize the amount from the auction, I on't think that you can make too many licenses vailable. MR. BESEN: I'm not sure I understand. ere you asking the question given the amount of pectrum would it make -- would we care if there ere too many licensees or would we just care in eneral whether too much spectrum was provided? MR. KATZ: No, I'm asking you whether here is a such thing as having too many licenses. uppose it turns out we could have as many 40 egahertz licenses as we wanted. Would you be in avor of restricting the number or say we should ust have as many as people want to buy? Because rguments have been put forth saying it was a bad hing to issue too many independent of the spectrum 152 onstraints. MR. BESEN: If there were unlimited pectrum, why would you want to place a limitation n the number of licenses you could issue? MR. KATZ: I didn't say I wanted to. I ust said people have -- the issue has been raised n the context of saying that people would have rouble funding investments in the infrastructure hey would need because somehow the capital markets ould be unable to pick which ones would survive. And I'm basically asking do any of you upport that argument or reject it. MR. BESEN: No, I wouldn't support it. I hink that sometimes that argument has been posed n the context of a specific limited amount of pectrum. And I think the question then would be hether you could issue licenses that are so small hat in fact it would create difficulty. The answer is in that context you might, hat is the difficulty would be of the sort that he market would spend a lot of resources sorting ut the -- aggregating up from the excessively 153 mall number of licenses. We know if the transaction costs were onexistent then we wouldn't care. Your errors ould be overcome costly. If there were costs of aggregating then ne might care. And that is an argument I take it hat was the sort of thrust of much of the orning's discussion which was you ought to try as est you can to get it right basically because here are costs of reallocations. You want to save hose costs if you can. You want to not prevent ertain transactions from being defeated because of he high costs of prearrangements. But you have to -- but you can't do hat. And inevitably you can't do that because of he lack of knowledge. And inevitably there will e subsequent reallocation. Do the best you can. There certainly are licenses that are of size that are probably so small that in fact they ould not survive the competitive shake ups. And t seems to me those are the sort of considerations hat ought to dictate the sort of the initial 154 llocations that the Commission comes up with, mphasizing they are initial allocations. MR. KELLEY: I think the way I would pproach this question are there competing uses for hose extra 40 megahertz licenses you are giving ut that in the real world might not have a chance f developing into actual competitors. And if hat's a real concern than you might be worried bout it. The way I would solve that is to issue as any -- Stan's world of unlimited spectrum -- issue s many 40 megahertz licenses as you can and allow he people who end up owning that spectrum to do hatever they want with it. And then you don't ave to worry about that alternative use for the xisting spectrum. MR. PEPPER: What about in the context of tan's sort of second analysis which is not dealing ith the world of unlimited spectrum but rather the orld of limited spectrum, and therefore the degree o which you add more licenses if you don't add ore spectrum you are cutting down on the amount of 155 pectrum for each license? And have you looked at the trade-off in hat context between the costs of having to develop service with less spectrum? MR. KELLEY: Where are we now? We are at bout 120 megahertz total. I don't know if that's he right answer or not, but I don't want to reopen hat debate for the same reasons I mentioned in my ntroductory remarks. Let's not reopen that ebate. Let's get service out as soon as we can. But in a world where you have a choice etween six 20 megahertz licenses and four 30 egahertz licenses, I think I have heard from the echnical folks. I have heard from people who are worried bout the spectrum clearing problems in some of the xisting bands that your -- you might get service o people faster and more ultimate competition ooner with a smaller number of larger allocations ather than a larger number of smaller allocations. MR. HALLER: You said earlier -- and I am little confused on this -- a smaller number of 156 arger allocations. Then you made a statement of ncreasing diversity of the licensees, if I nderstood it correctly. And it would seem to me o be in conflict if I understood what you are aying. UNIDENTIFIED SPEAKER: Yes, that's ight. There's a transfer. The question is can omeone come in and be a viable competitor with ellular or provide a viable wireless loop echnology with 10 megahertz allocation. And everything I have heard, and I uppose we are going to talk a lot more about this omorrow. Which is good. But everything I have eard suggests that that is probably not a good ituation, that those tens might not be effective n those roles. And that is not good. Will 20 be effective? Let the engineers nswer that question. What I have heard is that iven the spectrum clearing problems, 30 is about he minimum that you need to be viable to go head o head against the existing cellular guys. And if you do 30, you are going to have a 157 maller number of total licensees, but you might ave more effective competitors when you are all one at the end of the cay. MR. PEPPER: Could we get back to a uestion I think that Jerry raised. I think it was erry. When he said that if we have low cost roviders and we have enough of them it will drive rices towards cost. MR. HAUSMAN: Yes. MR. PEPPER: One of the questions is what s a -- can you identify or talk a little bit about minimum sufficient number of competitors to drive hose prices to costs assuming we multiple low cost roviders in the market. MR. HAUSMAN: Yes. Well, let me just epeat who I think the group of potential low cost roviders. I mean, besides new entrants who are ust efficient. You know, I think they are LEX, the ellular people, the cable, and I should have also aid the IXCs, and ESMR people. So we have that roup. 158 I think that five competitors are enough, robably more than enough to drive it down and have uite a competitive market. Now, if you take the merger guidelines iterally, they -- the merger guidelines would say ix would say six. But in practice what the Justice epartment has actually done historically in terms f challenging mergers -- you know, you don't know very merger that they have challenged, but I think probably am aware of what they have been doing ver the last 10 years. I think five is really the umber to aim for, that you don't want to end up ith four or fewer. But I think five or six are here. I think once you get beyond five or ix -- this is why I was trying to answer -- I hink you may lose more than you can gain. I don't ant to tell you. I want to let the market decide, ut you know when you start aiming for eight or ine you start trading off as Mr. Kelley said you now between economies of scale and various other 159 hings. So I think you should try to decide what he minimum number is, five or six, and then let he market take it from there. MR. PEPPER: I assume by five or six what ou are saying is that you are defining the market n a way that would include cellular incumbents, SMRs as well as then two to three new entrants. MR. HAUSMAN: Right. Exactly. What I ee is that in any region you are likely to have wo cellulars, one ESMR -- E-S-M-R. You might have wo, but I think one is where will end up. You might have Geotech which would give ou two in the 900 band using the frequency opping. So that is how you could get two ESMRs. But anyway, even if you don't have them, ou have two cellulars, one ESMRs which gets you up o three, and I would expect two or three PCSs. MR. PEPPER: And given your approach you ould rather err on the side of more than fewer and llow market forces to determine whether it is two r three so you'd argue that you'd want to have 160 hree new entrants? MR. HAUSMAN: Yes. I don't think you ant to start off -- I would disagree a bit with hat Mr. Kelley said. I don't think you would want o start off and say let's have three 40s. I would ather start of with six 20s. And if the market ecides that three 40s are better, so be it. But I would rather -- I think it is asier to aggregate than to disaggregate, and how his works given what we have seen in other ountries and what we have seen in the cellular ere. So, yes, I would rather start off with ore competitors, and then if the market can upport six, we would see some aggregation among he -- MR. PEPPER: What you are talking about asically is adding -- adding three new ull-service competitors to start with. MR. HAUSMAN: Yes, that is what I think s likely in densely populated top 50 MSA type MSA ype areas. Not necessarily you know, where -- a 161 win Falls, Idaho, but in the larger MSAs that is hat I would expect. MR. PEPPER: Stan? Dan? MR. BESEN: Let me say I don't think the ight question is let's try to determine precisely hat the optimal number or the irreducible minimum umber is. It seems to me there are -- I have seen a umber of plans, all of which if I sort of look at he implications of any of them for concentration, one of them -- over a fairly wide range, they give e no problem. They seem to me not to raise uestions of excessive concentration, and herefore -- MR. PEPPER: That was a slightly ifferent question. I was the question based upon hat Jerry was saying that if you have low cost roviders, you know, how many do you need to really rive your prices down towards cost? MR. BESEN: Well, this is -- MR. PEPPER: No -- MR. BESEN: I think no one can answer 162 hat question precisely. I think what one can say s that if in markets that are not terribly oncentrated one has a high expectation that that ill occur. But because of the difficulty of oordinated behavior, as we know, will be ubstantial in markets that are un-concentrated. And as a result we expect the firms to ehave aggressively and competitively. Whether the recise number is five or six or seven, I'm not ure once can know with precision. I think one can look at particular ransactions and particular combinations and ask hether considering other aspects of the market tructure those combinations raise competitive oncerns. And it seems to me again over a wide ange of outcomes the Commission will be hard ressed to choose one of them as in some sense etter than the other. The reason one wants to allow these rocesses to be determined by market process is 163 recisely because costs factors are in fact going o -- in general the low cost provider or the rovider that provides the services that consumers ind most attractive will be the ones you'd like to ave access to the spectrum. Again, within -- that's in fact what ou'd like to be the dominant factor that etermines the industry structure. The only thing you ought to be doing is orrying about whether you ought to constrain that rocess in some fashion, whether you ought to stablish limits beyond which concentration should ot be permitted. It's the fairly reasonable thing to do, ut I think those limits are fairly wide. MR. PEPPER: Dan. MR. KELLEY: I think if you can get three CS players that would be a very good thing. It is learly a lot better than the two cellular carriers e have now that dominate the existing mobile ireless markets. It would clearly provide you I think with 164 ome interesting entry points into a portion of the ocal telephone business. My concern is when you go beyond three dditional players, four additional players -- I on't know what the magic number is -- you start ausing problem with the viability of each one ecause the amount of spectrum they have might not e enough or the clearing problems might slow them own and prevent them from being effective for a ouple of years which would not be a good thing. I would disagree with Stan a little bit. nd that is that I think you need to worry about he costs of aggregating up to an efficient size if ou put out licenses that are too small. That is going to be time-consuming. And f you have a good basis for believing that you eed 30 to be viable, start there. MR. BESEN: Bit it works both ways. We re talking again -- we keep talking about ggregating up. It is possible that somebody might ecide to take the 20 that was talked about this orning and decide that he only wants 10 of it. 165 nd one shouldn't object to that either. The transactions can go either way here. he notion that we can sit here and predict in the ace of considerable uncertainty about what ervices are going to be offered and considerable ncertainty about the technology precisely what he -- the market structure I think is wrong. It's true we have to guess. It is nevitable that one is going to guess in terms of nitial allocation -- initial blocks to be icensed, but one should not necessarily take too eriously the idea that we are going to get it recisely right if only we had a few more months to o so. MR. PEPPER: Jerry? MR. HAUSMAN: Let's make one last point. think you need to -- in answering the question nd thinking about how many and what the minimum umber is you really have to take into account what he expected economic factors of stylize facts we all it of this industry are. To start with, voice mobile has been 166 rowing at 35 percent per year. So for those of ou who remember the rule of 70 from junior high hat means that the market size doubles every two ears. So that there's -- at some point we are oing to of course start to reach the inflection oint on the S curve. That was brought up this orning. But so far as anybody can see we are owhere near it yet. And so there will be more han enough customers to go around for everybody. And I think in that type of situation, ou know, questions about viability -- we are not alking about the cement industry here which hasn't rown for 35 years and if a new player comes in, ou know, an old player may need to exit. I think in this type of industry where we re growing that fast and we expect extremely fast rowth, you know, at least over the next five years hich is as good as anyone is planning horizon can e in my view, that the viability thing, you know, oing back to Michael's question, could we pass out 167 oo many licenses, is really just not on radar creen because there is just more than enough emand around for people if they can meet it. And here really won't be barriers to expansion of upply. The whole thing about frequency reuse ither for cellular or for PCS, if the demand is ut there, you can just split cells. It is xpensive to do so, but of course you can conomically meet your demand and expand your apacity quite a bit. So I think the point -- the two points, hat this is incredibly fast growing -- you know, he only industry since World War II I can think of hat has been like this has been the PC industry. And secondly, that the costs are falling nd people can easily expand their supply by requency reuse. I think the whole question of, you know, an we pass out too many licenses or how many ompetitors do we really need is really sort of a econd order. 168 MR. PEPPER: It's going to be interesting n the second panel this afternoon to hear from the nvestment community in terms of some of the hings -- MR. HAUSMAN: I can make a point on that ight now if you would like. MR. PEPPER: Yes, I -- MR. HAUSMAN: If you look at the arket -- I think there are two interesting market acts. Number one, Nextel (phonetic) is currently orth about $6 billion. It was down a point and a alf on Friday, but if you capitalize it, it's 6 illion. If you take Cencall (phonetic) and owpage (phonetic) which are the two other major SMR providers their market capitalization is $10 illion. They have had no trouble raising capital t all so far as I know. Nextel (phonetic) is oing to get money from MCI. And Dowpage phonetic) has made a public offering. So verybody knows that PCS is going to come in. Nevertheless, the money has been out 169 here for ESMR. I think that is interesting fact umber one. That also really makes me leery of a ot of the more pessimistic forecasts on PCS that ame out this morning because if those companies re worth $10 billion that means the market who in y view is not a perfect forecaster but probably etter than I can do, things are going to be pretty ealthy demand for local telecommunication, you now, if these companies are capitalized at that igh value. And then I think the second thing which s interesting is when you came out with the first rder last fall I think it's fair to say the 120 eg was more than most people expected. In other words, in economics language here was an unexpected event study we can do. Yet he market value of neither the ESMRs nor the ellular companies even glipped (phonetic). So again, the market -- you know, people ho are actually putting their money on the table nd buying these stocks again must think that there s going to be a lot of demand for mobile services 170 r if they were really worried about Michael's uestion about too many competitors, I would have xpected their stock would fall. MR. PEPPER: Well, there is an lternative explanation of course which is the one hat has appeared in a number of the investment nalyst reports which, you know, go to some of the ther questions which is the block sizes and hether or not seven was so many going in the other irection and -- MR. HAUSMAN: But I mean ESMR -- ESMR has nly 14 megahertz, and they don't have clear pectrum either. They have the short spacing roblem. Yet nonetheless -- and they have -- they uilt almost nothing. So, you know, if they're orth $10 billion with only their spectrum and a ew, you know, SMR customers, it seems to me -- MR. PEPPER: That's why I say it will be nteresting this afternoon to hear from the nvestment community because -- MR. HAUSMAN: Yes -- MR. PEPPER: -- the question then is I 171 hink you -- well, in hearing where there is some greement is that well, you may not -- we may argue hat we shouldn't set a limit that a likely a ikely competitive market is five or -- a minimum umber of five or six competitors including the ncumbents, the two cellular and the ESMR. And the question then is as you add three ore whether the fourth, fifth, sixth into the arket will be able to raise the capital. That is uestion to ask for the second panel. And I think that -- MR. HAUSMAN: Well, if I might disagree I on't think that is the right question. It is not hether the fourth, fifth, sixth are going to be ble to raise the money. It is how much the ederal government is going to get out of the pectrum licenses when they are auctioned because, ou know, literally if the fourth, fifth, and sixth an't raise money the price could get driven to ero, I'm willing to bet -- which I always am with y students -- that we are not going to see that appen. So that the money will be out there. 172 MR. PEPPER: Any other questions that you ant to ask before we move on to second set of uestions? Again, we are focusing on market tructure. UNIDENTIFIED SPEAKER: If I could clarify ne thing, Mr. Hausman, you indicated that you are n record for 20 megahertz was about right? You aid that? MR. HAUSMAN: Yes. What I am on ecord -- could I be precise about it. UNIDENTIFIED SPEAKER: Sure. MR. HAUSMAN: Because I think the 10s are oo small. And that -- I can't be sure that you re not going to need more than 20, but the 20s are good building block in case you need more because t is easy to aggregate from that. And 20s may ell be enough. MR. BESEN: Can I actually -- there was ome disagreement this morning about whether 10s ere enough. Some people thought 10s were enough. t's possible 10s are enough when combined with ome -- with somebody's existing allocation. So 173 ven if the 10 was not viable by itself it might be iable in might be viable in combination with other olders. Ten might be viable combined with one of he 20s. I guess it is even possible to combine it ith one of the 30s under the rule. So it doesn't ean it won't have value in the auction if one articipates combining it with something else. That in fact -- the only reason that it ouldn't obtain its full value is it -- it would nvolve the cost, whatever costs there are of the ecombination. If those are small, then a 40 would ell for the same as a 10 and a 30. MR. HAUSMAN: I would actually like to isagree with one point on that if I might. I hink that is true in principle, but the current osition is that the 30s are in the low band and he 10s are in the high band. And it is my understanding, and some of he economic analysis I have done seems to confirm his. That those would be quite expensive to ombine just because of the gap in the spectrum. 