WINNERS AND LOSERS IN THE GREAT CELLULAR GIVEAWAY
By

(FORTUNE Magazine) – Ruby Jean and Tolbert Moore, owners of Santa Rosa Beauty College, were winners in one of the richest lotteries ever held. So, as part of a syndicate, was Ernest Borgnine, the actor. In the lottery, the U.S. government gave away hundreds of franchises worth billions of dollars to use public radio frequencies for cellular phone service. Congress, which like everyone else had no idea the rights would become so valuable, did not want to conduct an auction. The FCC began choosing people to run cellular systems in 1983, first for 305 metropolitan areas, next for 428 rural areas. In the earliest rounds it picked winners based on competing applications. These required loads of paperwork and cost an average $250,000 to prepare. Even then the FCC had trouble distinguishing among them; it was happy to switch when Congress authorized a lottery. The policy effectively produced an auction anyway. To make sure they won at least a piece of the action, many players teamed up and entered as a group. In the contest for some franchises, every applicant was a member of the team, rendering the lottery moot. After a round of drawings -- 30 or more franchises were awarded at once -- players took part in wild trading sessions to consolidate a controlling interest in the locales they coveted. ''People would frantically trade pieces back and forth, and if you didn't have a chip, you could play with cash,'' says Mark Warner, founder of Capital Cellular Corp. in Washington, D.C., a broker of cellular franchises. ''It was a cross between Let's Make a Deal and the baseball trading meetings -- 'I'll swap you a tenth of Orlando, Florida, for a twelfth of Oklahoma City if you throw in two more pieces of Dayton.' '' In later rounds the FCC banned such groups. But the agency never figured out how to keep finaglers out of the contest. Many applicants without much of a background in telecommunications -- like the Moores and Ernest Borgnine -- were indeed legitimate small business people or limited partners in investment groups. But, says Warner, ''many of the people who applied for cellular licenses are the people who sell gold and oil leases -- scoundrels and charlatans.'' For example, in Washington, D.C., and Crossville, Tennessee, hustlers allegedly used the names of gullible people to apply for licenses but had them sign away most of their interest if they won. Though the lottery ended last year, the circus has produced few fraud prosecutions. Most targets of scrutiny settled before FCC hearings ran their course. Typically, the aggrieved applicant would pay the alleged bad guy to withdraw -- much to the relief of the FCC, which wanted to get the systems running as quickly as possible. The prices paid for licenses were often stratospheric -- in some cases over $300 for each person living in a service area. So many cellular companies won't make money for at least three or four years. ''But after five years, cash flows in major markets will be 50% to 60% of revenues,'' says Albert Grimes, president of American Personal Communications, which is planning to build a pedestrian network. Even then don't expect cellular companies to launch price wars for your business. ''Competition has not worked out the way the FCC intended,'' says Grimes. ''With only two companies in each area, why ^ rock the boat? The operators will just sit and make money.'' For the lottery winners, at least, the system has worked just fine. The Moores, the beauty college owners, made a profit of around $1.5 million from the Yakima, Washington, franchise that they won. They borrowed money, contracted with McCaw to build the system, and sold it to McCaw. As Warner -- himself a winner -- says, ''The government has basically given away tens of billions of dollars of an asset that is yours and mine and everybody's in the country.'' The Moores were twice lucky. They entered the lottery again with a partner and won RSA No. 396, serving Galesburg and Canton, Illinois. They say they plan to keep it.