Facts for Consumers from the Federal Trade Commission

Cellular Telephone Lottery Update -- January 1993

Prepared in cooperation with the Federal Communications Commission

An estimated 9 million subscribers now use cellular telephones to place calls on 1,500 systems around the nation. The Federal Communications Commission (FCC) issues licenses, by lottery, to build and operate cellular telephone systems. If you are considering investing in a cellular telephone license for an unserved area when new applications are accepted in 1993, you may first want to read this alert. Applying for a cellular telephone license is a high-risk investment. Even if you win a license, you could lose all of the money you invest.

This brochure explains how the Federal Communications Commission (FCC) licensing process works, what risks are involved, and how to avoid being misled by some application preparation services.

Cellular Telephone System Licenses

The FCC has designated 734 cellular telephone markets within the United States. Two cellular systems are licensed to operate within each market. Licensees have a five-year period during which they may expand their system within the market, free of competition. After five years, licensees forfeit their rights to the unserved areas, also known as "fill-in" markets.

Unserved areas are not found in all parts of the country; in fact, most are located in low population regions. Therefore, it is important to get information about the specific location of the unserved area before you invest. You may want to conduct a market study of the area's population density and traffic volume to determine whether the area can support a cellular telephone system.

The Application and Licensing Process

A cellular license application is a lengthy and complex document. Your application must include detailed engineering information and a written assurance that you will fulfill the FCC's financial requirements for issuing a license. Typically, this requires a financial commitment from a lending institution. The lender also must certify to a review of your financial condition and to the economic viability of the proposed system.

You must apply during the FCC's one-day filing window and pay a $230 application fee for each unserved area. The FCC issues public notices announcing application dates.

During the first stage of the FCC's cellular lottery process, applicants could form partial "settlement groups" or "alliances" to file for a fraction of a license. However, current FCC rules require that all applicants for an unserved area must agree to share a license. If even one applicant for an unserved area refuses to share a license, a lottery for that area must be held. Also, FCC rules prohibit anyone, with the exception of publicly traded corporations, from having an interest in more than one application in an unserved area.

After an application is selected, challenges to the winner's qualifications may be filed with the FCC. If a challenge is filed, the FCC reviews the legal and engineering aspects of the application and investigates any issues raised before accepting or rejecting the application. If a question of fact exists, a hearing is scheduled. If the application is found defective and dismissed, another lottery will be held to select an application from those already on file.

A successful licensee must construct a system and provide service within one year of receiving a license. A license may not be sold or transferred during the system's first year of operation. The FCC is adopting strict standards to deter speculators and encourage licensees that will build and operate cellular systems.

Application Preparation Companies

For a fee, some companies will prepare and file an application with the FCC for you to obtain a license. Companies that sell application services use the telephone, mail, and TV and radio advertisements to reach potential investors. Typically, they charge thousands of dollars for their services.

During an earlier phase of the FCC's cellular licensing process, the Federal Trade Commission (FTC) investigated the promotional claims made by some application filing services. Subsequently, the FTC brought two lawsuits alleging that certain companies did not disclose to investors that the cellular lottery is a high-risk investment. Also, a number of state securities agencies moved against major cellular application preparation services accused of making misleading claims in order to attract investors.

Tips for Applicants

Before purchasing application services, consider taking the following steps to help protect yourself:

Find out the specific location of the proposed cellular system. Beware of an application service company that refuses to provide this information.

Verify that the proposed system contains enough users to support a cellular telephone system. Many proposed systems in unserved areas rely primarily on projected income from "roaming traffic" -- cellular telephone use in vehicles. You may want to consider a traffic count before you invest if you are considering an unserved area where the income is likely to come from roaming traffic.

Conduct a financial analysis of the project. Include projections for start-up costs, operating capital, cash flow, and income.

If the application preparation service you are using claims it can provide financing for you, make sure it complies with FCC rules concerning financial requirements.

Do not rely solely on the financial representations of an application service company salesperson. Investigate the salesperson's claims. Ask questions. If the answers don't check out, you may want to consider other investment opportunities.

Be skeptical of an application service company that promotes membership in partnerships as a way to assure your success in obtaining a license or eliminating financial risk. Such memberships do not increase the chances of winning a license or of assuring financial success and may even be in violation of FCC rules.

Be cautious of an application service company that promises to build and manage a system for you. You should verify whether the company has the technical and business expertise to do so. Also, under FCC rules, a licensee must be actively involved in the management of the business or the license may be revoked.

Be cautious of an application service company that promotes settlement groups or alliances as a way to increase your chances of winning a fraction of a cellular license. Joining a settlement group or alliance will not necessarily better your possibility of winning and may actually increase your chances of losing.

Be suspicious of an application service company that claims a cellular license may be sold immediately after being granted. Current FCC rules prohibit the sale of a license during the system's first year of operation.

Consider getting advice concerning the viability of the investment from your attorney, accountant, or other business professional.

For More Information

If you have questions about the cellular telephone application process, write: Federal Communications Commission, Mobile Services Division, 1919 M Street, N.W., Washington, D.C. 20554. If you have a complaint about an application preparation service, write: Correspondence Branch, Federal Trade Commission, Washington, D.C. 20580.


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