LEXIS-NEXIS® Academic Universe - Document

Communications Daily

April 30, 1985, Tuesday

SECTION: Vol. 5, No. 84; Pg. 2

LENGTH: 2509 words

HEADLINE: 'Opportunity of the Century';

COMPANIES SELLING CELLULAR LICENSES POSE DANGERS FOR INVESTORS

BODY:

Former talk show host Mike Douglas looks earnestly into TV camera and talks

about "the business opportunity of the century." In commercial for American

National Cellular, Douglas tells viewers watching Financial News Network (FNN)

cable service how they can "stand side by side with communication giants such as

MCI and Western Union." In literature for company, Douglas touts "the business

opportunity/investment of the Decade, possibly of the Century" -- cellular

radio.

The Cellular Corp. (TCC), which operates out of San Francisco and Cleveland,

notes in its literature that "cashflow opportunities on this scale come along

maybe once or twice in a century." Cellular Ventures of Atlanta, part of a group

of Cellular Ventures companies throughout country, takes different tack. Its

promotion urges investors simply to "roll the dice."

Despite glowing words, however, experts in cellular and tax fields warn that

there are more dangers to investments in cellular applications than initially

apparent. According to Michael Sullivan, FCC Mobile Services Div. chief, anyone

considering cellular applications should be aware of "very speculative nature"

of investment.

L.A.-based American National (called American National Group on some brochures

and American National Cellular on newer ones), Cellular Ventures, TCC and other

companies are selling their services as preparers of nonwireline applications

for cellular radio markets 121-150, next batch to be chosen by FCC lottery.

Areas include Trenton (market 121), Erie (130), Montgomery, Ala. (139), Duluth

(141), Daytona Beach (146) and Visalia-Tulare-Porterville, Cal. (150).

One attractive angle for investors, according to sales representatives, is that

no particular requirements are needed. Salesman for American National said: "You

don't have to know anything about cellular at all. Just, here's an investment

opportunity." One salesman for The Cellular Corp. in Sausalito said that company

could supply "complete turnkey application" that would allow investor to start

cellular franchise, assuming application was chosen in lottery. Cost to investor

for application ranges $5,000-$15,000, with companies in some cases including

promissory notes to be paid if applicant wins lottery and receives franchise.

Motivation for getting into cellular business via application supplied by

various companies is promise, or at least suggestion, of quick profits. Salesman

for American National said "cellular's just a vehicle to turn $10,000 into 5 to

10 times that amount." In another instance, Marilyn Gardner of Largo, Md., said

she was told by ANC representative that investment of $20,000 would have return

of $80,000 in first year. Gardner saw ads on FNN, called 800 number to receive

information. Fred Padula of Mill Valley, Cal. said his mother, 71-year-old

retiree, also saw commercial and was impressed with part of commercial that said

she could be like MCI.. Padula, who independently had contacted ANC in Oct.

1984, said he was told that if he won lottery in Santa Barba ra, $5,000

investment would be worth $15,000.

Profits for investors are based on what companies promote as value of cellular

generally, on opportunity to join cellular alliance or on possibility that

applicant might get lucky and win lottery. Most promotions back up introductory

claims with quotes from news articles citing potential profits from cellular

industry generally, usually $2-$6 billion annual revenues by 1990. Cellular

Corp., in sales literature calling cellula r"5th largest utility," cited

Barron's Nov. 5, 1984 article finding that license might be worth $20 per person

in any particular market, citing Houston as example. If only 1% of Houston signs

up for cellular and spends $80 monthly, earnings should equal $29 million per

year, to be split among partners, it said. Using Barron's estimate of $20 per

capita as base, American National literature projects that Santa Barbara, one of

below-120 markets included in new lottery, will have 5-year revenue potential of

$44.9 million.

According to cellular experts in and out of govt., sales pitch based on worth of

markets doesn't apply. They contend there's much more value per person in

cellular market in major city, such as Houston, than in smaller markets, such as

Santa Barbara. Transcomm, cellular consulting firm in Falls Church, Va., has

produced revenue projections showing cumulative 5-year revenue in Santa Barbara

would be only $20.1 million -- figure almost twice as high as next highest

market, Eugene, Ore., and Trenton, each with $12.1 million total over 5 years.