174 t might be much more economical if you wanted to ave combination to have them adjacent to each ther or at least in the same lower block or the igher block rather than trying to span lower block nd adding a 10 from the higher block. MR. VAUGHAN: Can you quantify that? If e switch, the Commission were to switch -- put the 0s in the lower block? Is that significant conomic -- MR. HAUSEMAN: Well, what I'm saying is s that I think if you wanted to have 10s and if tan is right you want to have a mixture beside ach other so that when they are aggregated you ould have -- yes, it's my understanding that the ind of numbers you can come up with are about a 15 o 30 percent cost difference in terms of the eceivers because of, you know, the amplifiers and he various things you have to put in. Now, I can't say that I can independently o that because I can't price out a cellular eceiver, but those are sort of the types of umbers that I have been told and heard and seem to 175 ake sense. UNIDENTIFIED SPEAKER: We are going to ursue that tomorrow with some of the equipment anufacturers. MR. PEPPER: Maybe we could -- did you ant to ask any questions. UNIDENTIFIED SPEAKER: No, I wanted to et to the next question. MR. PEPPER: The next question which is. MR. HALLER: Can I get one larification? I'm curious just on definition of arket, if all of you view the market as the same. nd I think what I have heard today is that the arket is cellular, ESMR, and PCS, and I guess both arrow band and wide band PCS. MR. HAUSMAN: And certain types of paging would say as well. MR. HALLER: And paging? MR. HAUSMAN: Yes. MR. HALLER: So are all of you including he entire mobile communications market. MR. KELLEY: I would agree that there is 176 market there and that is sort of primarily what e are looking at effecting with these rules. But as I pointed out earlier, there are ther markets you want to look at. You want to ook at the local exchange market. And when you re making decisions about how to allocate the pectrum, you want to allocate it in ways that -- ou know, if it's cost less, you want to allocate n ways that will promote competition there if you an do that. MR. BESEN: In our paper we argue that he market was basically a broad market for mobile elecommunication service, really wireless ervices. And the reason we argued that was -- had o do with the ability of suppliers to shift among ervices being provided. So relying primarily but not entirely on ubstitutability on the supply side we argue that n fact there is a broad market for ommunication -- for mobile services. MR. PEPPER: So that you are actually ooking at the product market as the broad -- what 177 ome people refer to as full-service wireless arketplace. MR. BESEN: Well, basically we are rguing that in fact to the extent that firms -- ecause firms can shift with the same -- use the ame spectrum to provide any of a variety of ervices, those services all ought to be defined as n the same market. Those markets -- those separate products re -- not necessarily because consumers regard hem as substitutes, although they may -- but ecause firms can in fact shift among the provision f those services in response to opportunities for rofit from one of the other. And that -- that supply side ubstitutability is what in fact creates a single road market rather than a set of single -- or a et of smaller separated markets. MR. KELLEY: At the risk of getting yself into deep water technologically, one area here Stan and I might differ is on the size of the icenses. And he is talking about 10s maybe being 178 ood, and I'm arguing that you need larger. And one of the reasons is that if you ook at PCS as an alternative to part of the local xchange as a wireless loop service, my nderstandings of the kind of traffic loads that re offered over wireless loops are such that you eed larger chunks of spectrum to be efficient. MR. BESEN: Again, there is nothing nconsistent between that and what I have suggested efore. It's entirely possible that someone might ind 10 perfectly suitable to provide a set of ervices even though someone else might decide that or the particular set of service that he wanted to rovide he might need a larger band. But there is no inconsistency at all etween those two views. MR. KELLEY: In fact I say in my written tatement that I supplied that there are services ou can think of offering where 10 might be nough. My point is that there are other services e ought to be concerned about two. 179 MR. PEPPER: Don, did you want to move on o the second question, and then ask him questions bout that also. MR. GIPS: We have sort of moved on to he spectrum question, but I'm curious given what e heard this morning about the head start that ellular providers already have from the different anelists, how do you all view the head start roblem in terms of creating a competitive market. MR. PEPPER: By the way, it might be seful to note who your clients are as you answer hese questions. Very seriously because somebody assed up a question from the audience who are hese people sitting up here. And as noted that -- you know, Jerry said e conducted a study on some of these spectrum ssues and then the question was well, who is his lient. MR. HAUSMAN: Well, my main client here s the American public I hope. MR. PEPPER: That's ours. MR. HAUSEMAN: I know in the FCC bar that 180 s just amazing to say, but anyway in this roceeding I have worked for Pacific Bell, Airtouch phonetic), former Pacific Tel, and also for Bell tlantic PCS. In terms of the head start I think we ave had market experience on that. I don't think he head start is important. Two facts, number ne, the point I just made that the market ontinues to grow at the rate of 35 percent a year r even 25 percent a year. There are a lot of new customers for veryone to get, okay? That is fact number one. act number two is there was a question this orning about lock in of cellular customers. I think again in the big MSAs there is ot lock in because over the next few years you are oing to have to have customers change from their icrotack (phonetic) analog devices -- put a plug n for Motorolla -- to a digital cellular. So people are going to have to buy new ubscriber equipment anyway. It is not as if they re locked in to their analog equipment. 181 That equipment may be subsidized. ebates may be given by the cellular companies, but here is nothing to stop PCS or ESMR companies from oing that too. In fact the ESMR companies are planning o subsidize the subscriber units just like the ellular people have done. And then the third reason I don't think hat it is important is that we have already run his experiment before. And the experiment that we an was that in every -- of the top 30 MSAs in ellular, all but Boston and Washington had a head tart on the order of 12 to 18 months for the block carrier. And I haven't looked at it in the last ew years, but in about 1991 I actually did a study f this, and there was no remnant of the head tart. In other words, the block A people who came n later, different periods of time and different SAs had not really been adversely effected. So to the extent that we have run this xperiment and, you know, we have a fast growing 182 ndustry which is why I think the block A cellular eople weren't disadvantaged, I don't really see hat head start as really leading to, you know, a oor competitive outcome. MR. PEPPER: Couldn't one difference hough -- factual difference be that the people who ought handsets to operate on block B could easily witch to block A? MR. HAUSEMAN: First of all, we have also un this experiment in London. Someone talked bout one to one this morning. Mercury, slash, able and wireless, slash, U.S. West had started his summer in London. They run GSM on the 18 undred. Demand has been so great that they have ctually had will to ration their subscriber nits. Their suppliers have not been able to keep p with demand. So here is somebody who came in gain with the new type of units. You couldn't use our old cellular units on Mercury GSM. They offer a very innovative service, ff-peak free calling, and they have been inundated 183 ith demand. The last statistics I saw was that 50 ercent of all the new cellular hookups -- mobile ookups -- excuse me -- in London in the last uarter were on one to one. So they -- you know, in terms of new ookups were doing better than -- MR. PEPPER: Do you recall how much pectrum they got for that. MR. HAUSMAN: I think in England they ave a fair amount. MR. PEPPER: All right. As I recall, the ellular incumbent did not receive any additional pectrum. MR. HAUSEMAN: Right. They also have -- think they had 50 megahertz to start with. MR. PEPPER: 50? MR. HAUSMAN: Yes, some of the people ave 50, I think. MR. PEPPER: The new entrants didn't have o move anybody, did they? MR. HAUSMAN: Right. MR. PEPPER: They weren't microwave -- 184 MR. HAUSMAN: In Australia though they ave 20 megahertz for GSM. But you know, in terms of a head start I hink people will be able to offer service. And I on't see any reason why if they can offer a good ervice at the right price they won't be able to et the customers. There is nothing to stop people from witching over from cellular. But even if no one witches, given that the market is doubling in size very two years there is going to be more than nough demand for them to make their system viable. MR. PEPPER: Stan? MR. BESEN: I have submitted comments in his proceeding on behalf of the Cellular elecommunications Industry Association. I guess I agree with Jerry on the notion hat the head start is probably not a significant actor here. And it seems to me there are a couple f factors some of which he has already eluded to. One is the very rapid growth. Second is he fact that the service offerings themselves are 185 oing to change greatly over this period of time. e heard this morning discussions on a very large ange of services that potentially may be offered nder the PCS rubric most of which are not now on he market. In a world like that the new entrants are s well positioned as the incumbents to offer those ervices. The -- I think of the analogy here of he personal communications market -- personal omputer market when we might have sat here in 1982 nd thought that IBM's head start was nsurmountable and nobody would ever talked about ell or AST or any of the large number of other ompanies that seem somehow to have rather nicely vercome the head start of a firm that would have een regarded as a formidable competitor. The last point I guess is there is ome -- there is -- at least I mentioned to this oint one disadvantage the incumbents have and that s the continuing allegation to provide analog ervice for a time, something the newcomers will ot have -- not be responsible for providing. 186 And that will be -- that is a factor that s in fact a burden as opposed to an advantage that he incumbents have. And it should be reckoned in he calculus. MR. PEPPER: Dan? MR. KELLEY: I have filed a couple of apers in this proceeding at various times at arious stages for MCI. So MCI is my client. I iew the six of you and the people you report to rom a marketing point of view as my customers ecause if you don't believe that what I'm saying s in the public interest, it is not going to appen. On the head start issue I learned about ead start from Stan. He filed a paper in 1982 or 983 or for the A side cellular carriers who are orried about the head start that the wire link arriers were going to get. And as it turns out Professor Hausman is xactly right. It turns out not to have mattered ery much in that situation. And I suppose there re a lot of explanations for that. 187 However, we are right now -- and one of he explanations might be it was very early in the ireless game and customers were just becoming amiliar with what the service was. Right now we are in this accelerated rowth phase. And that can cut two ways. One, it an say, well, the head start is not going to be a roblem as Professor Hausman argues. The other is hat if we get much delay in PCS we might hit the op of that curve before the new guys get to come n and feast off that accelerating part of the S urve. But the bottom line I think is why take a hance, you know, on whether the head start problem s or is not there. Let's move very quickly to icense new competitors and get them out in the arket and minimize whatever head start there is. UNIDENTIFIED SPEAKER: I'm also curious o hear both Stan and Jerry's response and Dan's to hat we heard this morning which is clearly people elling us that the head start was a serious issue n their forecasts and how -- where you think their 188 orecasts are wrong. You were both here this orning, I think. MR. HAUSMAN: Well, I think that -- I ave to admit I haven't read all the papers that ame out. But I think in terms of where their orecasts are wrong, their forecasts by and large re flatly inconsistent with stock market values. nd until somebody convinces me that the stock arket gets it wrong, that is enough for me as an conomist. Where I really think that they are issing it is that I didn't hear anyone talk at all bout the necessity of switching over the majority f cellular customers to new handsets which as I nderstand it is just going to have to occur. I ean, you can't run digital off an analog handset. And then I think the second point is is hat -- that I think they may have been much more essimistic about when we are going to hit the top f the S curve than I am. You know, you can never be sure of this, ut to the extent that this becomes a -- let me put 189 t this way, the paging industry talked for years bout how can we keep growing. And then about five ears ago the paging industry actually slowed own. And then what happened was Pagenet phonetic) hit the market. Pagenet joined the 900 and of paging. And they decided to come in and ffer a low price service. And what Pagenet did as they were so successful that they got more new aging customers last year than all of the -- our locks and the rest of the paging companies ombined. So it is my belief that what they have eally done is finally started to get the elusive onsumer market rather than just the business arket which paging had been aiming for for years. And I do agree with people this morning hat for PCS to be really successful they are going o have to hit the consumer market and be uccessful there. And I think with a lower prior offering erhaps without all the bells and whistles will be 190 ble to do that. And we are a long way from the S urve. And I really do expect rapid growth through he end of this decade in mobile elecommunications. MR. BESEN: I think the most striking hing to me in listening to the morning discussion as the fact that apparently when one goes out to ries to ask people about these new services it is ery hard for them to picture exactly what they are oing to be. And consequently as a result I'm nclined, although I'm sure the estimates were made ith as accurate as they might be, that in fact here is substantial difficulties in doing the arket forecast in markets where the evolution of echnical change and the evolution of service fferings is so great that nobody will recognize a ear from now -- not even thought about in the uture of services that now people are trying to do orecasts for. And so I think it is just very difficult o put tremendous weight on estimates of that sort 191 iven the considerable uncertainty that the espondents of those kinds of surveys have in etermining how much of something they are likely o buy at prices that are hard to determine in dvance without knowing with any great articularity what features there are. I think we discover uses for things after hey are made available to us. That certainly is rue in the history of say personal computers. UNIDENTIFIED SPEAKER: The most famous orecast in this business was AT&T, so at the time f divestiture it was forecasting a million ellular companies by the end of this decade. MR. BESEN: I think they were forecasted ltimately television penetration would be about alf of U.S. households. Or just imagine what orecasts of fax sales would have been, say, five ears ago. Very hard to do here. UNIDENTIFIED SPEAKER: The most famous orecaster in economics I think was Irving Fisher ho shortly before Black Tuesday said the market as going to keep going forever. 192 UNIDENTIFIED SPEAKER: The problem with rving Fisher was he had his money in the market. MR. BESEN: On the head start issue I'm oing to be very interested to hear what the people n the next panel have to say. MR. PEPPER: I was going to say that. In act one of the questions that comes up is how do ou -- this actually came from the audience. You now, how do you equate a six-month to a two-year ead start between the A and B carriers in cellular nd a 10 to 12-year head start between cellular and ew entrants if in fact they are in the same usiness. And I guess that is what we are earing. Where there is some real disagreement ere is that, you know -- one school of thought is hat the market is expanding so rapidly with new ervices that we don't know that there is no head tart problem. On the other hand I think Dan and some thers are saying that notwithstanding the rapidly rowing market there are head start problems. 193 And if you take a look at the cost of cquiring a subscriber for cellular today as being very expensive part of the business, and what ncumbents can do to hold onto those customers may ecome more important. So it will be very interesting to ask the nvestment -- and I assume they are all sitting ere. So be forewarned. You are going to be asked bout these questions. If we could shift a little bit into some f the other variables on how the Commission can romote a competitive market structure we haven't eard anything yet about the geographic size or cope of the license. If you could address that nd what other kinds of licensing requirements you elieve are necessary in order to promote a ompetitive market. Why don't we actually start at the other nd of the table first. UNIDENTIFIED SPEAKER: I just had a uestion or a clarification. Do you want to o questions two and three together then? I was 194 rying to figure out what you were -- UNIDENTIFIED SPEAKER: Yes. Where are e? MR. PEPPER: We started with one and slid nto two. And I think that we have already begun alking a little bit about three which is some of he cellular telephone companies. The question there for the rest of you is re there specific types of market participants who ight deserve special treatment. And we have been talking a little bit bout some of the advantages that cellular and ESMR ompanies might have in terms of scope economies. nd by implication they might need special reatment. There are also questions about designated ntities, wire line, exchange carriers, others, SMRs, and so on. So I think to the extent to hich we are looking at these variables together, f you can comment on them. But I think it would be useful if we aybe started talking about the geographic scope 195 nd perhaps some of the problem that were dentified by this morning's panels with the xisting cellular market structure with the ifficulties that follow you anywhere types of ervices and whether or not there is something that e can do to remedy that and result in a more ompetitive market. Dan? MR. KELLEY: Thank you. I guess we are oing to -- the panelists are going to continue to isagree on the aggregation problem. I still think t is a concern. And given that concern I think hat you want warn to have large geographic icenses rather than small ones. I don't think that the larger markets we ave out there now, the MTAs, are all that bad. I ould hate to see it grow any smaller. I was one of those early on in this roceedings who supported the notion that it might e good to have a nationwide geographic license. The lawyers and lobbyists have told me hat that is not in the decision set anymore. I hink that the next best alternative is to have a 196 icense large enough that to the extent competitors eel they need to aggregate to a nationwide resence, such as mobile link is going after, it ould be easier for them to do that. So I like the arger rather than the smaller licenses. What was the second part of -- MR. PEPPER: Well, why don't we just deal ith the geographic size and come back to other -- MR. KELLEY: Oh, the types of ompetitors. Again, I think going back to a point made a little bit earlier, cellular companies -- nd it was reinforced by what I heard this orning -- they're in the market. They have got 25 megahertz spectrum. hey are going digital. They -- we do -- our firm oes a lot of work for a lot of companies in the ireless business and the radio communications usiness. And what our clients are telling us is hat the cellular companies are very busy. They re preparing for this competition that is coming. hat is good. That is exactly what we would expect 197 hem to do. But the point is they are already there. o let's bring in some new people in the market to omplete with them. MR. PEPPER: Stan? MR. BESEN: I don't want to be associated ith the view that says that aggregation is, quote, o problem. I think that is too strong. Clearly there are go going be costs to ny reallocation that exist. I guess I've never een very strongly convinced by either side of the rgument that says it is terribly costly to -- symmetrical costly to integrate great up than o -- than to vest down. So I tend to be an gnostic on that point. If it turned out that national licenses ere efficient, then they probably will emerge even hough there may in fact be some costs in doing o. MR. PEPPER: On that some people have rgued that in fact nationwide licenses in cellular ould have been very efficient and that there have 198 een a number of players attempting to put those ogether for the last five or six years and they ave not yes succeeded because of the licensing tructure in the industry. MR. BESEN: There are costs to the ggregation. There is no doubt about that. It is qually possible that in fact there be some arket -- or some market segment better served by a eries of narrow more localized firms. And if you started out with a national arket structure we might be sitting here wondering hether -- the great difficulty this industry has n getting down to a size more