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Nextwave Telecom: Right Party, Wrong Number?


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NEXTWAVE TELECOM: RIGHT PARTY, WRONG NUMBER?

Al Salmasi is a telecom whiz, but even some fans think his $4.7 billion bid for FCC licenses was too high

Al Salmasi has always been in a hurry. While in high school, he talked his way onto Clash of Knowledge, a TV game show for college students in his native Iran, and made it to the finals. Years later, after moving to the U.S., Salmasi, at 29, launched his own company, using military satellite technology to track truck fleets. When it faltered, he rebounded with a sale to Qualcomm Inc., which he helped make one of the fastest-growing telecom companies of the decade.

Today, the 42-year-old Salmasi is pushing harder than ever. At 7 on a blustery Friday evening, he and his lieutenants gather around a conference table in his 46th-floor office-and-apartment suite in New York's posh Olympic Tower. In little more than a year, Salmasi has transformed his new company, tiny NextWave Telecom Inc., into a fledgling empire. The team is wrapping up the latest in a series of giant deals, a commitment by Lucent Technologies Inc., which will supply equipment, to provide up to $1 billion in financing for Salmasi's dream: a national wireless network to compete against the likes of AT&T and Sprint Corp.

UNWIRED NATION. Over the next five years, Americans are expected to at least triple their use of wireless phones, and Salmasi wants a chunk of that growth. San Diego-based NextWave has stunned the industry by agreeing to pay $4.7 billion for licenses to provide digital wireless phone service to a staggering 110 million potential customers. Salmasi's goal: to create a "carrier's carrier," wholesaling airtime to companies that market equipment and service to consumers. "It sounds like luck," he says of NextWave's sudden emergence, "but we've been fighting huge battles all year."

Racing to secure his place in the burgeoning personal communications system (PCS) market, Salmasi faces daunting odds. NextWave's system is at least a year from launch, but AT&T and PrimeCo operate PCS services in more than a dozen markets, and Sprint PCS plans to roll out national service in January. Moreover, NextWave won't have the wholesaling niche to itself. Sprint, for one, also plans to resell airtime.

Although Salmasi has raised $530 million from investors, he needs billions more. More worrisome, NextWave's licenses have been held up nearly six months by a petition from rivals who claim NextWave exceeds the 25% cap on foreign ownership that the FCC imposes on PCS licensees. At least for now, Wall Street has soured on NextWave initial public offerings intended to raise $500 million in stock and notes. In October, Merrill Lynch & Co. dropped out as lead underwriter of the stock deal, citing poor market conditions.

Even some staunch backers think Salmasi bid too much--more than twice what AT&T and Sprint PCS paid in earlier auctions--for the FCC licenses. Now, NextWave must put nearly all its cash toward a 10% downpayment. Salmasi says the big bids were necessary to secure the national network he needs, but that the terms of his deal with the FCC--interest-only payments, at 6.5%, for six years--mean NextWave will be profitable before heavy payments come due.

Still, a series of vendor-financing deals with Hughes Electronics Corp., Lucent, and others has raised only about half the estimated $3 billion Salmasi needs, on top of the license costs, to build his network. "If it were anybody but Allen, I would give him a very low handicap for pulling this off," says Irwin M. Jacobs, chief executive of Qualcomm. Jacobs' faith in Salmasi comes from years of working together at Qualcomm, where Salmasi helped develop the digital technology now being adopted by much of the wireless industry. With Qualcomm's 4% equity stake in NextWave and the potential for billions in equipment sales, Jacobs has much at stake in the new venture.

CASH CRUNCH. Many observers predict disaster. Salmasi has "got a unique proposition in the marketplace, but I just don't see how he's ever going to make any money at it," says Terrence Valeski, a vice-president at Pacific Telesis Group. Telecom economist Herschel Shosteck says the company needs a huge infusion of cash.

Then again, few observers would have bet Salmasi could bring NextWave this far. His ultrasmooth salesmanship has helped. Intensely likable, he speaks of his company and its technology with almost religious zeal. "It sounds crazy," he says, "but what we are trying to do will change the whole world."

