Anthony J. Pennings, PhD

WRITINGS ON DIGITAL STRATEGIES, ICT ECONOMICS, AND GLOBAL COMMUNICATIONS

How the US Mobile Industry Came Together, Part II: The Grand Alliance

Posted on | July 21, 2019 | No Comments

Much like J.P. Morgan’s creation of telephone industry giant AT&T, the wireless industry was one of the information industries (along with cable TV, fiber optics and satellite TV) created mainly through the efforts of financier Michael Milken of the defunct investment firm Drexel Burnham Lambert. Milken helped the McCaw family assemble the wireless industry during the 1980s by raising money to purchase cellular licenses and to buy MCI Wireless for nearly $2 billion. McCaw Cellular Communications was later sold to AT&T Wireless Services in 1994, combining the nation’s biggest cellular carrier with the largest long-distance telephone company.

In a previous post, I explained how the wireless “mobile phone” business emerged about the same time as the breakup of AT&T, which had been under new anti-trust scrutiny since the Department of Justice (DOJ) filed suit in 1974. A year before, Motorola made the first mobile phone call and later in 1977, the FCC permitted them to build experimental systems in two major cities. In 1980 an AT&T report estimated that the market for mobile phones in 2000 would be 900,000 subscribers (The actual number of mobile phone subscribers in 2000 was 109.5 million). Consequently, when AT&T was forced to break up in 1982, it ceded the wireless business to the local phone companies. It was a significant strategic mistake that would cost them billions of dollars in the future.

Despite the limited market forecast, the FCC felt obliged to assign spectrum to the new mobile service. In May of 1981, they divided the 40 MHz frequency allocated to cellular into two segments in an attempt to create duopolistic competition. One segment would go to the local telephone company in each market, and the other would be open to non-telephone companies that wanted it.[1] This way, the phone companies could improve the service while the market could be “democratized.” If more than one company applied for the license, an administrative judge would review the company’s application. They would judge the merit of its plans and technical capability to provide the service coverage. On June 7, 1982, some 190 applicants applied for FCC licenses to provide cellular in America’s 30 largest cities. The applicants included a wide range of companies looking to make a play in the mobile industry, from the upstart McCaw Company to the former telegraph monolith Western Union. One of the most dramatic technological roll-outs of the 20th century was beginning but not without an additional twist in the method.

The year 1984 was a significant one for the development of the technological infrastructure in the US. Apple introduced the Macintosh computer; IBM bought Rolm, a pioneer of digital office technology; and AT&T was divided into a long-distance company, a manufacturing entity, and an assortment of regional local phone companies. 1984 was also the time the mobile phone industry began a series of dramatic changes. The telephone companies were starting to roll out their cellular services, and on April 10th Bell Atlantic made its first mobile call to comedian Bob Hope.

Progress also continued for the non-wire companies when in February of 1984, the “Grand Alliance” was born. This group consisted of the non-RBOC companies vying for the alternative cellular market. CellNet, Cox Cable LIN, MCI, Metromedia, Metro Mobile, MCI, The Washington Post Company, and Western Union signed several agreements to share or merge markets. They also made arrangements for rounds II and III of the FCC spectrum distribution.[2] The reason for the Alliance was the idea of “cumulative chances.” These companies began to agree to merge applications in a given market to increase the chances of one company getting control of a specific area and competing successfully against the local phone company.

In April however the FCC decided to allocate markets 31st to 90th via lottery, even digging up the same Ping-Pong drum used to select draftees during the Vietnam War.[3] Sown into the decision though, were the seeds of its own destruction. The FCC included three rules that ultimately would create chaos and lead to the elevation of McCaw. The government ruled that: 1) applicants could file duplicates of their applications; 2) they would not have to tie up capital; and 3) that the second through tenth place winners would be drawn at the same time. This last decision was made so the lottery would not have to be redone if the first choice became ineligible for some reason.[4] As a result, a new strategy began to form based on the notion of buying cumulative chances, and McCaw got the process started.