Normal Lerner of Transcomm said: "In markets 121-150, and before that, you

aren't going to find people paying $20 per head [for each subscriber]." Lerner

said price for franchise is based on potential operators' paying $5-$8. Cellular

experts point out that major markets in which there are struggles for control

may result in licenses worth $20 per person in market, but in markets below 120

license could also be worth as little as $5 per person.

Second part of sales program that creates visions of profits is representation

that investors will make money by becoming part of grand alliance. As explained

by Jerome Dobins, mktg. dir. of American National: "We don't know if alliances

will be formed. We can only point to what has happened in the past, draw

implications of what will happen in the future." Dobins said his sales people

don't guarantee that applicants will win or be asked to join alliance.

However, conversations with salesmen create different impression. American

National salesman said: "In the last 60 markets, alliances have been formed in

59, so that's a good shot for me." In other conversations, salesmen offered

similar views. One salesman, who also cited 59-of-60 statistic, said chances of

not being included in alliance are "almost zero," adding that of almost 5,000

applicants, only loser has been in Fresno. FCC officials say figure is incorrect

-- there were losers in Fresno, Northeast Pa., and Salt Lake City.

Cellular Corp. literature says: "TCC [The Cellular Corp.] expects that every one

of its clients who files an individual application will receive 'alliance' or

'settlement' proposals from independent companies after the application has been

accepted for filing." One Cellular Corp. salesman said that after application is

filed and public notice of markets is sent by FCC, "you should get a letter

asking you to join an alliance, perhaps 2 or 3 letters. What happens is that

alliances meet in a conference room to form one big alliance." He added: "The

FCC is all for these alliances. he FCC is interested in one thing, to get

[cellular] up and get it going."

Again, however, cellular experts dispute sales pitch for 2 reasons. First,

market conditions have changed. Experience about which salesmen talk is based on

top 60, perhaps top 90 markets, in which there is more interest by larger

companies. McCaw Communications Vp John Stanton said most markets in Round 5

"would be difficult to make profitable as a stand-alone business, and the market

of buyers for those interests will be fairly small." Stanton said there will be

"relatively few" competing applications to buy controlling interest in markets,

as in previous round. Scott Goldman, vp at Compucon consulting firm, said there

probably won't be alliance forming in Round 5 as in previous rounds: "People are

going to be reluctant to get 1/150th of Peoria."

Barry Adelman, attorney involved in forming alliances in previous cellular

lotteries, said it was "unlikely" same bargaining would occur. "First tier

markets [larger cities] are very popular and demand high prices," Adelman said,

but in smaller markets prices have dropped dramatically. In Round 4 (markets

90-120), there were average 185 applicants per market, so it could take $1.85

million to buy out applicants, and it's unlikely same bargaining will occur in

Round 5, he said. American National says it won't place more than 100 applicants

in same market. Other companies put similar limits. If every company invoked

same limitation, cellular authorities say, there could be 500 applicants per

market, and chances of buyout are unlikely on sheer economics alone.

Second reason cellular authorities give for investors' exercising caution is

that FCC is changing lottery rules. Commission already has published one rule

change, to eliminate "cumulative chances" in lottery, according to Sullivan.

Under old rule, each party in alliance would be entered for one chance in

lottery; under new rule, entire alliance would get only one chance. FCC is said

to be drafting new rules for Round 5 that could curtail formation of alliances

drastically. Although Commission has announced decision to review rules, and

none has been issued yet, sources indicated new ones could restrict compensation

in alliances simply to allow applicants to recover their costs -- not to allow

them to make profit. FCC already is closely examining applications from previous

rounds and has begun returning many of them.

David Hill, Washington attorney with active cellular practice, said he has put

clients "on hold" for Round 5 applications until "we better understand where the

FCC is going on this." He added that most of his larger clients have lost

interest in cellular. Eddie Sieradzki, consultant with Cellpro in Ithaca, N.Y.,

noted that rules for cellular rounds have been different. His firm hasn't

accepted any money for Round 5 applications because "we don't know what we will

do for you." He added: "There are other firms that are more than willing to

accept your money for Round 5, but I'd be curious what they have to say to you.

