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A high price to pay
Telephony / October 7, 1996

By Larry Luxner

WASHINGTON -- Back in 1985, when Arizona resident Kathryn L. Haycock -- a dental hygienist and mother of four -- decided to start her own long-distance company in competition with Mountain Bell, she knew it wouldn't be easy. But she never expected the fight of her life.

"I tried to obtain financing from traditional lending institutions, but was turned down. As a last resort, I finally mortgaged my house," said Haycock, president and CEO of Call-America. She's also vice-chairman of the Competitive Telecommunications Association, which represents 200 firms with revenues of less than $10 million each. "When our members have been approved for loans, we've had to put up the family home as collateral, or sign a personal loan guarantee. I can assure you that Bob Allen of AT&T has never been asked to do this."

Lonnie Pederson, president and manager of Telephone Service Co. in Wapakoneta, Ohio -- with only 34 employees, 9,000 access lines and $6.5 million in annual revenues -- says rural telcos such as his "are barred from the 21st century" by exhorbitant FCC filing fees and inability to bid on expensive C-block licenses.

Haycock and Pederson were two of 17 telco executives to testify Monday at an FCC forum that looked at the problems small businesses -- particularly those owned by women, blacks, Hispanics and other minorities -- face in competing with the giants of the telecom world. Under Section 257 of the Telecom Act of 1996, the FCC is required to conduct a proceeding "for the purpose of identifying and eliminating market entry barriers for entrepreneurs and other small businesses in the provision and ownership" of telecom and information services.

According to the FCC, the record developed in this proceeding will eventually help the commission in achieving its mandate under Section 309(j) of the act "to disseminate licenses for auctionable spectrum-based services to small businesses, rural telephone companies and businesses owned by women and minorities."

Even the definition of what qualifies as a small business is a matter of debate. The FCC says that when it first issued general auction rules under Section 309(j), it adopted the Small Business Administration's definition: to qualify, an applicant had to show that -- together with its affiliates -- it had no more than $6 million net worth, and no more than $2 million in after-tax profits.

Yet the commission soon realized that "the SBA standard might not be high enough to encompass parties that needed special incentives to raise the capital to compete in spectrum auctions, but were also financially capable of constructing and operating systems." So while the FCC retained that $6 million/$2 million definition for interactive video data service, it also adopted a $40 million small-business threshold for both narrowband and broadband PCS.

For the 900-MHz specialized mobile radio (SMR) service and the 800-MHz SMR service, the commission defines "small" businesses as having average gross revenues of $15 million or less for each of the three preceding years, and "very small" businesses as having average gross revenues of $3 million or less.

Under Section 257, the FCC has also come up with incentives to enhance small-business participation, such as the establishment of "entrepreneurs' blocks" in PCS auctions. Under this program, the FCC limits participants to applicants with $125 million or less in annual gross revenues, and total assets of $500 million or less.

According to FCC guidelines, "these restrictions would have the effect of excluding larger companies that could easily outbid designated entities and thus frustrate Congress' goal of disseminating licenses among a diversity of licensees, while at the same time including firms that are likely to have the financial ability to provide sustained competition to other PCS licenses."

Under Section 707 of the 1996 Telecom Act, Congress has also established the Telecommunications Development Fund, a non-profit corporation authorized to conduct research, make loans to, investments in, and otherwise advise small businesses to "stimulate the development of new technology and support delivery of universal service."

LaVern D. James, a policy analyst with the U.S. Commerce Department's National Telecommunications and Information Administration (NTIA), said women and minorities face special difficulties in the telecom arena.

"Current telecom policies don't provide incentives giving minorities access to these businesses," she said, adding that a recent NTIA report uncovered evidence of "real discrimination in lending" that prevents minorities from getting loans, even when they're just as qualified as non-minorities. She added that "although broadcasting is the area of telecommunications where minorities are most visible, even there minorities are still grossly misrepresented there. In 1994, for instance, blacks and Hispanics constituted 27% of the U.S. population but owned only 2.9% of the nation's 10,244 commercial radio stations, and just 2.7% of the nation's 1,342 commercial TV stations.

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