appropriate for the ervices being offered. So I don't think again once can know in dvance which of these structures is most ppropriate. Obviously one has to make some uesses. I think the notion of having some sort of iversified portfolio so that there is some large nd some smaller ones seems to make some sense. On the issue of whether or not the 199 ncumbents have enough I always regard that as sort f an odd question. In most markets we let firms row if they want to do so and can do so by ffering additional services to customers that ustomers want and provide it efficiently. We only worry about them growing too much f in fact they -- those raise anti-competitive oncerns. So I don't know what the notion of nough exactly means here. There certainly is a size to which firms ight grow that would raise competitive concerns or me. But simply the notion that the incumbents re already capable of providing PCS services does ot answer the question of whether or not they hould be permitted to require additional pectrum. It is a quite separate question and hould be judged in terms of competitive concerns. nd I fairly clearly differ from Dan in this egard. MR. PEPPER: You all may want to come ack to that because it seems to me there are 200 eally two questions you can ask about that. Specifically one is whether or not ellular's entry into the market by acquiring pectrum would raise their rival's costs, the new ntrant's cost, or alternatively if you allowed ellular to acquire in the extreme so much spectrum s to foreclose entry by new entrants, there are a umber of potential -- there are questions that you an ask to tease out answers on that question. So I think that -- MR. BESEN: My only point is that Dan's otion that already have enough is not ispositive. Far from it. And in our view, they ould acquire a significant amount. MR. PEPPER: Without increasing rival's osts for foreclosing entry. MR. BESEN: I don't know exactly how ivals' costs are raised here. Rivals have access o the spectrum. There is no direct effect on the ost of the rivals. MR. PEPPER: I guess that is a question hat goes back to some of the technical matters 201 elating to -- you know, given that we do not have n infinite amount of spectrum. We're working with finite amount. To the extent to which you as -- by iving spectrum -- by dividing the spectrum up into maller blocks thereby increasing cost of clearing, ncreasing costs of equipment, increasing cost of etwork operations where there are trade-offs of pectrum versus you know, the network operations. MR. BESEN: It obviously depends on the articular numbers one's talking about. We have one through a rather extensive set of calculations nder a whole variety of different market tructures. I commend you to look at them. There is a whole series of them under a umber of different circumstances some of which nvolve ESMR, some of which don't and raises ssumption about the advantages of digital over nalog. Again one can't answer that question in rinciple. I'm just objecting to Dan's sort of lanket assertion that because PCS is offering -- 202 s offering -- I'm sorry -- because the incumbents an provide PCS services in their existing llocation that that therefore applies that they hould get no additional spectrum. That seems to e to be a nonsequitor. MR. HAUSMAN: Well, I think the point I'm aking is that the cellular companies as they stand ith technology changing have the capacity to grow ith their existing allocations. MR. KELLEY: I thought, Bob, when you sked the raising rivals cost issue -- what came nto my head which is an interesting one to think bout and I don't know if I want to give you the nswer today -- but the concern that if you let the xisting cellular carriers funded by their local xchange company currents for the most part beared n every spectrum band the end result is they have position to protect and may in the process of rotecting the rents that they get from that osition spend those rents in the spectrum auction nd drive up the prices of acquiring frequencies to ompete against them. 203 MR. PEPPER: I'm sure Stan has an answer o that. MR. HAUSMAN: Actually, I'd be glad to. MR. PEPPER: Okay. Jerry, why don't ou -- you're not shy. MR. HAUSMAN: Okay. To start with this s MCI's exact argument for why the cellular ompanies shouldn't be allowed to buy block A ellular circa 1985 which they argued to udge Green that they had a position to protect, nd that they should not be allowed in -- remember CI got a lot of spectrum for free from you guys nd they sold it to McCaw (phonetic). Then they had the chutzpah to come in and ay that the blocks had this position to protect nd should not be allowed in block A. But again I have done econometric studies ere. And the prices actually are lower where the locks are competing with each other in A and B hen when they are facing non-blocks. So again there is no evidence that the locks have not competed in cellular and tried to 204 rotect their position. This is a recycled argument. It didn't ork last time. I don't think it should be allowed n the table this time. MR. PEPPER: Well -- MR. HAUSMAN: I haven't finished. I have he floor. So that is my first point. The next point, the raising rivals' cost, ou forgot the second part of the phrase, r. Pepper. To maintain power over price. Okay? And the question is how -- if you let the ellular companies in, how are they going to aintain power over price? Even if they got 20 egahertz, you know, between them, that is only 40 ut of the 120. There is still 80 left. There will be no vertical relationship etween cellular companies and PCS. Usually when ou worry about raising rivals' cost you have a ertical relationship in which I increase a price f one of your inputs. But since the PCS people will not be epending on cellular one iota, I really wonder how 205 ith 80 megahertz left there will be any raising ivals' cost to have power over price. The same for foreclosure. Again, if the ellular people bought 20, there is 80 megahertz eft. How can they be foreclosed? I mean, that is lot of spectrum. When we first started this exercise a lot f people thought 80 might be as much as the -- as he Commission would allow. So in terms of any anti-competitive utcome, I haven't heard a theory yet that, you now, has any basis in either economics or the istorical facts of cellular. My last point I will just return to the eographic thing. I think the geographic thing eally depends to some extent on what the ommission decides in terms of -- in terms of how hey were going to allocate the spectrum? Again if you go to six 20s which is my avorite plan I think a mixture of BTAs and MTAs is eally quite attractive. I'm not saying it should e three each. Maybe it should be four and two or 206 wo and four. But you do allow a mixture of ggregation. I think if you stick to your current plan hich has two 30s which would be the MTA, that in erms of people trying to link together to provide uper regional or national services which was being iscussed, I think it could be considerably arder -- more difficult under that type of ituation. So I think the geographical scope cannot e necessarily separated from the amount of pectrum that is passed out. But again I think if we get away from the 0s which again I don't favor, then I think the TAs start to look more attractive, you know, by he time you get to up to twenty or more. Then the last point, I can't -- I'm sorry have to say this. You said what could the ommission do to make the -- to ease the cellular roblem and the MSAs and the size -- you know, more ompetitive? It would be to get AT&T and MCI to top trying to forbid the box cellular companies 207 rom providing long distance. They could provide super regional -- they ould provide super regional service if it weren't or the assume MFJ, but of course that is a iscussion for another time. MR. KELLEY: Professor Hausman and I have ad that discussion. And I'll be glad to refer you o all the piles of paper that have been filed in hat issue. But going back to the ancient history if ou want to get into real ancient, I was at the FCC n the late 70s and early 80s when we were trying o figure out how to allocate cellular spectrum. And I think Chuck Jackson holds me ersonally responsible for the $86 billion consumer elfare loss for the delay in licensing cellular hat he and Ross Major (phonetic) -- but we were head of our time back then. We were thinking -- some of us at the ommission anyway were thinking about using ellular as an entry point in local competition. nd I think that the boxes were very successful in 208 reventing that from happening because they got he -- they were able to get the free spectrum for he B side and they went out and bought all kinds f A side and created a nice little duopoly ituation and created a market out of cellular hich at this point doesn't allow any competition r at least doesn't result in any competition for ireless loops. MR. VAUGHAN: STANLEY? Professor Hausman, ould you expand a bit on the comment that you elieve it is harder to aggregate say 30s at the TA levels contrasted with say heterogeneous 20s TA, BTAs? MR. HAUSMAN: My point was -- I'm sorry f I didn't make myself clear, Mr. Stanley -- was hat I think the current scheme with the 10s being TAs, that may create a problem with aggregation. So that is why I believe that if you go o 20s you could have a mixture of BTAs and MTAs ithout undue worry about aggregation. But from much of what I have heard and ead I think there is quite a bit of fear that the 209 0s in the upper frequencies may be difficult to ggregate. MR. GIPS: One of the questions that we ad given you is how can we help designated ntities participate in this market and what echanism should we be considering. MR. HAUSMAN: There are two feelings bout that. The first is I think the designated ntities should be permitted special consideration ith respect to paying for their spectrum because ere I think -- although I'm a real believer in arket -- that there may be capital constraints. So that I think some type of frame work n which they wouldn't have to pay all the money up ront but some other frame work could be but orward. I think there are many that might be uite useful. However, beyond this point I don't hink that the FCC needs to set part of the pectrum aside especially for designated entities. So I'm in favor of special financial rrangement but not in favor of the saying here is 210 megahertz and that should only go for designated ntities. I think the second thing I would also uggest here is that I think the attribution rules eed to be fixed or at least cleared up so that esignated entities will find it easier to enter nto joint ventures or other type of corporate rrangements with non-designated entities or either n the industry now who will enter. So I guess those are my two favorite lans. One would be a special financial rrangement and secondly is clearing up the ttribution rules to make it easier for them to ombine with other corporations or firms. MR. BESEN: I guess the one thing I would dd is that to the extent that designated entities n fact require licenses in the initial auction rocess, I would be in favor of allowing them onsiderable freedom in subsequent sales. To the extent that it turns out that the nitial licensees are folks who decide that in fact hey cannot use is as profitably as some other 211 ntity I would not impose significant trafficing ules on their subsequent transactions. UNIDENTIFIED SPEAKER: Doesn't that give hem an incentive to sell. MR. BESEN: It certainly does. UNIDENTIFIED SPEAKER: I'm not sure how hat encourages their participation other than aking a lot of money up front. MR. BESEN: Well, they may make a lot of oney. The question is if the objective is to rovide the best possible services to consumers hat in fact it will be a mistake if someone were n fact forced to hold onto a license for a onsiderable period of time when in fact someone lse could better offer service to the public. MR. PEPPER: You're not suggesting hat -- well, I guess we should probably stay away rom auctions issues since we have not yet released he item. So we are still to some extent under -- e still are under sunshine act so we should robably pass on discussing specific auction 212 echanisms. Dan? MR. KELLEY: I guess I'll take this pportunity to agree with my panel members. It is rare occasion. MR. PEPPER: So the agreement is lexibility on payment and no set aside is what. MR. HAUSMAN: I did have one other point, he ability to combine with other entities by learing up the aggregation rules. I take it that s just a technical thing for the lawyers to fix p. Economists don't have a special competitive dvantage on telling you how to do that. MR. PEPPER: What about questions -- have ou looked at the capital requirements for build ut? Have you looked at standard questions, uestions of -- does this to some extent go to eographic scope roaming for cellular -- for PCS ervices as compared to what has occurred in ellular? And what about provisions for example o -- or require resale in order to smooth out any 213 otential head start problems? Have you thought bout these questions. MR. KELLEY: On the standards issue one f the reasons in my early papers in the proceeding hat I thought a national license would be good, nd one reason why I believe today it would be good o allow for a rapid aggregation up to national icenses is that is going to make it easier to get tandards in place. I worry on the standards issue that if ritical issues get referred to industry forums, hose forums are going to be dominated by carriers ho are in the market and have vested interest and herefore get bogged down. So I think the Commission is going to ave to be active in this area to ensure that the tandards process isn't used as a way to erect arriers to entry or to raise rivals' costs as we ere talking about earlier. I have not looked at the capital ggregation issue myself. The other dash in question for this 214 iming of entry -- and again I will go back to my efrain, the sooner the better. MR. PEPPER: Stan? MR. BESEN: I don't disagree with the ooner the better either. I think that is right nswer. With respect to the standard setting, it's een a long time since I have actually looked at his question in this industry. It seems the times I looked at it in the ast there seemed to be quite reasonable elationship between the industry and equipment anufacturers that seem to be dealing reasonably ffectively with the standards question. I think the Commission might -- may have role, but I would limit it to an oversight role f the private bell injury standard setting rocess. And I would be seriously concerned if the ommission were to attempt itself to establish tandards at this point particularly given the ighly fluid nature of market demand and technology ere. MR. HAUSMAN: On capital again I think 215 hat that is not going to turn out to be an verwhelming problem. The capital markets are oing to work well enough -- you know, again with he caveat the designated entities might deserve pecial treatment. But, you know, again the ESMR people had o problem raising capital at least that I'm aware f. The interesting thing about ESMR too is that SMR in some sense is going to be using a new echnology, the Merz (phonetic) technology from otorolla. And there is some real problems with SMR because it has to do frequency hopping by onsiderably more than other types of technology. ou also have the short spacing problem. Nevertheless, they have been able to aise the money. To some extent there is already roven technology out there for PCS which is GSM if eople want to deploy it. It's been successfully deployed in ngland, parts of Europe and Australia now. So hat we have a proven technology. But what I heard this morning from what 216 he market seemed to think that certainly demand is ut there that could be met at a reasonable cost. So all that leads me to believe that here is not going to be a special problem here and hat the market will be able to sort this out. Again, I'll say the sooner the better. I ean, how can anybody disagree with that? That is otherhood and apple pie. We want a reason ecision, but there is no reason for special elay. And, you know Dan, in fact was at fault or the $85 billion which I would only put him down o $84 billion and spread the other billion over to awyers who practiced before the FCC. I think on the standard setting I find articularly interest but also difficult. It is asy to say we would like to have nationwide oaming. And perhaps if we had a nationwide ellular system without the roaming fees that would ave been nice. Maybe that was one of the costs of he break up of AT&T although we've certainly got a ot of benefits, you know, on the other side. 217 But I'm really quite worried that if the ommission becomes involved in the standard setting rocess we may be headed for the $84 billion gain. So I think that what should be done perhaps s to have a frame work for review, but no more han that. And to actually depend on private ctions. So I pretty much agree with Stan here I hink. MR. PEPPER: Before we wrap up, do any of he other panelists have any questions? Is there nything else. We promised you a closing statement. Is here anything -- MR. KATZ: Let me ask whether anybody ould like to add in his two cents worth about the otential role for unlicensed devices or for arrier provided services on unlicensed spectrum? Do you want to add anything? You want to et to your summary. MR. KELLEY: I guess just very briefly rom our work with a lot of companies that come to atfield Associates for technical help -- and they 218 ertainly don't get it from me. But a lot of ompanies come to get it from my colleagues. So there is a lot of good ideas out here. People chomping at the bid to get into the arket. And that is all for the good. MR. PEPPER: Why don't we wrap up? MR. HAUSMAN: Okay. I think that this is really historic departure for the for FCC using uction. And I think part of where Dan and I isagree is just our difference in where we come rom. And I think the real question here, hould there be a conscious policy of exclusion or hould there be a conscious policy of inclusion. Once upon a time when the FCC passed that pectrum people would come in with really neat deas and try to convince you that this is a good dea. And then you would give them spectrum for ree. And then you sort of have to decide is ompany A a more worthy recipient than Company B. think we are facing something very different now, 219 nd this is should the Commission have a purposeful xclusionary policy. In other words, should they ay the cellular people can't buy any more pectrum. You know, they have enough. Somebody as decided they have enough. And I think that is the wrong foot to tart off on in a market-based policy which this CC is going to unless there are real fears that he cellular companies can actually exercise market ower and hold prices above competitive level. I think that is really the only grounds nder which anyone should say here is who we are oing to let in and here is who we are not going to et in. Just to end up, I'm going to quote my olleague, Paul Sanderson's, textbook. We know hat the market will lead to the economically fficient outcome boring the exercise of market ower. And to quote Paul Sanderson, if anyone hinks differently it means that an ognition phonetic) planner could not come along with a 220 omputer and find a solution superior to the market utcome. This concept of efficiency that you can ot make one person better without making another erson worse off is one of the central ideas of conomics. So my view that the market should be llowed to decide, and if anyone says differently eally what they are saying is that it is an dministrative decision which claims implicitly hat it can be do better than the market and the llocation of resources. And you will find very ew economists who believe that that is possible. And I believe that the whole thrust of he administration to the greatest extent possible s to let markets decide. So I certainly encourage ou to do so. MR. PEPPER: Thank you. Stan? MR. BESEN: In 1952 the FCC released its pectrum allocation plan for television, even efore Bob Pepper was with the Commission. MR. PEPPER: I was going to say this was 221 ven before -- you were still here then? MR. BESEN: Yes, I was here. There was a atter on which the Commission worked for a very ong time. It actually started at least back as ar as 1948. So it had been at this for about four ears. After all this was the sixth report and rder. They had been trying for some time to get t right. The plan was actually rather detailed nd elaborate. It decided how much stations there hould be in each locality. How many should be UHF r VHF. How many should be commercial or oncommercial. How many should -- what the size of he service area served by each station should be. It was a very elaborate and detailed lan. I'm sure lots of very high quality man-hours ere devoted to trying to get it just right. And f course the Commission. In fact, one of the earliest problems I ver worked on when I began looking at the ommunication industry was the fact that there were ll these idle UHF allocations. 