McCaw was spread quite evenly among cable, cellular and paging but by the summer of 1984, they began aggressively going after mobile. They took a risk and bought Knight-Ridder’s cellular applications for $1 million. They had no assurances from the FCC that the government agency wouldn’t declare the previous application ineligible and nix the idea of buying license applications in general. But when Round IV for the 91st to 120th largest markets began, over 5,100 applications arrived. Richard L. Vega and Associates had begun producing applications for $1,500 each whereas applications for Round I had cost about $300,000. The applications flooded the FCC’s headquarters and threw it into chaos. As a result, the FCC announced in late August that it would speed up the process and hold its Round II lottery on October 3. Shocked by the announcement, Telocator, the DC-based trade association for the cellular industry, formed The Counter-Alliance. Within a month, some 150 different businesses representing 700 various applications agreed to merge into 60 partnerships and take the process out of the FCC hands. McCaw aide John Stanton headed the Counter-Alliance and skillfully brought together the smallest of the FCC applicants with the promise of working out their differences and combining their “cumulative chances” into controlling interests.[5]

What would transpire in a New York City conference room is probably the most unheralded major telecommunications event of the 20th century. The Counter-Alliance put the smaller players back in the game but it also allowed McCaw to develop relationships that proved useful later for acquisitions. With Stanton reaching out to small license holders across the nation, McCaw was doing valuable research for future acquisitions. But that future was still unclear. In September, a “trading room” was formed at Rubin Baum law offices in NYC to work out what was called “Le Grand Deal”.[6] Representatives from Rounds II and III met in a conference room on Fifth Avenue to trade license applications in order to increase the chances that a company could control a single market, say Austin, Texas. Since the lottery would be drawn for the first 10 applications, the idea was that a single company could trade licenses in other markets in order to increase their chances to control other markets.

One crucial issue was equivalence. What would be the metric of value? How would the traders determine the value of each market? Their answer was the “POP,” a value determined by the 1980 population census. The traders worked out a formula that divided the population of an area by the number of license applicants. For example, Orlando, Florida, had a population of 700,000 people. Thirteen companies had applied for the FCC license in that area. So each application was allocated 55,000 POPs. A value of $3 per POP was used based on the McCaw-Knight-Ridder deal. Each could trade POPs for POPs.[7]

In the next post, I will discuss how McCaw Cellular became the dominant alternate cellular network by utilizing a new financial tool, the junk bond.

Notes

[1] While AT&T was the dominant phone company, GTE had a significant share and small companies such as the Warwick Phone Company in Warwick, New York also provided service.
[2] Alliance formation from James B. Murray, Jr. (2000) Wireless Nation: The Frenzied Launch of the Cellular Revolution in America. Cambridge, MA: Perseus Publishing. p. 77.
[3] Sale of McCaw Cable from James B. Murray, Jr. (2000) Wireless Nation: The Frenzied Launch of the Cellular Revolution in America. Cambridge, MA: Perseus Publishing. pp. 146-147.
[4] FCC three rules from James B. Murray, Jr. (2000) Wireless Nation: The Frenzied Launch of the Cellular Revolution in America. Cambridge, MA: Perseus Publishing. pp. 81-82.
[5] Counter Alliance from James B. Murray, Jr. (2000) Wireless Nation: The Frenzied Launch of the Cellular Revolution in America. Cambridge, MA: Perseus Publishing. p. 92.
[6] from James B. Murray, Jr. (2000) Wireless Nation: The Frenzied Launch of the Cellular Revolution in America. Cambridge, MA: Perseus Publishing. p. 92.
[7] Pop figures from James B. Murray, Jr. (2000) Wireless Nation: The Frenzied Launch of the Cellular Revolution in America. Cambridge, MA: Perseus Publishing. p.200-205.
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AnthonybwAnthony J. Pennings, Ph.D. is Professor and Associate Chair of the Department of Technology and Society, State University of New York, Korea. From 2002-2012 was on the faculty of New York University. Previously, he taught at Hannam University in South Korea, Marist College in New York, Victoria University in New Zealand. He keeps his American home in Austin, Texas and has taught there in the Digital Media MBA program atSt. Edwards University He joyfully spent 9 years at the East-West Center in Honolulu, Hawaii.

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    Professor and Associate Chair at State University of New York (SUNY) Korea. Recently taught at Hannam University in Daejeon, South Korea. Moved to Austin, Texas in August 2012 to join the Digital Media Management program at St. Edwards University. Spent the previous decade on the faculty at New York University teaching and researching information systems, media economics, and strategic communications.

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