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Up for Bid: A New Multichannel TV Service

Just when you might have thought the media world was settling down to broadcast, cable and satellite TV, the government next week will auction spectrum for a new terrestrial microwave service that could become a competitor to those entrenched distribution systems.

Two companies—one backed by EchoStar founder Charlie Ergen, the other by former UK cable magnate George S. Blumenthal—have made down payments of roughly $7 million apiece to vie for licenses that could bring the new multichannel TV service to the country.

Oddly absent from the bidding will be Northpoint Technology, the company that talked the FCC into creating the service, dubbed Multichannel Video Distribution and Data Service (MVDDS). Northpoint argues that it is entitled to the spectrum free and has gone to court to press its case rather than participate in the bidding.

The third-largest potential bidder is MDS America, which has put up a $2 million down payment to acquire licenses in rural markets for a broadband Internet and data service. Eleven other outfits qualified to bid, but none put up anywhere near as much money and few have a chance at more than a handful of markets.

The MVDDS service will be assigned the same 12 GHz swath of spectrum used by direct-broadcast satellite TV but will be transmitted via ground-based microwave towers rather than satellites.

Up to this point, the dispute between Northpoint and its detractors has captured headlines as they battle in the courts, the FCC and Congress. Now, however, the attention is likely to be diverted as two proven entrepreneurs compete for the right to start another business from scratch.

A bidding war between Ergen and Blumenthal has the potential to shut out most other bidders, laments John Greene, attorney for North Carolina's Capitol Broadcasting. Capitol hopes to win licenses covering North Carolina and part of South Carolina to complement TV licenses it already owns in those states. But, Greene concedes, "if Charlie Ergen wants it all, he can afford it.

"We just think it will be valuable for data and video distribution in the future, but we don't have a business plan yet," he adds.

Likewise, it isn't exactly clear what Ergen or Blumenthal plan to do with the spectrum. Both Ergen's EchoStar and rival DBS operator DirecTV argued for years at the FCC that introducing MVDDS in their spectrum band would cause unacceptable levels of interference for satellite-TV subscribers.

Now that Ergen appears set to bid, many speculate that he will gobble up the spectrum and sit on it for years to block introduction of a new pay-TV competitor. Others say he could use the licenses to deliver broadband service or to better meet obligations to deliver local broadcast channels.

An EchoStar official referred questions to Ergen's partner in the venture, Phanie Sundheim, who heads Englewood, Colo.-based South.Com, and said Sundheim won't talk about plans until after the auction itself. Her company is 49% owned by EchoStar. She also heads Alta Wireless, another EchoStar-backed company that won some local multipoint distribution service (LMDS) licenses in a 1998 FCC auction.

Blumenthal did not return phone calls to his home over the holidays. According to documents filed with the FCC, he is bidding for the MVDDS licenses under the name DTV Norwich and without the backing of other investors. The New York executive rose to the top ranks of the global telecom industry before his latest venture, UK cable leader NTL, filed for bankruptcy protection to escape a mountain of debt.

Blumenthal got started in the telecom business in 1983 when he and former partner Barclay Knapp founded Cellular Communications, one of the early U.S. mobile-phone companies. They sold most of that business to AirTouch in 1996 for $2.5 billion. They took in another billion when SBC and Telefonos de Mexico bought Cellular's Puerto Rican subsidiary three years later.

Using the Cellular proceeds, he and Knapp launched an audacious bid to replace Rupert Murdoch's BSkyB satellite service as the UK's top pay-television company by patching together a string of cable companies. NTL very nearly succeeded but was saddled with an unmanageable $22 billion in debt.

Bondholders, including Liberty's John Malone, forced them to leave the NTL in 2002.

Other companies approved to bid on the MVDDS spectrum have far less cash than Ergen or Blumenthal but are nevertheless genuine players in telecom.

MDS has used microwave technology to deliver communications services in the Middle East and has Saudi and Kuwaiti investors. MDS Chief Executive Kirk Kirkpatrick predicts his company will benefit, no matter which bidders win. Further, he predicted that Ergen and Blumenthal might not want the rural licenses MDS seeks. Even if they drive prices out of his range, he says, they'll become hardware customers of MDS.

Unless, of course, Northpoint manages to gain the spectrum in court.

Kirkpatrick scoffs at Northpoint's claim to free-spectrum rights. And, indeed, the company's fortunes have dimmed in the past few months. In November, congressional negotiators eliminated a provision from a federal spending bill that would have canceled the Jan. 14 auction and doled out the spectrum free, presumably to Northpoint. In November, the federal district court in Miami invalidated two of six Northpoint patents. Although Northpoint hopes to gain the spectrum via a separate case now pending in the federal appeals court in Washington, the lack of an assigned date for oral argument has some speculating that the court is leaning towards dismissal.

The genesis of MVDDS was a 1998 FCC request for applicants seeking to launch commercial services on the 12 GHz band. Along with several satellite-based applicants, Northpoint asked for permission to create the terrestrially delivered TV service. A year later, Congress bolstered Northpoint's standing by ordering the FCC to investigate new ways to deliver local TV stations to satellite subscribers. In November 2000, the FCC authorized MVDDS. When it set technical rules for the service in May 2002, Northpoint's demand for license rights was denied, and the spectrum was slated for February 2003 auction. The bidding was delayed three times before next week's date was set last summer.