222 At the very time -- apropos of today's iscussion -- land mobile radio was starved for pectrum. And the process went on for probably a ecade or so to squeeze small amounts of spectrum rom television over to the poor then-starved land obile radio user. We have come a long way from that. I ean, really I think it there is remarkable. I hink we are now at this proceeding talking about etails. The big decisions have been made. They ave been made correctly. We are talking -- Jerry emphasized the ssue of relying on auction rather than dministrative process to determine precisely hat -- who should get the assignments. I'll emphasize the point I made earlier hat it is critically important that the Commission an allow flexibility in use after the initial ssignments are made. This flexibility in reassignments is in act as critical a part of the process it seems to e as the initial auctions. 223 No one should not believe -- everyone hould know, I guess, at this point that we can't e sure precisely which services will be delivered nder the rubric of PCS, who will be the best firms o provide them, and what is in some sense an ptimal market structure. We ought to be leaving as many of these ecisions as we can to private market processes ubject only to the constraint -- which I think ermits the Commission very wide latitude -- ubject only to constraints that the market not ecome excessively concentrated. If the Commission pursues that approach, akes that view of the matter, I think this process ill have an extremely happy ending. MR. PEPPER: Thank you. Dan? MR. KELLEY: There is more agreement up ere than is apparent. The sort of motto for the day is the ooner the better. I'll repeat it one more time. I think the Commission should go about romoting a competitive structure in order to 224 romote innovation, investment, and efficient ricing. To me promoting a competitive structure s not the same thing as using a merger guidelines nalysis to prevent undue concentration. Your job is to promote competition not to revent bad things from happening. And in the ourse of doing that you should provide opportunity or new entrants because that is going to bring the ost competition to the market. Thank you. MR. PEPPER: Thank you very much. MR. HALLER: Well, okay. Very nteresting session. Thank you panelists. We will ake a break now and reconvene promptly at 3:00 ith our last panel of the day. Thank you. (Thereupon, a recess was taken, and then the deposition continued as follows:) MR. HALLER: If we could please get tarted again. All right. We are back for our ast session for the day. This session we will earn about the finance community. I was handed an article which may be an 225 ppropriate way to start off when you start talking bout the financial community. And I quote, in 1865 a writer of the oston Post informed his readers well-informed eople know it is impossible to transmit voice over ires. And if it were possible to do so, the thing ould be of no practical value. I think that we are sure learning today hat there is a tremendous value to communications nd the communications that can be provided by CS. To that extent, I hope this panel in fact nlightens us even more on that subject. I would ike also to mention that because the auction -- he general auction's second report and order is till in the sunshine period because it has not een released -- that is Plans and Policy docket 3-253 -- we will be placing a copy of the ideotape of this session in that docket as well. So to the extent that issues related to uctions have been discussed in today's meeting hey will become formally part of that auction's 226 ocket. With that, I'll turn to Don Gips for our ext panel. MR. GIPS: Thank you, Ralph. I would like to introduce our panelists. e have Al Houston from AT&T network systems, ohn Oxendine from Broadcap, Herb Wilkins from yncom, Paul Rissman from Alliance Capital anagement, Nancy Peretsman from Salomon Brothers, nd Mark Roberts from Alex, Brown & Sons. We are going to go back to the format we sed in the first panel and have each panelist tart with five minutes of opening remarks, and hen turn to questions. So I'll turn immediately to Al. MR. HOUSTON: Didn't bargain to be first, ut let me get started. My name is Al Houston. 'm the project finance director, North American egion, that is U.S. and Canada for AT&T Network ystems, the manufacturing arm of AT&T. In my five-minute written statement I efer to AT&T's public statement position in the 227 CS proceedings. As I'm here representing the anufacturer from a financing prospective no urther reference will be made to those positions. I am employed by AT&T Network Systems, herefore my views on finance are from a supplier's rospective. I think the first thing here is where is he money going to come from to get this new usiness started, let it remain viable, and grow. We believe that that's the question that he FCC invited this panel to answer. And I think o facilitate that question they provided three sub uestions: What market and regulatory factors ill make PCS a viable business, what type of inancing will support PCS, and how can the ommission best create realistic opportunities for esignated entities. With respect to the first question I will ocus on the problem, three environmental factors hat in our view will contribute to the viability f PCS, number of licenses, geographic scope, build ut requirements. 228 In general the decision to provide inancing is based on perceived risk and return xpectations. The higher the risk profile, the igher the expected return, and the lower robability of finding investors willing to nvest. Therefore, investment opportunities with he perception of extremely high risk will lack for nvestors. We believe that there will be a direct orrelation between the number of licenses granted, he geographic scope, the associated build out equirements, and the economic viability of such a enture. The combination of a small geography and high number of licenses with less than aggressive uild out requirements theoretically creates a ighly competitive environments which is one of the ommission's objectives. However, such an environment may not ppeal to investors, either debt or equity. Simply ecause predictions of viability will be more ifficult. 229 Each licensee must have access to a ufficiently-sized population so that reasonable -- o that at reasonable penetration rates their usiness venture will be a viable one. It is impossible to state with any degree f certainty just how the mandated build out period ill produce the PCS performance data that nvestors normally look for prior to making nvestment decisions. However, we believe the longer the time rame before PCS specific performance data is vailable, the longer the period before investors ome on board in significant numbers. Come on oards in signature numbers. Industry specific data remove uncertainty nd stimulate rational investment. As a result we uggest that the build out requirements be evisited to ensure that they are closely linked to arket demand and provide investment opportunities hat attract investors. The second question, we believe the icense acquisition will be financed strictly 230 hrough equity. The economic potential of this market in he proposed environment with such -- so much ncertainty will make it difficult to find debt at his time. On the third question I want to address omething that is very important. We believe to itigate against the unintentional warehouse of icenses which would be due to insufficient capital o progress to the build out phase, the Commission ay wish to consider establishing a total apitalization adequacy test as a form of requalification for anyone entering the bidding rocess. Thank you. MR. OXENDINE: Okay. This is not an easy ne. We were asked to answer three questions, what arket and regulatory factors will make PCS a iable business, what type of financing will upport PCS, how can the Commission best create ealistic opportunities. That's a lot to answer in five minutes. 'll have to refer to my notes. I think that with 231 egard to encouraging participation of designated ntities, namely women, small business, rural elcos, it is important for us to create some eaningful opportunities. And in order to do that r we need some resources. We as minorities, women, and small usiness do not have sufficient resources or xperience or expertise to do it by ourselves. So I think the Commission has to look at ome preferential provisions for us. Specifically he Commission has looked at spectrum set asides, ax certificates, and installment payments. And I think each of these are invaluable or us. But recently the Commission had wanted to eexamine policies regarding tax certificates -- ell, not tax certificates, but reexamine some of ts policies. And I think that while they should eexamine them they should not completely eliminate hem because they are reexamining them. For example, one concern of the ommission -- and I imagine everybody's -- is that et asides are for minority and women only, but in 232 act if these set asides supposedly include small usinesses, minorities and women, and all of us ualify to bid on supposed set asides, then there ught not to be any constitutional problems with et asides. So I think that it is dangerous to look t set asides and then eliminate them. I think if e look at set asides we'll probably want to keep hem. Initially I said that I don't think we re as minorities have a heck of a lot of money. aving been a former banker and currently a venture apitalist, I think putting on my business hat I ould like to see people come to the table who have ome experience. And we are going to have to do hat perhaps with some joint ventures. So I kind of suggest that we as esignated entities should be able to joint venture ith other companies who both offer us some elecommunications experience as well as some ollars. And I know the Commission is concerned 233 bout preventing designated entities being fronts. nd consequently they have put some pretty tight ules regarding having a 50 percent ownership and 0 percent control. But I think that these ownership estrictions need to be looked at. Specifically eing a radio person and owning some television tations I know that I'm able to do that having had ontrol of my stock but at the same time not having 0 percent equity interest in my company. And I would hope that the Commission ould be able to revisit that issue and look at the act that perhaps they would be a little bit more lexible and not ask that you have to have 50.1 ercent ownership as well as 50.1 percent control. The Commission has looked at additional reference options for the designated groups. And t has been suggested that there be a two-year oratorium on the installment of payment. And I think as a venture capitalist I hink that makes some sense because when you have a usiness you have to make sure that when you build 234 t people have an opportunity to pay back whatever hey borrowed. So this option they are looking at or a two-year pay back I support. Currently the Commission does not allow he cellular companies to get involved with the esignated entities as such, and I think that hat -- I won't say that might be a mistake, but I hink that we as minority entrepreneurs can use ome of the expertise that the cellular folks ave. And it might make some sense for us to work ith them. MR. GIPS: Mr. Wilkins? MR. WILKINS: Instead of trying to go ack over where everybody has been I think I will ry to pick up because nobody seems to be able to inish. I believe that the significant points ere are that in order for anyone to be successful n this industry there has to be some assurance as l indicated earlier there is equity in place that ill allow that person or company to finance out heir operations. 235 The cost of building the infrastructure ecessary to support PCS/PCN under the current icense structure is significant. And clearly very ew people other than major companies can afford he capital to build out and competitively pursue he development of PCS/PCN with the current license tructure. I believe that the size in the licenses, he area, the geographic area should be reduced arkedly. I think that instead of having the umber that we are being asked to have now there hould be at least two to three times that number f license areas. I'm not sure how geographically one would reak up the nation to create perhaps as many as 500 licenses. But I think that that is necessary f the Commission wants to achieve the kind of iversity of ownership. I think that that kind of definition of ize, of license size, should run to a 20 megahertz lock and as well to a 10 megahertz block to. I believe that in addition to reducing 236 he size that the Commission in providing for esignated entities the opportunity for financing he Commission should consider carefully an lternative to debt. And that alternative would be an equity take in each of the designated entities with the ommission taking perhaps a warrant in each of the esignated entities as opposed to some kind of ebt. The Commission if it wanted to in some ay monetize its equity holding it could set up a econdary market in warrants or other kinds of quity securities. It could block those equity ecurities, securitizing some other kind of nstrument. So that in effect the government could ealize the cash state that it wanted now without ecessarily hindering the development of the PCS CS/PCN licenses. In order for someone to be competitive in he 20 to ten megahertz blocks, that entity has to eally have the capability of providing the 237 ifferentiated service to the public. They cannot come in and provide PCS/PCN ervice as the 30 megahertz block will or they will ose from a competitive standpoint. And to be ompetitive, to have the capability to offer ifferentiated service, one has to have the apacity to go to the market and have the market hen it pursues a financing receive the potential or success. And that potential for success is nhanced to the extent that there are not debt urdens associated with a designated entity, to the xtent that there aren't encumbrances associated ith the ownership that is the 51 percent imitation and/or the resale of the license. I think that to the extent that the ommission and/or the government would take an quity interest a lot of those concerns would go way. The government should prequalify all of he designated entity holders so that in effect the roblems of how much equity an entity holds would 238 e eliminated prior to the auction actually taking lace. And once the auction had been completed, he designated entity or any other party would be ree to sell that license on the open market. That n fact would provide an enhanced basis for raising apital in the marketplace. MR. GIPS: Mr. Rissman? MR. RISSMAN: As an equity elecommunications analyst for a firm with about 35 billion to invest and about 15 percent of that oing to our telecommunications issues judging from he previous comments it looks like we are going to e seeing some activity. I have to preface my remarks with the act that on Wall Street perception is everything. hat we think we know is true makes all the ifference. It may be true. It may be false. verything is what is in our minds. Too bad. The arket is like that. The environment that PCS would be born in ill be very hostile, extremely hostile. You know, 239 'm assuming 1994 -- late '94 options. I'm ssuming a two-year build out period. By then I hink the addressable base will be 25 to 30 percent enetrated with existing cellular services. verything will be digital. Costs will have eclined for the incumbents. Seamlessness. ationwide basis will be there. Microcells will be here. People will have events intelligent network apabilities so that you will have one person, one umber service. It will be a very full service ellular incumbent environment. It will be very ough to match those full services. Based on the applications some -- some pplications will die. Some applications might be ble to slip under the door. A ME 2 (phonetic) pplication, it's dead on arrival. The best ustomers are gone. PCS might be the only alternative service hat does not have national seamlessness. If P-Tag phonetic) goes with CDMA and if somebody else goes ith GSM you're not going to be able to use the ame handset. 240 The incumbents, the cellular incumbents, ill offer one person one number service. If you re a ME 2 (phonetic) cellular system, you are oing to start building out macrocells. Your ompetitor is going to say well, look, I have acrocells. I have microcells. You can use your andset in your car. You can also use it in your ouse. The PCS competitor comes and says hey, ook, you can use your handset in your car. Big eal. For that reason because they can't compete n services they will be forced to compete on rice. Because the cellular operators will robably enjoy a price advantage, on a ME 2 phonetic) cellular service the PCS guys will be he first ones out of business. Cordless long distance access might be a airly viable alternative in the short term but hat is only an arbitrage of the subsidies. And as those subsidies go away, as things ecome more rational, these guys won't have a 241 eason to exist. It is possible -- I can think of one nvestible application and that is optimize your ystem. Current cellular systems are optimized for ehicular service. Optimize your system for people ho are in their homes and who are walking around. There is a lot of equipment that you on't need, equalizers, echocancelers, things like hat. You started with that and then build out our service slowly to become a macro cellular ervice. You might have to charge more than a ellular incumbent for macro cellular. You can harge less for micro cellular. You might be able o get it that way. The final point is give PCS operators as uch as you possible can give them. That will -- nly that will ensure their success. We do not ant to finance anything that we have doubts about hether their system will work. If you come to us with proven amount of pectrum and you may get financing. MR. GIPS: Thank you. A little 242 epressing, but thank you. MS. PERETSMAN: I'm Nancy Peretsman. I'm managing director of Salomon Brothers. I had elished the opportunity to come down here today nd get away from the recent pessimism of the treet, but here I am again. UNIDENTIFIED SPEAKER: That's the streets or you. MS. PERETSMAN: That's right. I'm on the nvestment banking side of the business. I thought would really limit my remarks specifically to the uestions of what type of financing will support CS, in that that is a marketplace with which I ave the highest familiarity. If one of the axioms that was advanced arlier is that perception is everything, the econd axiom of the street is that history repeats tself or learn by example. The last part of that axiom is there is eally nothing ever new. And based on theory I hought that the best way to consider how PCS might e ultimately be financed is to look at some of the 243 ecent models we have had in the marketplace. We have case studies clearly in cellular usiness. We have case studies in SMR, in cable, n the CAPs (phonetic), and even to some extent in he United Kingdom cable and telephony businesses. What these businesses all had in common s that they sourced from banks -- not in this articular order -- but from banks, the financial arkets, the venture community, and the strategic nvestors capital for businesses that yet weren't ully operational in terms of the cash flow, eaning that the cash from those businesses didn't n and of itself support those businesses. The question that always strikes one was ell, okay, how do they do it because maybe we will earn something here. What is interesting is if ou look at each of these case studies, and they ary depending on the peculiarity of that articular time, place is that there are some imilarities. One is what we call establishment of ranchise value. Many of these industries were 244 ble to finance themselves because they could prove o the financial market that there was a franchise alue. Now, what does a franchise value really ean? In its most distilled terminology it is that here is a buyer for these assets and the price hat the buyer would pay is ascertainable. If you go back to the early days of inancing of cellular, if you go back 12 years ago o when some of us were out there trying to raise oney in the cable business, at the end of they day he comfort that the financial community was able o get, whether it was the providers of debt or ven to some extent with the providers of equity ere, well, if we gave up this franchise, what ould somebody pay for it? And that allowed if you will a base case o establish a frame work from which people could alculate estimates on financial return. Obviously this is a slightly different orld that we were considering in PCS because ranchise value is going to be a function of 245 ompetition, and it is also going to be a question f franchise value and to whom. One of the questions that I think is egitimately on the table is we have been talking bout competition among the wireless operators and ow competitive that might be. The gentleman to my left I think ntroduced a very interesting concept a few minutes go and that is the question of the true definition f the telecommunications marketplace. Is this really competition among the ireless providers, or is it in fact this ompetition among all the possible providers of elephony service? Because we are, I would argue, ooking at a model that is going to suggest that we ave many more possible components here providing ervices going forward. The second aspect that I would say if I ere to grossly generalize over some of the trends hat have underscored the financing of the ifferent industries is that there was either early trategic money that went into that industry and 246 ade a difference, or there was very deep pockets y -- best described by people who believed. When you had Craig McCaw (phonetic) elling cable systems -- thank you. MR. GIPS: Finish your sentence. MS. PERETSMAN: Well, you can come back o me in Q&A. MR. GIPS: Mark? MR. ROBERTS: Now I know why Paul Rissman oes not return my phone calls. My name is Mark Roberts. I'm a elecommunications analyst with Alex, Brown & ons. To preface my comments and put them in some ontext, we are the oldest investment banking firm n the United States. We have made a specialty out of focusing n growth and emerging growth industries. We -- or example, since 1980 we have done more initial ublic offerings of companies than any firm on Wall treet. We spent a lot of time studying PCS. And think we might have a view that is a little bit 247 ifferentiated than some others that you'll hear rom on Wall Street. I think part of this is we have not done lot of the investment banking work for the ncumbent cellular service providers which we think ends to bias the view somewhat. Let me state my basic premiss. We elieve that personal communications services will e rapidly deployed at price points likely to timulate significant demand and foster rapid rowth if licensees can acquire large blocks of ontiguous spectrum covering large, conomically-significant areas. Two points, competition will be the riving force behind the deployment of PCS. And at ur firm we see significant linkage between rapid eployment of PCS and regulatory and legislative fforts to introduce competition into other forms f voice, video, and data communications. Second point, the ability of PCS to ompete with cellular is critical. Because we elieve at a minimum, full cellular mobility is the 248 irst visible market for new PCS entrants. We are also think that the nature of PCS ill tend to favor large dominant communication ervice providers because first of all PCS networks re going to be very capital intensive, very high ixed cost networks that require heavy investment ell in advance of any revenues or potential nvestment returns. Secondly, PCS makes the most economic ense and tends to have the highest value to the icensee when it is leveraged off of an existing ire line backbone such as an inter exchange arrier, a local telco, cable TV, or even a ompetitive access provider. Now, we think the license structure ssues that will make PCS a viable business and end to maximize the auction bids are one, a inimum of 30 megahertz of contiguous spectrum, wo, minimum of an MTA license size, and three, hat you minimize the timing of the availability -- he timing of this new service, that the auction hould go forward very quickly. 