Presentation of Gerry Stevens-Kittner

Vice-President, Spectrum Relations, MCI WorldCom Wireless Solutions,
to the NIA convention, Long Beach, California, February 18, 2000

Good morning. This is my first formal appearance as a member of the MCI WorldCom Wireless Solutions team, so it's a particularly exciting occasion for me. And I would imagine that for many of you, who have been anxiously awaiting information about MCI WorldCom's plans for two-way leasing and filing, this is a welcome opportunity to exchange information.

With your indulgence, I would like to share an inspirational quote I read recently: "People cannot discover new lands until they have the courage to lose sight of the shore." In our case, the shore is analog video cable, and while we are not yet ready to entirely lose site of that shore, it is undeniably true that the brightest promise for our spectrum lies in broadband applications, whether those applications are going to be voice, data, or streaming video. And I would venture to say that neither me nor any of my esteemed colleagues on this panel knows precisely what the new landscape we are headed towards will look like. Nevertheless, we do not have the luxury of a lot of time to ponder the elements of this new landscape.

The good news is that the broadband access market is among the most sought after opportunities in the high technology industry. The sobering news is that DSL providers and cable companies are out of the gate aggressively building out plant and marketing their services. Each new customer that DSL or cable signs up for service is one less customer that may be willing and able to transition to our wireless platform. And the prices charged by these competitors will serve as the ceiling for comparable levels of service that we hope to offer. Prices for 512 kbps x 128 kbps are already in the $40 to $50 range, and those prices are likely to go down, not up.

So, for these competitive reasons, MCI WorldCom Wireless Solutions, and no doubt Sprint as well, are anxious to move forward with a two-way window. Would we rather have more time to analyze and develop a clearer picture of what the new data landscape will or should look like, you betcha. But we don't have that luxury. We and you must do our best under the circumstances to work together to craft amendments and leases that solve some tricky issues. I would submit that the alternative for most educators in this room, which is to stay on the analog video shore, is, at best, a less than optimal use of this potentially potent educational tool called ITFS spectrum.

Lest there be any doubt about it, MCI WorldCom Wireless Solutions places a high value on ITFS excess capacity. Like being too thin or too rich, you cannot have too much bandwidth. But there are certain unalterable realities that are operating for purposes of the first window. Even MCI WorldCom has a finite amount of human and technical support. All of us have a limited amount of time before the FCC should and must open a two-way window. And I think we would all agree that there is a tremendous amount of work to be done to be ready for the window, not the least of which is negotiating amendments and two-way leases. We at Wireless Solutions have had to be selective in shaping our agenda for the first window. We do not have the time or the resources to negotiate amendments and two-way leases with every one of our licensees, nor do we have the ability to perform the engineering, and, in a lot of cases, even if we could perform the engineering and negotiate lease language, we could not obtain the requisite interference consents. Thus, we have looked, and will continue to look at a number of variables in choosing which channels within which markets and in what configuration to seek to apply for in the first window. The most prominent of those variables have been the interference environment, both internally within a market and across markets, consistency of channel plans from market to market, the size of the market, and what we thought we could reasonably accomplish within the assumed time frame.

Thus, we will be focusing our finite resources on certain channels in certain markets between now and the first window. 4 to 6 months after the first window, the rolling window process will commence. The first window is the beginning, but by no means the end of MCI WorldCom's plans to deploy excess ITFS capacity. The first window will be the most challenging, because so much about it is new. We need to stay very focused on what we have to accomplish for the first window. Successfully completing our tasks for the first window will inure to the benefit of everyone.

The sooner and better we roll out a commercially viable service and start signing up users of our bandwidth, the sooner and more critical it will be to develop access to further capacity.

We recognize the challenges ahead. We recognize that we have yet to have conversations with many of our ITFS license holders whose excess capacity we hope to utilize in both the near and long terms. We recognize that we need to hold extensive discussions with our ITFS license holders about what their needs are in a data environment in order to be able to shape our platform in a way that is responsive to those needs. For many of us, this conference is our first opportunity to begin these critical dialogues.

Before touching on some specific provisions in two-way leases, let me address what seems to have become something of a controversial issue – non-disclosure agreements. Let me start by stating what NDAs are not. They are not designed to divide and isolate. They do not prohibit conversations and sharing of information among licensees. We have no desire to take advantage of any licensee. On the contrary, we need positive long term relationships with our licensees. Inevitably, we will be coming to our licensees over and over again during the 15 year term with modifications and adjustments and new applications to file. If a licensee feels taken advantage of, that will not facilitate a good working relationship.

Understand that MCI WorldCom is spending substantial sums of money performing research and design on two-way broadband platforms. So are a lot of other wireless companies that are in competition with MCI WorldCom. We do not want other companies gaining access to our proprietary intellectual property. MCI WorldCom is itself under NDAs with each equipment vendor we are talking to. MCI WorldCom will be contractually bound not to share certain information absent an NDA with a licensee. Furthermore, in any set of negotiations, there are sensitive financial elements. We naturally are reluctant having ITFS entities sharing that sort of information, but not so much because we are sensitive to what we intend to pay licensees, but because of the misimpressions those kinds of conversations invariably produce.