No one knows what an application will be for Round 5. You can assume it will be

what it was for Round 4, but there's a 50% chance of being wrong." Cellular

Corp. already has mailed its investors completed applications for Santa Barbara,

with Salinas going out in "next few weeks and Santa Rosa 2 weeks later,"

salesman said.

Finally, salesmen note, applicant may get lucky and win lottery. But FCC

indicated in March it will take "hard look" at bona fides of any tentative

selectee, including financial backing. All new FCC rules are intended to cut

down on speculation, sources indicated.

If investor with applications firm enters lottery and doesn't win, there's no

recourse. Last year, American National "toyed with the idea of a 20-year annuity

to get money back, regardless," according to Pres. Michael Godfree, but changed

policy so that "if you don't win, you have lost your investment, period." Bryant

Parker, stock broker with Paine, Webber in McLean, Va. office, said he was told

by salesman for American National last year that "worst-case scenario," as

Parker said he phrased it, would be that American National would put $5,000

up-front money from investors into 20-year annuity.

If applicant still decided to enter, given speculative nature of market, there

also is question of whether it's worth it to use application firms. Prices for

services, and tax treatment of services, varies. American National literature

says its applications "will be of the same quality of applications that have

cost the majors upwards of $150,000-$300,000 per application, and are available

at a small fraction of these costs." In commercial, Douglas says American

National can "provide you with a precise application for a fraction of the

normal cost." American National started out last year charging $30,000 for

application. Now, however, price is $10,000 cash for entry into 2 markets

(company chooses one and investor chooses one), with additional $5,000 "limited

recourse" due if applicant wins. Salesman called it "special, 2 markets for

price of 1" offer. Its applications are completed by Satellite Systems

Engineering of Bethesda, Md. Cellular Ventures similarly charges $5,000 per

application.

The Cellular Corp. charges $15,000 per application. Investors can use either

Plan A, which is $5,000 deposit and $10,000 due upon receipt of completed

application, or Plan B, which is $5,000 deposit and $10,000 due 2 years from

date applicant receives award of construction permit. In Plan B, investors pay

10% interest on unpaid balance. Spectra Financial Network, marketing arm for

TCC, also employed unique marketing technique last year. In Dec. 20 letter,

labeled "urgent Christmas bulletin," Spectra Pres. Kent Maerki and his wife

Natalie told investors: "We have reserved the Reno market exclusively for

Spectra representation and clients." FCC officials said that isn't possible,

that Reno, as with other markets, is open to any applicant.

Costs for applications being charged by companies are seen by experts as far too

high, in part because most applications are computerized and any after first one

are produced at little cost. Curren Price, cellular project mgr. for Satellite

Systems Engineering, which does applications for American National, confirmed

that his firm prepares applications for less than $5,000 American National

charges. He added: "Production of those [applications] enjoy economies of scale

if we don't do individual work for individual markets all over again." Norman

Lerner of Transcomm said most applications are computerized, with only

difference being financial letter of commitment required by FCC: "You just print

them out as fast as you can once you develop an application."

What should Round 5 application cost? Goldman of Compucon and attorney Hill

estimated $1,500-$2,000. Sieradzki, who called $5,000 price "shocking," said he

could see Round 5 applications going for $1,000 apiece, noting that those in

Round 4 were $3,000 and that Round 5 markets are "so much smaller." Those

systems, he said, will have 2-4 cells, far fewer than some Round 4 systems,

which had 9.

There also are tax questions for investors to consider. The Cellular Corp.

salesman said that if potential investor uses Plan A, putting all $15,000 up

front, entire amount can be capitalized and "written off" on taxes. As recently

as mid-April, American National salesmen were saying that entire $15,000 fee

could be taken as simply Schedule A business expense deduction, on ground that

application fees were expenses incurred to make profit; sales information

included sample Form 1040 showing writeoff.

American National's Godfree admitted that original program was structured as

"reasonable tax shelter" but company decided later that this year "we don't

think the deduction is there in the same way." American National is now

"negotiating with the IRS" to protect investors who took deduction last year.

Godfree sai ddecision to advise investors to take writeoff was based on premise

FCC would accept filings last year. However, federal tax experts said that

Revenue Rulings in 1982 would preclude writing off application fees as ordinary

business expense and that no deductions could be taken unless applicant lost

lottery, and then not until after all markets in which applicant has entered

have been decided.