249 Let me expand on that very briefly. The 0 megahertz license size, PCS entrants must get ontiguous blocks of spectrum so that they can fficiently compete and have a similar cost tructure to the incumbent's cellular service roviders that have 25 megahertz. Secondly, license sizes of less than 30 egahertz are likely to permanently lock in premium nvestment returns for the cellular industry. Now, his will inhibit PCS deployment and inhibit their bility to raise capital. The minimum MTA license sizes are imilar, you reduce the time of after market ggregation and the cost of aggregation which tends o increase the amount someone can bid and the hortens their time to deployment. Thirdly, the biggest risk, as I have lready mentioned, is that the license -- that you tructure the licenses in such a way that it equires a lot of after market aggregation which xpands the time to market. The longer the time to market, the lower 250 he expected investment returns, and the higher the ost of capital will be, the harder time I will get aul from returning my phone calls. Lastly, let me close by saying that we re very -- we find PCS very attractive. MR. GIPS: I like that closing. I would ctually like to start by pushing further on the art that Mark was just making and have some of the ther panelists comment on what is the amount of pectrum we have to provide for PCS to be viable in erms of being able to attract financing. And it s open to anyone. MR. RISSMAN: If I could answer your uestion this way. Right now we don't know what he size of the spectrum award is that will work. We have consultant studies that say 20 egahertz is fine. We have consultant studies that ay 30 megahertz is fine. We have consultant tudies that say you need at least 40 megahertz. All I can tell you is that Mercury one to ne has 50 megahertz of cleared spectrum that it oesn't don't have to share with anybody, and they 251 re successful. Incidently, they claim that 50 megahertz llowed them to reduce their capital expenditure ost by 20 percent over what it would have been if hey had been given a plain old cellular spectrum. So what we would like to see is a pectrum grant that we know is going to work. We o not want to see a spectrum grant where we will e scratching our heads saying, boy, if this oesn't work our money is down the drain. There is enough risk in this as it is hat the size of the spectrum grant does not have o be the issue around which the risk turns. MR. GIPS: Is there a tipping point. MR. RISSMAN: All I can tell you is we now it works for 50 megahertz. We don't know hether it works for anything else. MR. GIPS: Mark? MR. ROBERTS: Let me -- yes, I will xpand on my earlier comment briefly because we are urrently working with a number of the technology roviders and have talked with a number of the 252 ervice providers both from our box as well as some f the new entrants. It seems that at the 1, dot, nine igahertz, 30 megahertz can allow you, particularly hrough deploying all digital and don't have to upport analog subscribers that you can deploy a CS infrastructure with similar efficiency and imilar costs structure to the current 25 egahertz, eight to nine hundred band that the ellular service providers have. Secondly, we think 30 megahertz appears o be about the minimum size particularly if you re going to deploy services in third and ourth-tier markets, rural markets where you might ind that this is the amount of spectrum that would llow you to efficiently deploy what amounts to the ull service multimedia networks. Because as you ove from a copper-based infrastructure to a ireless infrastructure, you would use these in ural markets to supply both voice, video and data. Also in talking with a number of the olks who would like to get into plain old local 253 ccess service, 30 megahertz appears to be an fficient point where you could deploy Microcells ff of a full-service network node structure and upply basic narrow band wire line telephony at rices that would allow you to earn a competitive nvestment return compared to prices that people re -- or slight premiums to what people are urrently paying for wire line telephony. MR. WILKINS: I really think that is a ittle bit approaching overkill when you talk about pectrum blocks in excess of 30 megahertz. I really think that the smaller blocks re competitive. And if that weren't true you ouldn't see enhanced SMR our there, as someone entioned earlier, one of the other panels raising apital. This industry really, I think, would ssume digital service -- an uviquitous (phonetic) igital service -- be adequately served if we had 0 megahertz block. I think that if you wanted entities that ere out there and were competing directly head to 254 ead with existing cellular companies, then yes, hey need 30 megahertz of spectrum. If the Commission's goal is to create ore cellular companies, then that's fine. The ommission can just break up the spectrum into 30 egahertz blocks. But if the Commission really wants ifferentiated service, if it wants alternatives, f it wants different entrepreneurial services ddressed in the marketplace, then I think that the ommission's present separation is adequate to do hat. I think that there are enough 10 egahertz blocks, one 20 megahertz, and the two 30s s clearly adequate. And perhaps you ought to reak up the 30 megahertz and cut them to 20 so hat people will more efficiently use spectrum pace. MR. GIPS: John. MR. OXENDINE: I kind of isrespectfully -- I disagree with you, Mr. Roberts ecause when we look at some basic truths, if we 255 ook at the amount of spectrum for each license I uppose we could take the whole 120 and give it to ne person and be very efficient that way. The peration would be successful but the patient would e dead in that democracy wouldn't be served and here wouldn't be a whole lot of people involved. I think that we all know that the smaller he spectrum the mores crowded it is. And the arger it is the less incumbered. But I think that if we moved forward and ook at something like three 20s, for example, that s more equal. You get the cellular people to lay. You get designated entities to play. You et some joint venturing going there. You get some trategic alliances going. As it stands at this point in time the 0, the 20s and 10s, in my thinking you are going o have the big guys are going to win because -- I on't mean to be specific but when the Post winds p getting Washington and Baltimore it is very easy o build there and not have to worry about the ncumbents, the railroads, and the other microwave 256 sers. But when the little guys come who have he 20s and 10s, they got the incumbents to deal ith. You are right. They will never be able to o anything. So I think we need to have a ompromise here. And I think that the way it tands there is enough spectrum -- if I had my hoice I would have three 20s and get everybody to ork together. When you have 30s, and 20s, and 10s, the ig folks get in there right away because we know hat this is a capital intensive business, and hose who have the money are going to win. If we want to allow for the others, we re going to have to make some exceptions. MR. GIPS: Did you want to -- MR. HOUSTON: Well, I really do not have specific position on this. I think one of the hings that we ought to bear in mind is that from a inancing standpoint the degree of risk that you erceive in a venture will influence your ehavior. 257 And to the extent that you have a pectrum size that doesn't provide for growth in erms of the services that a licensee can provide ver time or they are constrained by what they can o in terms of the service offering and so forth, I hink what that does is to limit their future ccess to capital. And so as the decision process takes I hink the decision must be taken into the context f not only what service can be provided today ased on what we know, but what they might be able o do in the future. That is really my comment on hat. UNIDENTIFIED SPEAKER: May I ask the anel a question. MR. GIPS: Yes. UNIDENTIFIED SPEAKER: Do you think that 0 or 30 megahertz wide licenses will work just ine if you have to share with incumbents. And if hey don't work just fine if you have to share with ncumbents, what does say the five year stretch out efore you can move public safety entities, what 258 oes that imply to -- for time to market and herefore your competitive position. MR. OXENDINE: We know that the ncumbents have three-year holding periods. We now Pepco can keep its license the next three ears no matter who wins. I'm just suggesting that he big folks are smart enough -- they can put ogether strategic alliances and joint ventures ith some regulatory support where you can have 40s r 30s, or 50s, or whatever you want. But when you trictly you have 30s, 20s, and 10s whoever is irst there is going to win and not have a need to orry. If i have a 30, and I have the State of alifornia and part of Nevada, I don't need to work ith anybody who has got -- you know, just Los ngeles or Sacramento. But if I only have one part and you have ot the other part we have to work. And guess hat, we will work in the same time frame. So this rgument that you make that unfortunately if you've ot a whole lot of players it is going to take 259 orever and the cellular people are going to be here forever -- well, the cellular people are imited too by regulation. I'm suggesting that we open it up so verybody can play. And I don't hear that from our side of the table. MR. GIPS: Does Mark or Paul want to espond to that? MR. ROBERTS: John, I guess I would use his as an example, when we are trying to raise quity capital for a new PCS entrant, the first uestion that any potential investor is going to sk is how is your cost structure and what is your arketing strategy? How are you going to compete gainst the incumbent cellular service provider who s in every case going to aggressively attempt to reempt both your price points and your service fferings. And if you have to go through a period of fter market aggregation as one of the earlier anels mentioned, we've had after market ggregation for nearly a decade now in cellular. 260 e still don't have a seamless nationwide network. It is going to be very difficult for me o raise capital for someone who can't conclusively nswer those questions. And the capital they do aise is going to be very expensive versus the ncumbent service providers, who for example the ncumbent cellular operators who are also going to e making these same sorts of alliances, and they re going to have very low costs of capital. As we are seeing currently on the wire ine telecommunications side, cost of capital is a trategic competitive issue here. MR. OXENDINE: You make a good point xcept that it is based on the assumption of xclusivity. And I'm suggesting to you that erhaps we are talking about the cellulars and the ther coming together in strategic alliance. You ave not addressed that issue at all. I mean, you are suggesting that it very ompetitive environment and that it is either or, ne or the other. If it is all inclusive, if we have some 261 egulatory movement on the part of the FCC it can nclude all the players. Is that not a ossibility. MR. ROBERTS: I think it is very possible hat you can include all the players if you are pecifically addressing designated entity and small usinesses, new emerging growth businesses or you now other designated entities. I think there are a number of ways where hey have the opportunity to leverage off of a ominant service provider. But I firmly -- at east at our firm -- we fairly -- firmly believe hat the dominant competitors of PCS are going to e large, very well-established sophisticated ommunications companies who are -- and the nvironment that we think would be proper would be or the FCC to create an environment where you have lot of competition. I don't think that just legislating lliances or regulating alliances will result in he sort of service proliferation and the prices alling to the point that consumers will be 262 enefited. MR. GIPS: Commissioner Barrett, did you ave a question? MR. BARRETT: Yes. Then I assume, r. Roberts, that you have already assumed there re no market scenarios or structures under which ou would see investments being right for anyone ho is not what you call large? Large I accept, ut large and necessarily sophisticated I don't ccept. Then you have automatically turned off the bility for anyone who is a new entrant who happens o be sophisticated and has the knowledge of being nvolved? MR. ROBERTS: No, we actually are ctively involved in raising large amounts of apital for new entrants into what I would call PCS ervices. MR. BARRETT: Are they large and quote ophisticated? MR. ROBERTS: They are sophisticated and hey are actively trying to become large through oint ventures and alliances but it has been very 263 xpensive capital for them had and trying to back o raise thus far and they have had the luxury so ar of not having had to compete head to head with he incumbent cellular service provider. MR. BARRETT: If Mr. Houston happened to eave AT&T and take some of Herb Wilkins, you know, e can afford to underwrite all of this if he wants o. If I had Herb Wilkins' money. Would he be determined -- he certainly ould not be the determined large, but a new ntrant. Would he be considered sophisticated from n academic standpoint and experience standpoint to e able to do the business. MR. ROBERTS: When we talk about ophisticated we are mainly talking -- MR. BARRETT: I know what you're talking bout but I just want to make sure that we are alking about the academic and intellectual ophistication to be able to do certain things such s switch and understand the markets and understand he demand process. And clearly Mr. Houston would nderstand all of that. He may have not have the 264 oney that Mr. Wilkins has, but he certainly has long with the two of them together could do ertain things and bring a certain level of ophistication to the marketplace notwithstanding he fact they would be new entrants. Would you suggest that there is no place or them. MR. ROBERTS: No. In fact, just the pposite. We would suggest that there are a lot of pportunities for them. As I said before, we are ctively working with a number of just those sorts f companies. In fact, just in the last six months lone we have raised about $400 million dollars for ntities that fit the profile that you just entioned. The difference would be the -- on the xperienced management. For example, you mentioned witching. We would probably look to someone to rovide some sort of vertically integrated ervice. It is not clear to us that Mr. Houston ould be able to come to us and raise money to bid 265 or the spectrum. He probably after winning the spectrum hrough having used someone else's -- MR. BARRETT: Mr. Houston is just an xample. MR. ROBERTS: Yes, I'm using this as a ypothetical that after winning the license and aving a business plan that we felt could be xecuted effectively would have enormous pportunities to raise capital in the markets. The difficulty would be for him to come o myself or any other -- Salomon Brothers -- ecause then we are in turn going to got to Paul nd try to convince Paul to put a hundred million ollars into Mr. Houston's company. And the kind of questions you heard from aul today are the typical questions that you would et from any portfolio manager on Wall Street. MR. BARRETT: You have answered my uestion. Either to you, Paul, Nancy, or whomever, hat kind of market structure would the -- if you 266 ook at the size of the markets and the number of ompetitors, what kind of market structure would he financial community consider most viable, the TAs, the BTAs, large blocks of spectrums or small locks? Let me tell you the reason I ask the uestion. Why don't you answer that and first let e tell you why I ask the question. And I will ell you that first since Nancy is looking up at he sky. It was my position, Nancy, that during he process when we voted before when we had two 0s and the four 10s and the 20, that if I were n -- and I happened to mention Salomon Brothers by he way. If I were there and I had someone else's oney to invest I would look at the two 30s and I ould encourage someone to aggregate the three of he 10s. And I would waive the ten standing alone nd the 20 goodbye and say I wish you well, but let e talk to these people with the three 10s that hey have aggregated. And that is the reason that 267 ask you what kind of market structure and cenarios that you see that would be most viable. Would you finance the stand alone 10 and he 20 as presently constituted. MS. PERETSMAN: An independent stand lone? MR. BARRETT: Mmm-hmm. MS. PERETSMAN: Doubtful. Doubtful. It ould depend on whether or not it was affiliated ith somebody who was already in the market and/or as affiliated with somebody who was providing ervice in that market -- or providing that kind of ervice in another region so it brought some xpertise. To answer your question I think there's lso -- it is difficult to answer MTAs, BTAs as a eneral rule because one of the principles that we ave learned across the board is it depends ramatically on a market size. You know, the top 0 markets are going to accommodate obviously a lot ore competition than market 25 and 50. I mean, you can look at the broadcasting 268 ndustry for models to that point. So I think that ur level of comfort of participants is very much a unction of what the market size is. MR. BARRETT: Can you describe a scenario nder which you think -- and I'm sorry. I didn't now whether Paul, you or Mark wanted to respond to hat initial to that... MR. RISSMAN: Sure. I would wait for a 0 or 20 licensee to aggregate into a larger block efore they came to us for equity financing on your irst point. Second question, as far as MTAs go, TAs don't really bother me too much. There. There will be a market opportunity for a ot of people who aren't really interested in using CS beyond their region. In fact you could robably claim that the people who are using -- who ant to use the phone beyond their region have lready signed up as cellular customers. So the great mass that are left are robably more regional in their interest. BTAs I hink however are a little bit too narrow. And I ould want to see BTAs aggregated into an MTA 269 evel. If somebody comes to me with a BTA icense they would not be financeable from point of iew. MR. BARRETT: If they were aggregated in hree 30s they would be? MR. RISSMAN: Three 10s on a BTA. MR. BARRETT: Three 10s. I'm sorry, es. Three 10s. MR. RISSMAN: I would not find any BTA icense attractive whatsoever because -- and that s because of the confusion regarding technologies hat are going to be used at this time. MR. BARRETT: Let me ask you a question. an you think of any scenario under which if a new ntrant -- whatever a new entrant is -- has hose -- either those singularly or the ability to ggregate under which anyone on the street would onsider financing them in the