There are going to be multiple elements to the consideration Wireless Solutions will pay ITFS licensees for their excess capacity, and, in my experience, no two excess capacity leases are ever the same. We will be negotiating with you over a variety of monetary and non-monetary forms of consideration. Depending on what types of transmission services you desire to transmit on your reserved capacity, we will be talking to you about providing you with video transmission capabilities or data transmission capabilities. We will be talking to you about modification and installations of receive sites. We will be talking to you about access to tower sites and/or cell/hub sites. These and other parts of the contract will have a direct bearing on the financial consideration the two sides will end up agreeing to.

Thus, the sort of conversation that goes, "so and so got such and such a percentage of adjusted gross revenues, and I only got this percentage," ignores the complexity of the effort to arrive at a fair and equitable set of terms.

We don't hold all the cards here. We want your spectrum. We think we might be able to make money off of your excess capacity. We want you to come along with us willingly, excitedly and confident that you have a fair deal.

Finally, if all that isn't good enough to give you comfort, each of you is or should be represented by counsel during the negotiations, and it is the rare attorney in this industry that doesn't represent multiple licensees across several markets. Even though the attorneys are covered by the NDAs, an attorney is not prevented by an NDA from giving general advice and counsel on what a licensee might ask for in the course of the negotiations.

NDAs are good – they facilitate open and honest communications. Absent an NDA, we will be severely constrained in what we can share with you.

Our approach to two-way lease negotiations will be as straightforward as possible. Early on in our discussions, we will endeavor to learn, or, in some cases, confirm, what your institutions needs are. Do you want video or data capacity on a going forward basis and how much of each? Are your receive sites concentrated in one geographic area or are they widely dispersed? How far are the receive sites from the central transmit site, or from prospective cell sites? MCI WorldCom brings many more tools to the video and data transport environment than did the individual wireless companies that you dealt with before. It may be that in particular cases, the best solution to an ITFS licensee's needs are wireline based, such as a T-1 link, rather than to deploy spectrum to solve a particular need. In any event, our first goal will be to match MCI WorldCom's resources with our licensees' needs.

In terms of the leases themselves, we will be looking for 15 year terms. If we are going to invest huge sums building the network architecture, we want the longest term we can get in order to give ourselves an opportunity to reap a return on that large investment. This is a start up-business. It will take several years to become cash flow positive, and then several more years after that to recoup the initial investment. The size of the investment warrants at least 15 years. Frankly, if it weren't for the FCC's regulations, we would be asking for terms of 25 years or more.

Renewal language should not change all that significantly from the types of provisions we've seen in the past. We feel we deserve a right of first refusal, and an exclusive negotiating period at the end of the term. Hopefully, fifteen years from now, our ITFS partners will have reaped rich rewards, both financially and otherwise. Having taken a lot of upfront risk, setting up the network, and having assisted the ITFS partner in being in a position to enjoy the two-way data environment, we feel we deserve a preferred position when it comes to renewing the lease.

We anticipate setting terms for paying our licensees monthly minimums and a percentage of adjusted gross revenues. Those terms will take a number of factors into consideration. In almost all cases, we are amending existing agreements. Our main objective is to make the existing agreement relevant to the new business. Our adjusted gross revenue formula will have us paying you on recurring data, voice or video transport revenue generated by the spectrum. We will want to exclude things like installation fees, equipment rentals or sales, long distance services, wireline based revenues, and value-added Internet support services like web-hosting. When we negotiate these fees, we will have to take into account the competitive pressures MCI WorldCom Wireless Solutions will face. We can't anticipate charging our high speed data subscribers $150.00 per month for 512 x 128 service when our competitors are charging $50. Our monthly minimums, in particular, will have to be realistic.

On the subject of upfront fees, in the swashbuckling days of CAI and its counterparts, upfront fees were a way to mitigate the risks of the likes of CAI going into bankruptcy. Clearly, that is not a risk anymore, at least with the two companies represented on this panel. So if upfront fees are part of the consideration, they will be regarded by us as part of the overall package of financial and non-cash consideration, perhaps as advances or deposits against future payments.

What happens at the end of the 15 year term if the parties part ways? Those are difficult issues, but there are some ways to address them. The FCC has already addressed one, by requiring the operator to return at least 25% of the channel capacity to the ITFS licensee in a downstream mode. We write that provision into our contracts, with the proviso that if we can identify a suitable channel to return in a downstream mode that is not one of the licensee's licensed channel, the licensee should be willing to accept that channel, assuming, of course, that we can get the other licensee to swap.

As to continuing access to tower sites and shared equipment, we will certainly be willing to make access available on fair terms and conditions for a period of time following the end of the lease to enable the ITFS licensee to make alternate arrangements. We have no intention of kicking anyone off of our facilities precipitously. We will want to make some distinctions in the lease terms between an ITFS entity wanting to continue to operate for its own educational purposes, as opposed to leasing its excess capacity to a commercial competitor. We do not feel obliged to create any sort of preferred access to our facilities for the benefit of another commercial operator.

In closing, let me make some cautionary comments. Like any start-up business, this is no sure thing. Our industry has hardly been a beacon of success. One phase after another has failed to prove to be a long term effective use of the spectrum, at least commercially. I don't know how many more opportunities we'll have to make this work. In the next few months, we can either raise the utility and value of our collective spectrum to tremendous heights by working together, or we can fall prey to divisiveness. I and my colleagues at MCI WorldCom Wireless Solutions look forward to working with you in a spirit of good faith and good will on this ambitious, challenging and exciting path. There should be no question in anyone's mind that only together can we can achieve the fullest potential of our spectrum.

Thank you Don and the NIA for this opportunity to share some of our plans.

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