And some big players are buying in. In August, MCI Communications Corp., which has no PCS licenses, agreed to buy at least 10 billion minutes of airtime over 10 years in exchange for reduced rates and the right to buy up to 25% of NextWave stock after the offering. Other carriers have agreed to buy some 21 billion minutes. Salmasi "repeatedly pulls rabbits out of his hat," says Whitey Bluestein, MCI's vice-president for wireless strategy and development, noting that "he has raised over half a billion dollars as a startup company." If it all comes together, "some history will be written around" Salmasi, says telecommunications analyst Bob Egan of Stamford (Conn.)-based Gartner Group Inc.

For the moment, though, Salmasi remains in regulatory limbo. If he's nervous, he doesn't show it. His pallor and puffy eyes attest, rather, to 18-hour workdays. His self-confidence is unwavering, as he says it always has been. Salmasi grew up wealthy in Iran. His father and uncle owned a multibillion-dollar construction business, where he worked during breaks from Tehran's elite Alborz High School. By 1979, the family was worth at least "several hundred million," he says. But after the Shah fell, "we lost everything."

Well, nearly everything. Five years later, Salmasi's father, uncle, and several friends, all relocated to Los Angeles, put $14 million into Salmasi's first business, Omninet Corp. By that time, Salmasi, who emigrated in 1971, had earned degrees in engineering and math and gone to work for NASA. Omninet applied concepts he helped develop there to a satellite-tracking system for truck fleets. Second in command was Salmasi's bride, Nicole, whom he had dated in Iran. She, too, had moved to Los Angeles and become an engineer.

Startup costs proved overwhelming. Even after Salmasi's uncle put in $9 million more, Omninet had to sell out to another startup, Qualcomm, for access to FCC licenses. Salmasi's family and friends got 47% of Qualcomm. And Salmasi helped make the truck-tracking service a moneymaker: By 1995, when he left, it accounted for more than half of Qualcomm's $387 million in revenues.

At Qualcomm, he also moved into an even more promising venture. Jacobs had been working on adapting a military communications technology, code-division multiple access (CDMA), for cellular phones, but before it was ready, the industry adopted a rival technology. Salmasi urged Jacobs and his colleagues to press ahead anyway and persuaded PacTel Corp., now AirTouch Communications Inc., to test CDMA. Impressed, AirTouch signed on.

In the meantime, Salmasi had begun selling CDMA systems in South Korea and Japan. A big break came in 1990 when Motorola Inc. and AT&T Network Systems, now Lucent, licensed the technology to produce CDMA equipment. Now, thanks in large part to Salmasi, CDMA is emerging as the standard of choice among big wireless players, with the notable exception of AT&T. And Qualcomm is in the big leagues of telecommunications manufacturing. Without him, says Jacobs, "we would have spun our wheels for a long time."

Salmasi made his big move after the FCC announced it would auction several licenses to entrepreneurs. He formed NextWave, putting in $7 million for about a 14% stake. He recruited Janice Obuchowski, an Assistant Secretary of Commerce in the Bush Administration, as well as top executives from Nynex, GTE, and AT&T, who together put up another $7 million. Early backers included Qualcomm, which put in some $20 million, Sony Corp., and a Korean steel company. Rivals contend NextWave is 35% foreign-owned, but Salmasi disputes the way they count shares. The FCC is expected to rule any day.

Despite the tumult at NextWave, Salmasi, Nicole, and their three children recently moved to New York, where they occupy a duplex opposite identical quarters that serve as offices. Salmasi says he wanted to be closer to Wall Street and to oversee the launch of NextWave in New York. Nicole, who manages their multimillion-dollar stock portfolio, says she disliked San Diego.

Even with time and money seemingly running out, Salmasi dismisses doubters. Obuchowski, noting that "we've been due-diligenced up the kazoo," expresses confidence the FCC will grant NextWave's licenses by yearend. Once they're in hand, Salmasi predicts, cash will pour in again. If he's wrong, he and everyone who has sunk millions into his vision could lose a bundle.By Eric Schine in New York, with Amy Barrett in Washington, D.C.Return to top


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