BTAs. MR. RISSMAN: Only post aggregation. MR. BARRETT: Okay. That would be after ne of the big players with deep pockets had gotten 270 hat they wanted; am I correct and aggregate with hem? MR. RISSMAN: We could see -- any entity hat wants to provide PCS I would want to see have eep pockets. MR. BARRETT: Would your assessment be ased on merely being configurated as BTAs? Would t be based on the market potential that one has to erve? Would you have that feeling if there was a reat demand in an area and there was a great area n which a BTA would serve, would you still take he same position with who you would be willing to inance? MR. RISSMAN: Well, the reason I say that s that suppose you have gotten aggregated three 0s into a BTA. You decide to offer GSM based PCS nd all of the BTAs around you are offering CDMA ased PCS. Nobody would be able to use their phone utside of your little area. You would not have a iable business plan. MR. BARRETT: Anyone else want to -- r. Wilkins or Mr. Houston do you share his 271 eelings? MR. HOUSTON: Basically from a anufacturer's standpoint I take a position on hat. MR. BARRETT: You do from a anufacturer's standpoint? MR. HOUSTON: I do take position on that eally. MR. BARRETT: Okay. Herb? r. Oxendine? MR. WILKINS: No. No, I don't share his osition. I think that the extent that you elect hat is perceived now as the technology in the arketplace drives how we structure the PCS/PCN ndustry we lose an opportunity. This is an industry that is going to be round for quite a long time. To structure it now o that it merely rides on the basis of what the echnology exists, ignores the fact that there are robably entrepreneurs right in this room who have deas who would allow the development of the pectrum in such a way with different technology to 272 erve different market interests. One presumes when you take the position f Wall Street that the service that the spectrum ill be used solely to develop additional cellular ystems. That is not what this will be used for. here will be other types of services developed rom this technology that is not pure cellular. And that we have to get away from. If he Commission goes the way of the Wall Street we ill have pure cellular systems competing head to ead on the basis of price, solely on the basis of rice without anybody making any money and without he country having the kind of service that we ould all like to see it have. But if the Commission looked at smaller ggregation, smaller licenses and small block pectrum, I think the Commission will be surprised t the huge amount of new and novel uses that eople can come up with to use a spectrum. And I'm ertain they will. That is what venture apitalists look for. MR. BARRETT: Let me just ask a real 273 uick question because Mr. Wilkins talks about the all Street perspective. I assume Mark, Paul, and ancy, neither of your responses are based on any echnical aspects of difficulties of the small ever onfigurations, are they? Okay. UNIDENTIFIED SPEAKER: No. MR. BARRETT: Did you want to respond to hat initial question, Mr. Oxendine? MR. OXENDINE: My only concern was that I hink the FCC has already talked about ordering two arge spectrum blocks and five smaller ones because hey were considering the entire country. I don't know what you would do when you ook at Lexington, Kentucky with 850,000 people and robably a bill might be anywhere between eight to 13 million. What do you do with those kind of ommunities? MR. BARRETT: I wanted you to respond to y question. I don't want you to get into a debate ith them. Let me just go on to do something else. nd I want to be clear about this, neither -- 274 ancy, neither your, Mark's or Paul's response are ased on any technical difficulties that you nderstand with the small configurations but rather hat you are looking at it purely from the erspective of an investor being able to have a easonable opportunity to -- for the investment to e safe; am I correct. MR. RISSMAN: When you say technical do ou mean technological? MR. BARRETT: Yes, that is what I mean? re any of your reasonings based on the fact that here are some technical difficulties? You entioned some in terms of what one would be able o do. But I just want to know if Nancy and Mark's esponse would be based on anything above and eyond the financial aspect which is to get as much rofit and to make sure that one's investment is elatively sound based on either size or alleged emand or potential demand. MR. ROBERTS: I would qualify that lightly. Our view of PCS is slightly predicated n technology from two standpoints. Currently 275 here are note efficient technologies, digital echnologies, that would allow you to move from nalog to TDMA to CDMA to frequency hopping or hatever else anyone would happen to come up with hat are commercially viable within the time frame hat we think you need to deploy a PCS network. Also the phones that currently can -- I elieve the term they use is the dual frequency hone that would move from one dot nine to two igahertz are not realistically priced to be used. So our view as far as the contiguous pectrum blocks is somewhat predicated on what echnologies we see in the pipeline and how long we hink they will be before they are ready for ommercial deployment. MR. BARRETT: Nancy, did you want to espond to that? MS. PERETSMAN: We are presuming a level f viability. And with that presumption we are alking about economic models. MR. BARRETT: Let's assume that one of he small configurations would have some level of 276 conomic viability and would not have just for the ake of the conversation any technical difficulties otwithstanding what Mark is suggesting -- and I hink he is right to some extent. Would you still even with the economic -- ith the technical aspects being relatively clear r positive rather and there being a market and eing relatively viable in terms of size and romise of demand, would you still shy away from inancing? MS. PERETSMAN: No, but I guess we are tarting to run into a bit of a catch 22 here. It s really the view that the smaller -- let me put f this way, the smaller the spectrum allocation he presumption is more competition. The more ompetition -- if you introduce that on the level hat it already exists we start to get to -- there s an amount of competition that ends up being very onstructive and then afterwards you fall off a liff. I think what we are all concerned about s where that cliff is. 277 MR. BARRETT: And I'll be quiet, r. Chairman, in just a moment. Mr. Wilkins, you had talked -- you had ade some remarks about set asides that I didn't nderstand. You had -- there had been I guess everal debates this morning about set asides as a unction of increasing the probability of new ntrants. And I came in on the tail end. Are you gainst, for them or just -- for what I prefer for ack of a better word called fundamental fairness n opening up the market, period. MR. WILKINS: I'm for fundamental airness in opening up the market. I think that here are limitations. Limitations are defined by he capital requirement to get involved in the rocess itself. The capital defines whether or not the ervice will be competitive, the capital -- your bility to buy a 30 megahertz block and be uccessful is a function of how much you pay for t. If you pay too much you are not going to be uccessful. 278 Of course if it were free, you could robably end up with some kind of a competitive ervice down the road. So it is the process and he way it is set up that defines what is riskier or an entrant coming into the marketplace. And because the process itself can only e got into if you are well-financed and have dequate equity capital after you have gotten the icense, there are limitations on the openness of he process itself that I think will drive away a umber of the people who would instrumental in roviding some very unique and creative pplications and -- for the service. MR. BARRETT: Thank you very much. And I ave talked too long. Thank you. MR. GIPS: I actually wanted to come back o a point Nancy raised and get people's opinion of here the cliff is, how many competitors, how many icenses can we issue before we hit that cliff of oo many. MS. PERETSMAN: I guess I brought it up o I'll start. I think as a start I should say I'm 279 till troubled by the definition of the arketplace. But let's presume for a moment that t is a wireless marketplace. I think our view is that the maximum is hree. And there's probably markets at the right umber of two. Combined with the other articipants in the market who are -- I understand hey were covered at earlier session today so I on't belabor the obvious, but you have already got handful of competitors going into this arketplace day one. MR. ROBERTS: I guess we disagree with hat. We think there is an opportunity here for a ot more than three. You already have two which re two incumbents cellular service providers. And et me at this point interject something. MS. PERETSMAN: I'm sorry. But are you aying -- I said there are already a handful of two o three additional ones. MR. ROBERTS: Oh, you are saying two to hree additional ones. Okay. Yes. Under the urrent license structure of a 120 megahertz then 280 e think what you are going to end up with is robably three -- two to three additional ompetitors, okay, just given the fact that you ave allocated 120 megahertz. At this point let me also redefine the arket a little bit. Apparently there is a istaken notion that we have the view -- or at east that I have the view that PCS is nothing more han additional cellular service. I couldn't isagree with that more. I think the opportunity ere for personal communications services is for an normous number of new wireless voice, video, and ata services probably not developed in that rder. Cellular is PCS, but PCS is not cellular. The only reason that we emphasize the pectrum blocks is because we don't see any reason hy the incumbent cellular service providers will ot and in fact they are planning to aggressively ntroduce the same sorts of services and price oints that new PCS entrants would attempt to ffer. And we believe that given the nature of 281 his industry and the high fixed cost structures hat they will attempt to preempt PCS. So that is hy we -- that is the main reason we have mphasized the size of the spectrum blocks, not hat we think that PCS is to be, you know, just ore cellular. MR. BARRETT: Anybody else want to omment on that? MR. RISSMAN: Sure. For a minute. You an run through a little exercise in your head. ake the number of subscribers you think there will e at some end point, say 10 years from now. Give he two cellular incumbents half that numbers ecause they have such a big head start. Let's say you want two extra licenses, hrow Nextel (phonetic) in there. That's three for he remainder. Divide it up by 51 for 51 MTAs, see ow many customers you need for each one. You now, anything below, say, 150 to 200,000 customers n an MTA is probably not all that viable. But of course the big ones will be arkedly different from the more sparsely populated 282 nes. MR. GIPS: There is a question from the udience that related to some of the discussion his morning. The ESMRs and MCI and Nextel (phonetic) ou just mentioned as an example have been able to ttract significant financing with 15 megahertz ssentially of spectrum. Why have they been able to and why the kepticism about PCS with less. MS. PERETSMAN: I understood that remark his morning. And I would like to point out in the hronology if you look at Nextel's (phonetic) istory, the amount of capital just as an example hat Nextel (phonetic) is able to attract was eally deminimous until they attracted some trategic investors. So if you are talking about arm's length, ndependent institutions such as Alliance making a ecision to put capital, it was a fraction of what he market capitalization is today. In fact you can tract where the capital 283 tarted to explode. Nextel (phonetic) went public t 15. It's now down to nine. The point being hat when it was out there on its own it didn't ave a lot of support. Comcash (phonetic) shows up nd makes an investment and one of the great little xioms that we referred to before is you know you ollow the money or there is another way of saying t which is people look for comfort from other big nstitutions. So it wasn't until those big smart orporate investors, quote, unquote, started howing up that the independent equity capital tarted traveling along. We can go through that tory time after time for virtually every one of hese companies. MR. HOUSTON: I think in addition to that omment I think the apparent footprint that Nextel phonetic) has, if you translate that into eographical scope, getting back to what is on the genda, you'll probably get a feel as to why. So I hink there is a direction correlation between hose two. 284 MR. OXENDINE: It almost seems as if the ther side of the room is like the soldiers of ortune. And it is real interesting to me. It mplies that some people haven't read the budget ct very well which I thought legislated some of hese things and suggested that A there be ignificant entities and there could be some recedence set. But if -- that hasn't been the case where hat people don't understand that. I think the nly way we are going to ever motivate people like hat to do anything is for you as regulators to do omething. Because they will not do a thing unless hey are motivated. I mean, this is very apparent right ere. You tell me where to put my money, and hat's where I will put it. Otherwise I'm going to ee what I can make and leave. It is a sad ommentary but that is just the way the money arkets work. And so it is incumbent upon the egulators to do something because the financiers 285 on't do a damn thing. And I know that from having een a financier for a lot of years. MR. HOUSTON: I think I want to make a omment in going back to what Herb said earlier hat after having the license and going out and etting the equity to actually pursue a viable usiness. And now commenting on the most recent omment in terms of what the -- I think the comment hat I made earlier about that prequalification for he licensing, if someone brings to you prior to articipating in the business -- in the bidding rocess, a whole plan that shows the capitalization otential for their business undertaking and you et -- that will do more I think for the designated ntities than anything else. Because what happens is in order to be ble to put together the capital structure that hey will bring to you they, will have to have gone o the marketplace with a core set of competencies hat they have put together and convinced others, omeone else, that they have a good business 286 roposition. And included in that will be the echnical competencies that will be required to ake it successful, the managerial competence and ll that sort of -- and by having that as a rerequisite requirement could be doing a lot of ood for new entrants not just the designated ntities but any new entrant that doesn't have the enefit of the deep pocket as has been referred to. MR. PEPPER: Can I ask Mr. Houston a lightly different question? In your opening tatement you said that you viewed -- you thought hat the financing strictly would come through quity and not through debt. And yet in the cellular business a lot of he manufacturers provided debt financing through roviding equipment. I was just curious given your xperience on the cellular side why this is ifferent. MR. HOUSTON: And when I referred to debt was talking about debt in the traditional capital arket environment. If you -- and unfortunately a 287 ot of the manufacturers, equipment manufacturers, hould have provided -- used equity instead when hey supplied the equipment. Should have lassified it as equity instead of debt. I think they would be a lot better off as result. So it is question as to whether or ot -- what the classification of the capital hat -- how they classify what they provide to the ndustry. And I think the PCS market will attract ts fair share of supplier credit. However I want o caution one thing that the market is different han the perceived risk looking forward than what ou had in the cellular industry. It's going to be ifferent. I think it goes back to Nancy's point in erms of the final -- what really is the market ecause at one point 10, 12 years ago when AT&T rovided supplier credit for over $200 million to cCaw (phonetic) there wasn't a cellular industry. oday -- a wireless industry. So now I think when you look forward you 288 re putting the things in a different prospective. nd I think the reaction and the perception is oing to be different. UNIDENTIFIED SPEAKER: Excuse me. Are ou suggesting that the equipment manufactures will ot be as quick to jump into this market? MR. OXENDINE: Or will they take equity nstead of notes. MR. HOUSTON: I think it's open to ebate. I'm not sure because I think the arketplace is different than it was ten years go. But I don't think it should be precluded. I think it is open for debate. MR. PEPPER: If we could have maybe Paul, ancy or Mark respond to John's question, what ould be done from our prospective to make nvestments more attractive in the designated ntities small business, firms owned by women and inorities? Mark talked about -- actually it sounded ike fairly aggressively pursuing those kinds of oint ventures. And I guess what else can we do to 289 ake those investments more attractive. MR. RISSMAN: One thing you can do is to eep the cost of entry as low as possible. MR. PEPPER: And how do we do that. MR. RISSMAN: You could give them the pectrum for free. I'm not kidding. MR. PEPPER: What about in terms of the ost of entry on the spectrum side? Others have ome in and said that the cost of spectrum even at arket price is only a fraction of the cost of uilding out the infrastructure. What would you think should be done in erms of ever geographic or spectrum block size? MR. RISSMAN: Well, any -- you know omebody can think of a niche application like ixed wireless for example. And if it is a smart dea and in they have a good business plan, and if he managers are well-experienced, that is inanceable. We are not talking about the huge amounts f financing that somebody with a MTA of 30 egahertz MTA is going to require or want. 290 But for example, the narrow band PCS guys ill probably get a lot of licensing because they ill be able to -- a lot of financing because they ill be able to think of good niche applications. Any small business that thinks of a good iche application will have Will have access to a imited amount of financing on a small scale. MR. PEPPER: Have you heard of any good iche applications in broad band PCS versus narrow and PCS? I guess Mr. Wilkins suggested up to 1500 icenses which would make it very local and elatively small blocks of spectrum. That to me sounds like it is right for iche services. Other people told us there is no uch thing as a niche service in PCS because if you ave 30 megahertz or if your cellular was with 25 lus maybe some more spectrum you can provide not nly the highly mobile service but also the niche ervice. So There is no such thing as niche in his area. Is that -- MR. RISSMAN: I tend to agree with Mark nd that point of view that in the end everyone 291 ill be able to provide all services and that herefore the niche will go away. But if somebody can think of a good niche would be dying to hear about it. MR. PEPPER: Mr. Wilkins, you might want o respond to that since your opening statement eemed to indicate that niche services were really ort of critical to developing opportunities for mall businesses. MR. WILKINS: I think they are. And I hink that the large companies -- they will them robably ultimately get there but I think there is lways the head start possibility for somebody who omes up with the unique idea. And I think that the smaller licensing reas offers an opportunity to want to service in n area on a trial basis at least where the risk is omewhat mitigated by the smaller size and the rea. The larger the license you have to pay or the less likely it is that the entrepreneur ill take risks and the people providing the 292 inancing will allow the entrepreneur to take risks ith their license. What most people will want if they put up oney is to have the entrepreneur rush to some evel of cash flow development in his business. nd they won't really look at the licensing, or the ntellectual business licensing opportunity to go ut and define service. I don't think anyone will bid on a pectrum unless they have some idea of what they ntend to do with it. But there will be new ervices that are never tried before and to have o -- to role that out over a full MTA for instance ight be impossible. A new service over an MTA I think would e very tough for anybody to finance. MR. PEPPER: What about the amount of pectrum? Some people said that actually the more pectrum you get the lower the costs of entry ecause of the incumbent microwave problem as pposed to the geographic scope. MR. WILKINS: I think that is true, but I 293 hink that anybody who bids on a 30 megahertz block eally isn't worried about the cost associated with emoving microwave services. On the other side, the smaller guy is. nd maybe by making the licensing smaller you might llow somebody to go around the microwave problem. aybe you can break up an area and smaller areas ould have fewer microwave problems. I don't now. Someone would have to have an engineer take look at that. But I would think that you would have pportunities to have fewer problems in certain locks of spectrum if the license areas were maller. And hence I think you would get those ervice developed, the new services developed in 10 egahertz blocks. MR. PEPPER: Mark, you have been talking o entrepreneurs with I assume a range of ervices. Does that sound like a winner or a on-starter? I mean, which -- or something in etween and why. 294 MR. ROBERTS: We are sort of operating rom the premiss that ultimately these networks are oing to converge both wired and wireless etworks. And network investments have tended to all into commodity returns. So operating a etwork be it wired or wireless ought to be a ommodity business. And there is a whole set of easons why you can say that cellular has not been hat. For an entrepreneur or a small designated ntity, they have a difficult time developing a usiness plan where they can compete against the ntrenched service providers in a commodity usiness. So first of all, raising money for them o bid for spectrum will probably be difficult. ut once they have the spectrum, particularly if ou were to encourage by the regulations designated ntities to partner with one of the large commodity etwork providers and force them to take equity and etain those licenses or -- you know for a ignificant period of time you offer the 295 pportunity for the designated entity to work with his big joint venture partner which you have heard entioned by both Paul, and Nancy, and I earlier in ther context. The reason we mentioned that is because f this sort of commodity return concept that the ig players are better at doing that. So that is ne way of doing it. Beyond that we think there is a articular opportunity for small businesses and esignated entities to offer a variety of ertically integrated value added PCS services and echnologies without necessarily having to have hem be PCS licensees. MR. PEPPER: Mr. Oxendine, how does that trike you. MR. OXENDINE: I think that -- I mean, we ave all talked about generic truths. You asked bout geographic scope of license. I think it is eal clear that the bigger the service area the ore it costs to get involved and less likely small layers can survive. 