NextWave Gives Asian Firms an Entree to U.S. Phone Market

SAN DIEGO — Whatever else one might say about NextWave Personal Communications Inc., the start-up company that startled the phone business this week by bidding $4.2 billion for a fistful of wireless communications licenses, it cannot be accused of lacking creativity.

Founded less than a year ago by Allen Salmasi, an Iranian-born entrepreneur and engineer, NextWave cleverly exploited the desire of big Asian electronics conglomerates to get a foothold in the U.S. communications market--something that Federal Communications Commission restrictions on foreign ownership have long made difficult.

NextWave made the deal attractive in part by tapping into the need of Qualcomm Inc., Salmasi’s former employer, to find some big customers soon for its controversial wireless communications technology, code division multiple access, or CDMA. And lest it run into trouble with the government, NextWave company hired a former Commerce Department and FCC functionary, Janice Obuchowski, as vice chairman.

Now, long before it earns its first penny of revenue, NextWave has about $450 million in capital--and the obligation to pay the FCC $4.2 billion in the coming years as it builds a wireless network that will serve about 40% of the U.S. population, including Los Angeles.

The biggest shareholder in the company is the venture capital firm Cerebrus Partners, with a 5.1% stake. Several other institutional investors also provided funds, including CalPERS, the state public employee retirement fund, and the Eastman Kodak pension fund, according to Salmasi. And Qualcomm owns slightly less than 5%.

Then there is Sony Corp., which is looking for ways to develop new products using the CDMA technology and invested about $10 million, and Nippon Telegraph & Telephone, which spent $5 million.

“Through this investment, we can watch the U.S. situation more closely,” said Toyoyuki Kato, a spokesman for NTT DoCoMo Group, a Nippon Telegraph unit that controls 48.4% of the Japanese cellular market

Industry observers said the Japanese, who introduced the world’s first cellular phone in the 1970s only to watch their U.S. competitors seize the market, are desperately trying to make up for lost ground--and that CDMA could be their booster rocket.

“Clearly the Japanese companies are seizing opportunities out of a sense of crisis,” said a knowledgeable American businessman, who asked not to be named. “They feel they are behind the U.S. in telecommunications and are making extra efforts to try to catch and overtake the U.S.”

The Koreans have similar motives: led by the giant LG Group, Korean firms collectively ponied up about $100 million.

Kim Ingong, a spokesman for LG Group in Seoul, said his company’s $30-million investment in NextWave bought it a foothold in the U.S. market and helped support a future customer. LG Information & Communications Co., which last year invested $2.5 million in U.S. long-distance carrier TTI, also has a contract to provide NextWave with up to $250 million worth of telecom equipment.

“We can get a profit through both the investment and equipment supply,” he said. Other South Korean investors include Pohang Steel and Iron Co.; Iljin, one of the world’s largest diamond polishers; Kopyong, a major construction firm and Korea Electric & Power Co., the giant state-owned power company.

South Korean telecom companies hope to pick up some skills that can help them survive back home: Like many of its Asian neighbors, South Korea has experienced a boom in cellular phone use. The country now boasts 1.6 million subscribers and is adding 100,000 new customers a month.

I.S. Park, a telecom analyst with SsangYong Investment & Securities Co. in Seoul, said South Korean companies also want to sell their expertise in CDMA; South Korea was the first country to adopt CDMA nationwide.

That NextWave won its licenses at an auction that ostensibly was reserved for small, “entrepreneurial” companies has raised more than a little criticism, as has its links to Qualcomm, from which Salmasi said it will buy at least $1 billion in equipment. Qualcomm, along with manufacturing partner Sony Corp., has first shot at supplying NextWave with 50% of its network equipment and 60% of all headsets if NextWave enters the retail wireless market.

But Salmasi denies accusations that NextWave is controlled by Qualcomm and says the company played totally by the rules.

“There was no limit as to how much money we could raise and we worked a little harder to develop a business case that was acceptable to the financial community at large,” said Salmasi, in justifying the winning bids. “These kinds of investors evaluate it 10 ways from Sunday to assure themselves it’s a viable business.”

In the end, indeed, many of the competitors in the auction had similarly deep-pocketed backers, and FCC Chairman Reed Hundt said the process had worked as planned.

NextWave’s commercial success, however, is anything but assured. In fact, many industry observers are betting it will fail and that its dearly purchased licenses will be available someday at an FCC re-auction. Naysayers said the price NextWave paid was so exorbitant that it can’t possibly generate enough revenue by selling airwave time to pay the FCC what it owes.

Further, NextWave has tied its fate to CDMA, which promises to help wireless vendors increase their capacity by spreading more digital calls across a channel. Increasing capacity is an important selling point, but the technology is extremely complicated and many still wonder how well it will work in the field.

And NextWave will be facing a host of entrenched competitors--up to seven other vendors in each of its major markets, including Los Angeles, New York and Washington-Baltimore. Those include heavyweights such as AT&T; Corp., Sprint Corp. and Pacific Bell who have had a head-start in building their networks.

What makes NextWave confident? Salmasi said the inherent, but still theoretical, advantages of CDMA and the ability to bundle a number of wireless services--from digital voice, messaging, paging, even cable TV--all in one neat digital package will make his company’s services the most economic option for many customers.

And Salmasi has done some of this before: In the 1980s, he built a company that used satellite communications to track trucks and eventually sold the highly successful business to Qualcomm.

Kraul reported from San Diego and Iritani from Tokyo. Researcher Makiko Inoue in Tokyo also contributed to this report.