296 That is a basic truth. And as it stands ight now the way we are set up, the two and the ive, I think the only way that the small layers -- and I agree with you here that the small layers will be able to get into niche marketing or example doing some mobile -- extended mobile hone service and they can develop an expertise in hat hopefully. And some strategic alliances that ou kind of suggested. I mean, if I were moving forward as we re presently set up, I think it is disastrous to o for the 30s if you were me. And it makes a lot f sense to go for the small ones, the 20s and 0s. But I would only finance them if there was a pecific niche that you had and a strategic lliance. Short of that I wouldn't do it. MR. PEPPER: You earlier in your opening tatements talked about attribution questions of ow we define small business, minority, female articipation. MR. OXENDINE: I would have -- it is not y world unfortunately. I would have had three 20s 297 hich would have caused some attribution in terms f getting to 40 or 30. It would have caused some trategic alliances. It would have caused some oint ventures. But in the imperfect world that we live n and we'll probably have the 30s. And it makes a ot of sense for a lot of reasons. But at the same ime think we need to accommodate the 20s and the 0s. And the way again I said we would have to ook at it is to look at some niche marketing that erb talked about and we got some specifics for, nd a look at some strategic alliances that are lmost forced in a way. And the idea about giving away free -- othing is free, but if there some designated ntities, not to talk about minorities or racial olks, but if there were some designated entities ho had free because we only had to put up 85 rand, we could raise a hundred thousand dollars nstead of $3.2 million. And I think that could motivate some of 298 our people to come and play with us. So that akes some sense. I think there are some ideas if e sit down here and put our head together if could e a win-win circumstance. I think the amount of spectrum is ufficient. I think if we figure out how we can ut together these alliances and joint ventures and ake some sense. But we have not done that yet. e have not had that as a goal. And I think that erhaps you need to mandate it as a goal and we ill come up with some answers other than just eing anecdotal about it. MR. HOUSTON: Just a quick comment. That s, I think one of the things you could do for the esignated entities more than anything else is to t this moment to not preclude any particular usiness option that they could be dealing with oo. Any type of alliance or strategic usiness arrangement that they can forge should be ntertained in future discussions because I think he market is so new that you really can't start 299 utting parameters about one should be able to do r should not be able to do. I think that is one of the things I think hat you should be -- leave open, that would be ery helpful. And the other comment is that this s not an AT&T network systems. But I don't know here the money that the FCC is going to collect rom the license and how it will be used. And maybe one of the things you want to onsider is how you participate in accomplishing he social objective because I really think it is a ocial policy objective on the designated entities nd how you accomplish that objective by usage of ome of the license fees collected. MR. PEPPER: Actually Congress has etermined where the money is going to go, and they ave already spent it. Somebody earlier started alking about the deficit, and I think it is going o in part to retire that. MR. RISSMAN: Just one thing quickly bout strategic partnerships. I think it is a reat idea in principal but I can just see somebody 300 ith a 10 megahertz BTA approaching MCI who wants 0 megahertz BTA so they can provide fixed wireless nd saying want to be my partner. And MCI starts o salivate and says yes we will be your partner, nd that is the last you ever see of the guy. A designated entity that does not have he network expertise is going to have to give up ontrol of the network, who does not have the arketing expertise is going to have to give up ontrol over the market. Somebody with one good idea will easily e swallowed up and absorbed by a larger partner. hat would in essence defeat the whole point of iving a set aside in the first place. You've got o be very careful to watch out for that. MR. OXENDINE: See, I totally agree with ou, but I think that the FCC has looked at the wnership interest and not looked at the control ircumstance as might be the case with us roadcasters. If we looked at the ownership -- and I on't care if you have 90 percent of it. If I can 301 ontrol it, that's fine. And we have the play. nd you wouldn't swallow me up in an instance. I ean, we are all intelligent enough to know about imited partnerships and how they work and how -- he fact that you can have a general partner orporation where I can have a, you know, ontrolling interest of that general partner and aise an awful lot of money. And Herb does it very day. So I would suggest just policy wise that he FCC take a look at ownership, control, recedence being broadcasters and perhaps implement t here because it could be very helpful in the ircumstance that you are talking about. MR. WILKINS: I really don't think that he partner in the joint venture relationships will ork. It was true when cable first rolled out and hen telephone companies offered to bill cable ystems. And there were probably maybe two or hree cable operators in the country even though hey were desperately in need of money who took the elephone companies' offers to build on a lease 302 ases their backbone. And I think that most of the cable perators realized to the extent that they became artners with the cable companies -- with the elephone companies back then they would have lost heir independence. And cable would not be like it s today had they entered into those lease rrangements. MR. OXENDINE: See, Herb, we are not in isagreement, but do you understand what I'm alking about? The Commission's equity equirements right now preclude -- are you not in avor of them opening them up so that we as inorities will. MR. WILKINS: I am in favor of them pening the ownership process up. But I also think f the process itself, the need to have a partner o go into the auction really defines who will ltimately own and control the license down the oad the. The designated entity may own it today, ut down the road the designated entity will not 303 wn that license if the obligation is to have a big eep pocket at the start of the race. MR. OXENDINE: See, Herb, I would like to ave that problem. I don't want you to solve that roblem for me. I'd appreciate -- I think we make mistake among ourselves. I don't want to walk away from here and ay the reason why I couldn't be -- I don't have a inority preference is because Herb Wilkins who is ery well respected thinks that down the road I'm oing to be taken advantage of. I'll take care of yself down the road, but just give me the pportunity to play now. And that is what we are alking about now. MR. WILKINS: When I made my first remark said that I thought that the Commission should ake an equity stake -- or the government should ake an equity stake in the designated entity icense -- company. And that would solve the roblem. MR. OXENDINE: They are not going to do hat, but they can give -- 304 MR. WILKINS: I think if they can figure ut how to monetize that equity stake that they ill do that. I think that they can monetize that quity stake. I think that the folks on the street ould find that a rather unique opportunity to make buck, and they will do it on that basis. MR. PEPPER: This has actually been ascinating, but if I could just shift for a second o actually ask Paul a question because in an arlier round he had said something I found quite ntriguing, that is what do you see as the key unctional characteristics of PCS in order for it o work, to compete, to attract capital, to make oney at the end of the day? And I think I heard you saying something little bit different earlier than what you said everal months ago, but I'm not sure. MR. RISSMAN: Well, aside from a niche pplication which I think many of us agree probably s only a short term -- only has short term iability, what we are seeing now in both the 305 ellular industry and in the wire line industry is convergence, Pacific Bell is dying to get PCS pectrum because it doesn't have any wireless pectrum at the moment so that it can integrate -- ssentially what it is trying to do is protect tself from competition because the cable guys, nce they get their hands on PCS spectrum will try o use PCS as a way of implementing fixed wireless ver their cable plant. Once you have fixed wireless, the telcos ho see this as a major threat will also come up ith a fixed wireless. And they will say, well, ook, our competitor is offering you fixed ireless. We will offer you fixed wireless and ore. We will offer you fixed wireless and ireless in your car. And you can do it with one andset and we will give you bill and we will give ou one price and you will find that a more ttractive proposition than just using -- having a ixed wireless service and then having to go to our cellular carrier for vehicular service. You arry two phones around, get two bills, et cetera, 306 t cetera, et cetera, and not have it all be eamless. So I think the competitive dynamics of hat is going on are driving everybody to the same onclusion. And that conclusion is if we don't ffer the same services that our competitor offers e will lose. That the ultimate conclusion of that ynamic is that everybody offers all services. UNIDENTIFIED SPEAKER: What is the suite f services that you see as critical. MR. RISSMAN: Essentially it will be the ind of things that the one number -- one person, ne number providers are trying to implement now ith their advanced intelligence networks, where ou will be able to be reached anywhere. You will e able to use the same handset no matter what peed you are traveling at with one phone number. hat is the personal -- you know, the personal ommunication vision as it was originally set up. MR. PEPPER: So I have to able to use it n the home with no additional charges? This 307 orning we had somebody from GE talking about -- MR. RISSMAN: No, no, no. MR. PEPPER: Actually it is somebody lse. It was somebody from the Yankee group alking about different pricing bands, where if you se it in your home or on your premises there is no ir time charge. As us move away from your home, the urther away you get the higher the air time harge. If you use it in your car at high velocity hat is the peak charge but you are able to use the ame device and you may not have any airtime harges for it. On the other hand, depending upon how you se it there is -- there rather will be air time harges. Is that the kind of services that you see volving? MR. RISSMAN: I think people will be able o charge a premium because instead of having to se two phones you only have to use one phone. And ith all of the intended efficiencies in that. So nobody is going to pay .50 a minute to 308 se the phone in their house, but if paying .10 a inute to make a toll call, an inter lateral toll all, and I can use my wireless phone and pay .12 a inute, and I cannot have to use my land line phone nymore, I would consider that as long as I could se the phone in all contexts. Now, some people want a phone in their ouse just because they like to have a phone number t their place. A lot of other people wouldn't ind that to be particularly satisfying. MR. PEPPER: I guess the question for you hen is if somebody develops a service that falls hort of doing what you just described, will money e available from the investment community for that orm of service. MR. RISSMAN: I think what we are all aying is not as much money. MS. PERETSMAN: Not as much money because t will rely on the perception that there is a ranchise value that is that spectrum isn't being ptimized and it could be sold or transferred to omebody else who could use it in a package and 309 ptimize it. So the financing will come off the -- f you will the view of the end game rather than he business in and of itself. MR. PEPPER: So the need to provide a ull spectrum of services is crucial up front in rder to attract the up front financing? MS. PERETSMAN: No. I don't think you re saying that? MR. RISSMAN: No, I'm not saying that ither. You don't have to -- but to attract the ost financing, yes. And also if you can offer an pgrade path that is a strategically clear one you ill be able to get financing if -- nobody is going o put $2 billion dollar worth of capital equipment n their MTA tomorrow. Everybody has an upgrade ath. So as long as you can strategically rticulate it and as long as you have a plan to ventually provide -- be a full-service provider. MR. PEPPER: What is your estimates of he cost of being a full-service provider on a articular block? Let's take any 30 megahertz 310 lock across the country. What is it going to ost. MR. RISSMAN: I have no particular xpertise. I would refer to David Ried (phonetic) n that. You know, $700 a subscriber, whatever. MR. PEPPER: Can you talk maybe a little it about the current cost structure of cellular in erms of what it costs to get a new subscriber and here those costs are and what that means for -- ou heard a lot this morning and the panel right efore yours about whether or not cellular can lock ustomers in or not. What is your take on that? MR. RISSMAN: Well, the incremental apital expenditures between, say, five to seven undred dollars for a subscriber. MR. PEPPER: But that's in network or is hat -- MR. RISSMAN: Yes. That is in towers, adios, whatever, new cell sites. Then there is a marketing charge that is round $350, $400, $450 per new subscriber. And hat goes up to $800 per gross subscriber because 311 0 percent of your subscribers leave the system very year. So all in -- and that does not include our per minute charge. But we are talking, you now, a good thousand, 11 hundred 12 hundred ollars per subscriber just to get the guy on your ystem. MR. PEPPER: Is much of the cost ssociated with the subsidy on the equipment? MR. RISSMAN: Equipment subsidies -- MR. PEPPER: The subscriber equipment I'm alking about. MR. RISSMAN: Yes, there is usually a ouple of hundred dollars of equipment subsidy in hat $350 to $400 figure. MR. PEPPER: Mark, Nancy do you agree or isagree? MS. PERETSMAN: We are in the same agnitude. MR. PEPPER: You were here this morning r earlier when there was a disagreement over how ifficult it would be to take an incumbent cellular 312 ubscriber away from cellular and migrate them to a ew PCS service. What is your take on that? MS. PERETSMAN: I'm sorry. I wasn't here his morning. MR. PEPPER: Actually, it was this fternoon. It was the panel immediately before his one. Mark, I think you were here. MR. ROBERTS: I think mainly it is going o be function of service and price. If you are ffering an equivalent service where you have the apability of doing high speed hand off, similar to cellular service provider. And I would not think t would be necessary to offer nationwide or, you now, roaming in the sense that cellular says they ffer it on a nationwide basis. But if could you offer roaming in an conomically viable region, you know, altimore/Washington or the LA basin, something ike that, about the size of an MTA, for example, I hink that it would be fairly easy to take a ellular customer away based upon price. 313 The general consensus of most of the arket trials of PCS that have been done are that bout 80 to 90 percent of the consumers really want ull-cellular mobility. And they are not satisfied ith much less than that. But what you find is they are not atisfied paying more than $40 a month for it ersus the $80 a month they are currently spending or about 1/10 as much as how they -- or about half s much use as what they would like what they would ike. MR. PEPPER: In terms of what you nderstand about the existing cellular cost tructures and operation what is the ability for ellular operators to lower their prices to get it own to the $40 a month target. MR. ROBERTS: If you look at first of ust the tangible returns on investment over the ast decade you will find that the average return or a wire line telecom company is about 12 to 13 ercent. The average return on tangible capital 314 or a cellular company has been 30 to 40 percent hich I think accounts partially for their ability o raise the financing that they have. Also, I think it accounts for the ttractiveness of this industry as SMR players and thers have come into it. Their ability to offer CS services on new spectrum I think would be robably about half the infrastructure costs they re spending now because to a large extent I think number of the efficient operators would try to tilize the same tower sites. And tower site acquisition is the largest ixed cost of a cellular network. If on the other and you're a wire line company or cable telephone ompany or particularly a local exchange carrier hat for some reason does not have a cellular verlap in that area you could probably deploy a CS network for about half again that much, maybe 250 to $300 a subscriber. Now, that would be just he infrastructure costs not counting marketing. Then further the digital technologies hat they are talking about I think you heard from 315 erry Waylin (phonetic) earlier this morning. GTE as talked publicly about using a digital echnology called CDMA where they would be able to ave the capacity in suburban areas where the hand ff speeds are slow and they already have a large mount of over capacity because they built their etwork to try to handle peak loads during rush our and in business commuter corridors that they ould be able to offer in a suburban area what mounts to free calling. It's about a thousand inutes of use per month for a flat rate of $40. Now, that price begins to go up as you ove out onto the roadway or into what they call a remium corridor. MR. PEPPER: So essentially what you are escribing is it begins to look an awful lot like he PCS service you described. MR. ROBERTS: Yes. MR. PEPPER: Or I guess Paul described. MR. ROBERTS: Exactly. MR. RISSMAN: If I could just add on to hat. Vanguard (phonetic) Cellular in a recent 316 resentation forecast that their cost would be down o about .08 a minute after they have fully mplemented their digital technology, and that they ould be planning on charging .20 a minute, so half f what they are charging now. MR. PEPPER: One of the questions that is eally important and one of the reasons that we ask his group to get together is your assessment of ou know how much capital will be available with hat difficulty or ease for potential licensees. Paul started off by talking about -- I hink you used the phrase hostile environment that CS would be moving into. Notwithstanding that, it sounds to me ike you are saying that capital will be vailable. MR. RISSMAN: It really depends on A, who he operator is, B, how much spectrum they have ot, and C, whether they have a good business lan. And those things are so variable. MR. PEPPER: And two of those three don't eside here at the Commission. How much spectrum 317 ight reside here not definitely. Because who the anagement is and what the business plan is, we an't do anything about that. MR. RISSMAN: Right. MR. PEPPER: What are the things that we an that will make it more likely that somebody who as a good business plan and has a good management eam that will have capital available. MR. RISSMAN: One of the things that nfortunately hasn't been done earlier is the uctions, the combinatorial nature of them. Am I llowed to comment on this? MR. GIPS: Yes. Tell us about ombinatorial auctions. MR. RISSMAN: All right. Okay. You now, the combinatorial nature of the auctions made ome companies think that they were going to need a uper computer to decide how to some condition need ssume computer to decide how to bid. And MCI voted with its feet. They went ff and bought Nextel (phonetic). AT&T may have een it coming because they went off and bought 318 cCaw (phonetic) California. The long distance companies benefit from aving a large scope quasi nationwide PCS license ore than anybody. And MCI wanted PCS publicly at east more than anybody. And in a since the awkward nature of the uctions drove them away. The simpler the awards re, the easier it will be for a company -- these ompanies are not -- these companies are risk verse, and they are impatient. And they don't ant to do stuff that requires that much effort. So that if you make it too difficult for hem to think of ways to get the spectrum that they eel they want, they just won't wait around. Now, fortunately for you maybe, Nextel phonetic) is not there anymore. But I still think n a subsidiary level that the more holders there re of licenses, the harder it will be to get the icense holders together. People will simply get sensory overload nd they will be negotiating with everybody and hey won't know who is firm and who is not. 319 etters of intent will signed. Letters of intent ill be busted. And it will adds meaningfully to he amount of time that people get these things ogether. And as we have been saying, since your -- ince the cellular carriers are trying to preempt our business and they are moving very quickly, ime to market is really very important. MR. PEPPER: So -- I know you couldn't be ere earlier. One of the presenters earlier said ggregation was no problem. And that the market ill correct for any defects that we have in our llocation plan. And if it turns out that the eographic areas are too small, no problem, there ill be aggregation. If the blocks of spectrum are oo small, don't worry, there can be aggregation. But what you are saying is that there are ransaction costs and time delays with that? MR. RISSMAN: Yes, I'm saying yes in 10 ears that will all be taken care of. MR. PEPPER: What about between now and 0 years. What is your estimate? Have the three 320 f you maybe looked at what the impact of relying n aggregation could do in terms of delaying, etting to the point where there would be ufficient either spectrum blocks or geographic icenses. MR. RISSMAN: No, but MCI isn't there any ore. I rest my case. MR. PEPPER: Mark or Nancy? MR. RISSMAN: Go ahead. MS. PERETSMAN: We don't have any articular opinion in terms of time frame, but let s presume it is more than a year or two. Take the bsurd case of 10 years sort of out of the picture, think the point that is in front of us all is egardless of how long it is, on the theory the ime is of some essence here in terms of relative ompetitive positions, that you are really trading ff a time frame for that aggregation against the imeliness of trying to get the future prospects of he business funded earlier rather than later. So t is a tough tension. MR. PEPPER: What would you do if you 321 ant to avoid the aggregation delay? What should e do to reduce that delay in terms of -- again, his is -- you know, in the context you are here oday, talking about reconsideration of our PCS llocation. What would your recommendation be in erms of reducing the delay on aggregation on ither geography or spectrum? The implication is what we did is nsufficient because -- MS. PERETSMAN: No, no, no. Right. Yes, understand the question. I think that there are he two aspects to that question and I'm going to eserve the right to come back at you on this one ecause it is an interesting question. The first is that -- the question is irst how much of the seepage are you willing to olerate because you just don't have -- there is a inancing question in terms of the time delay. here is also economic seepage with both those ransaction cost. And one would think that to the extent hat one of your tasks here is to try to minimize 322 ubsequent seepage as these aggregations take lace, that maybe we are all better off trying to irst out of the box optimize the sizing question. And so my recommendation would be simply pend a lot more time thinking about the sizing uestion rather than setting up a process that ould expedite aggregation but allow for some eepage and all kinds of the cumbersome parts of ransfers. MR. PEPPER: By sizing you mean geography r spectrum or both. MS. PERETSMAN: Actually I was thinking ore about geography. MR. ROBERTS: First of all I would point ut that the gentleman that thought that the market ould take care of all the aggregation problems lso said that he thought the stock market valuations were always correct. So it is nfortunate he didn't leave the three of us his hone number. I think the best thing that you could do o alleviate the risk -- and to the extent you 323 lleviate the risk you increase the amount that otential licensees are willing to bid for the icenses -- would be to hold to a 30 megahertz lock, at least 30 megahertz of contiguous spectrum ecause as you have heard today that will allay the ears of those who see PCS as a, you know, very hreatened service from the cellular service roviders. Secondly, I take the view that the MTA icense size is a reasonable license size. It rovides coverage in a rational economic area. I hink in -- so having the MTA as a minimum number icense size would probably be the best thing ecause there you do away with two things. You do away with the need to do extensive mounts of aggregation of spectrum blocks. You do way with the need to do a lot of aggregation cross geography. And then the third issue is lmost self-satisfying given the first two, which s you need to shorten the time to market as to the hortest possible time frame both in terms of icensees' perceptions of how long it is going to 324 ake them after winning a license that they are oing to be able to introduce service, A, and B, he time frame in which you award the licenses. I see it as a fairly simple function. he longer the delay before PCS is in the market he lower the future expected investment return, nd higher the cost of capital is going to be. MR. PEPPER: You would agree with Nancy hat aggregation -- and agree with Paul that ggregation adds delay? MR. ROBERTS: Aggregation adds ignificantly to delay. It also raises the risk rofile and the cost of -- I mean there are very igh transaction costs. MR. HALLER: Without regard to how we ight do it are you saying that we should make very license 30 megahertz and MTA? Have no other ptions? That is what they would all be? MR. ROBERTS: To the extent that we think hat 30 megahertz is the minimal viable license ize and that an MTA is sort of the minimum viable eographic size, if you are going to bid -- 325 articularly if you are going to try to raise money o bid for the spectrum I guess that would be the deal circumstance. MR. PEPPER: I guess the question that aybe Ralph is asking -- from where I'm sitting I ee the whole group. And I see Mr. Wilkins here ort of gasping for breath and especially as what e was talking about earlier really a very ifferent kind of service I think. I mean you are talking about something hich is going to be the full-service highly mobile ompete with cellular. And I think Mr. Wilkins is alking about something that is, I think, ifferent -- please correct me -- where you are ooking at smaller blocks, lots of licenses, much ore localized and much more of a niche service. And I guess the question is the extent to hich -- can both visions coexist within what we re calling broad band PCS. MR. ROBERTS: I guess I'll just finish ut since you started asking me what the ideal orld would be. 326 I think they could coexist. Now this is little far afield for me because I'm not a -- his is legal and all of this. But if you were to andate resale for example so that if a 30 egahertz licensee has just won the license, and he s starting to build out, if he was obligated to esell to service providers -- and even articularly if he was obligated to sell to esignated entity service providers a certain ercentage of his spectrum for some period of time r under some tariff agreement then I think you ould see a proliferation of all sorts of niche ervices and technologies to fulfil those service eeds. But that's -- like I said, that is very ar afield from my area of expertise. MR. PEPPER: I can see Mr. Oxendine sort f staring at me from the other side because of his oncern earlier about that doesn't really end up roviding equity and control. These are extremely tough questions as we ry to balance them. 327 MR. OXENDINE: Dr. Pepper, I don't have a roblem with what he said. I could support the 30s nd the 50s, whatever you want. I think there are wo things we need. If you are going to deal with designated ntities they need to have wireless communications xpertise. And secondly we need cooperative usiness arrangements. Those are two things that re critical whatever size you use. And I would argue that what you could do ou could effect in the joint venture area if you ad a waiver with regard to cellular participation ou could do something. And with regard to ownership if you had a aiver and entertained control you could omething. Those are two things. We could be in he same boat. MR. GIPS: I have one more quick question nd then we will wrap it up. In the order we have stablished build out requirements both to make ure the spectrum isn't warehoused and also make ure that access is provided to the largest number 328 f people possible. I am curious to get your perspectives. r. Houston raised it at the beginning. What are he proper build out requirements. MR. HOUSTON: As you said I referred to t before and I think I'll restate it and probably ort of add to it a little bit that the build out equirements should be linked to market demand. I hink there should be a real linkage between here. And what that says then that you might ot be able to establish what I call a general uild out requirement. I think depending upon ifferent markets you may have different build out equirements. And because I think at the end of the day he shorter one can demonstrate that they have a iable -- the shorter the period that one can emonstrate they have a viable business ropositions they more likely they are to attract apital. And I think the aggregation is somewhat inked indirectly to the lack of being able to 329 emonstrate the -- having a viable business roposition. MR. GIPS: Anybody else want to comment n the build out requirement. MR. RISSMAN: I think as far as the ublic markets go the point is essentially moot ecause the market will discipline any company that oes not build out aggressively. MR. PEPPER: But what does aggressive ean, I guess, Paul, the number of parties filed etitions for reconsideration saying that a 90 ercent requirement at the end of a 10-year period aises costs substantially beyond and then there ave been a variety of alternatives proposed. What is the point beyond which the market r before which the market would discipline as pposed to in the trade off of adding costs. That ast increment. MR. RISSMAN: Well, the only analogy I ould cite is analogy of Nextel (phonetic) which ecause it is approximately -- was approximately ix months late in turning on its Los Angeles 330 ystem was heavily penalized by the market. Nextel (phonetic) has a series of hurdles hat it has imposed upon itself to meet in terms of hich cities will be turned on when. And these are he kind of things the market is looking for. On the other hand there are other factors hat other markets consider important. For example n the United Kingdom the market considers the ercentage of the population that you are going to over by such and such a year to be important. It is all pretty much local factors, but gain it is not very quantifiable. Basically if he market thinks that you are doing the right hing in your schedule it will regard you and vice ersa. You can't predict. MR. OXENDINE: Are you asking about eliberate warehousing or are you talking about eople who just can't that build out because they idn't meet their schedules? What's the question? MR. GIPS: We actually had percentage uild out requirements that were just based on a chedule and you had to agree to meet that when you 331 ought the license. We have five minutes left so I would like ach person to just go around quickly and give any losing remarks that they have. Start with Al. MR. HOUSTON: In terms of a conclusion or hat I would like to close in saying is PCS will be very capital intensive and highly speculative usiness. And it's going to be competing for its hare of the available capital in the elecommunication market place. We believe that it is going to take news nd creative business relationships as I referred o before to build a successful business. I would think that the PCS environment ill be different from the cellular and other ommunication services. And therefore what we ecommend is that the Commission be flexible in its ule making in this new market because you really ave not faced anything like it before. Exercise lexibility. MR. OXENDINE: I think you know my oint. I think that PCS holds some significant 332 pportunities and promise for a lot of people but f designated entities are going to have any play t all it is going to call for some special onsideration from the FCC. MR. WILKINS: I think that if the ommission is willing to experience the full enefit of the spectrum that is being auctioned, he Commission should ensure that entrepreneurs ave a fair and equitable chance of participating n the development of the spectrum. And I think hat the process is needs to be defined in such a ay that that opportunity is absolutely ensured. I think the Commission should consider an quity stake as opposed to debt. Somebody entioned next to me that equity is Socialism and I uess debt is Capitalism. I don't understand that, ut that is Wall Street for you. MR. RISSMAN: Just want to say that as ar as my position as an equity investor goes I on't particularly care is PCS is equitable. And I on't particularly care if it makes a lot of money or the government. 333 I care if it gives a company that I'm nvesting in a lot of profit. Now, there are many, any, many opportunities out there to invest in. housand upon thousands, and thousands. I don't et paid for having vision. I get paid for potting money-making opportunities. We bought lots of cable stocks in the all because we thought it was a good investment. n the information super highway vision, now we ook like idiots. So I guess I would just say that if ou -- to the extent that you can nurture this echnology to make it as profitable as possible, I ould. MS. PERETSMAN: I don't bring the rospective from a professional sense of social ngineering either. The overlay that I would say n final remarks is that it seems that in order for ou to maximize or at least to accomplish one of he goals that you have in front of you, which is o maximize the proceeds that are available to the CC for this -- or to the government -- resource, 334 hat you ought to clear and structure your rules in uch a way so that there isn't a lot of what I ould call seepage, and whether it is seepage, eorganization, or profiteering that takes place as result of subsequent transactions. And therefore you might well be mindful s you are structuring the rule making process if here is an ultimate conviction that the number of layers who will deem it in their own self-interest o participate in this are going to be limited to a ertain number, that perhaps there is a recognition arly on that that's an appropriate way to tructure the process. As it relates to designated entities and ther groups, I would think that within this model here still is some room to be able to achieve a ocial objective. The fact is that one can't be as ptimistic about the up front proceeds, that carve ut if you will, will be able to provide to you. MR. ROBERTS: We are fairly enthusiastic bout the opportunity that all at the Commission 335 ave. We believe if the licenses are properly tructured, the capital market will be willing to iance the license acquisition, the build out, and he operation of new PCS networks. We believe that there are markets, large arkets that are ready for entry today and that we iew the introduction of PCS products and service s very attractive. MR. GIPS: Thank you all very much. I ound this session as I'm sure we all did very nformative and also quite challenging and ertainly painted the contrasts that we needed to ddress in trying to figure out how to do this llocation location. MR. HALLER: Before you leave let me if I ight just give you a little housekeeping here. We ave heard a great dealing of information today, ut the story is not over at this point. Clearly his is a complex set of issues with widely diverse iews and this forum has provided I think a good pportunity for experts to come together and xchange those views and get those views before us 336 s quickly as possible. Few decisions in this are either right or rong, but they range from favorable to unfavorable epending on this issue. Different decisions provide varying pportunities for economic growth and job creation, nd that is what we are trying to find out here. e have heard demand predictions from 17 to 29 illion. To the extent that our decisions effect hat number it is incumbent upon us to know how to aximize those opportunities. PCS has a great potential to make niversal service a reality not only for voice ommunications but for all kinds of enhanced ervices as well. Some today have told us that 10 megahertz s quite usable; others find it unusable. Some see TA licenses as unfinanceable; others see them as reat opportunities. Some think you have to have really deep ockets in order to get into PCS; others see trategic alliances as providing real opportunities 337 or designated entities. These meetings are going to help us in ur decision and to come to decisions in a very apid manner. Likewise any new thoughts that you ant to put on the record can help us make those ecisions as well. The Commission has record of moving wiftly to implement narrow band PCS. We are very lose to licensing that. Congress gave us auction uthority not long ago, and the Commission has lready adopted rules implementing that auction uthority. The charge of this task force from the hairman and the Commissioners is basically this, et it right, but don't delay it. And I can assure ou that is exactly what we are working on. We ave staff members throughout the agency devoted to his topic to bring a speedy resolution to it and hat is exactly what we intend to do. Now, tomorrow it is going to be I think nother very interesting day. It's the next piece f the puzzle. All of us have to work together. 338 omorrow we are going to bring the technical people nd the spectrum experts together to tell us what's ossible, what's on the drawing board and how much pectrum is necessary to do that. I would like to thank all of our anelists today for being here. I would like to hank all of you in the audience for the interest hat you have shown in this, and I definitely urge ll of you to you come back tomorrow and see what he rest of the picture looks like. With that, I id you a good evening. (Thereupon, at approximately 5:00 o'clock, p.m., the above proceedings were concluded.) * * * * * 339 CERTIFICATE OF TRANSCRIBER I, Olga J. Papach, hereby certify that pages 1 through 80, represent a transcription from the cassette tape furnished to me; that I am neither counsel for, related to, nor employed by any of the parties to the action which this transcript reflects; and, further, that I am not a relative or employee of any counsel or attorney employed by the parties hereto, nor financially or otherwise interested in the outcome of this action. ______________________________ OLGA J. PAPACH, TRANSCRIBER 133 CERTIFICATE OF REPORTER I, Patrica Nelson, a stenotype reporter, before whom the foregoing proceedings pages 81 through 130 were taken, do hereby certify that said proceedings were taken by me in stenotype at the time and place mentioned and thereafter reduced to typewriting under my supervision; that the transcript is a true and complete record of the proceedings. _________________________________ PATRICA NELSON STENOTYPE REPORTER 339 CERTIFICATE OF COURT REPORTER I, VERONICA L. CHILDS, a court reporter n and for the District of Columbia, before whom ages 131 through 339 of the foregoing proceeding ere taken, do hereby certify that the testimony hich appears in the foregoing deposition was taken y me in shorthand at the time and place mentioned n the caption hereof and thereafter reduced to ypewriting under my supervision; that said roceeding is a true record of the testimony given; hat I am neither counsel for, related to, nor mployed by any of the parties to the action in hich this proceeding was taken; and, further, that am not a relative or employee of any counsel or ttorney employed by the parties hereto, nor inancially or otherwise interested in the outcome f this action. __________________________ VERONICA L. CHILDS Court Reporter in and for The District of Columbia