TV personality Mike Douglas says it may be "the business opportunity of the century" in a commercial on the Financial News Network.
In Wall Street Journal ads, Douglas "invites you to learn how you may become very rich in the billion-dollar cellular mobile telephone industry."
Responding to this and other appeals, thousands of investors are paying a number of companies as much as $5,000 each to help them in their quest to win a Federal Communications Commission license to operate this new communications technology, which permits motorists to have telephones in their cars for a much lower cost than before.
Now the FCC, which now is using a lottery to award one license per city to private applicants, fears it may have opened the door to a widespread abuse of the process by some promoters who submit license applications on behalf of investors. The agency has been swamped by applications: More than 5,000 investors have bid for the 30 licenses the FCC will award later this year, and agency officials say many of these applicants may not understand how long the odds against them are.
In a recent public announcement, the FCC urged investors "to beware of potentially misleading or fraudulent claims by marketers of cellular mobile radio franchise applications." The FCC did not name specific companies.
"Individual investors should exercise extreme caution in pursuing one of these proposals," the FCC said in a letter to Congress. Assertions made by some "of these companies may be fraudulent and are certainly misleading," the commission said, also without identifying any companies.
Companies that provide the application services say they supply the necessary paperwork, engineering specifications and proof of financial backing at a fair price.
The FCC awards two cellular licenses in every city; one goes automatically to the local phone company, and the other is reserved for the phone company's private competitors.
While some large communications companies have applied for licenses, individual investors also are competing to win the lotteries with the help of companies that prepare applications in the investors' names and file the financial and engineering documents required by the FCC.
One of the companies that offer applications services is American National Cellular, based in Los Angeles, which sponsors the Mike Douglas advertisements. Douglas has a media contract with the company for the commercials but does not have a financial stake in the company, according to Michael Godfree, president of ANC. One of the ANC ads, which has run in other publications in addition to The Wall Street Journal, says "Many Potentially Lucrative Markets Remain. Pre-Construction Worth up to $6 Million. Potential Operating Revenues up to $45 Million." According to ANC, the $6 million figure is the value of the license before constructing the cellular communications system, and is based on third-party estimates.
The company makes it clear in its contracts that "in such a high return is a high risk," Jerry Dobin, the former marketing director of ANC, said before he left the company recently. "We tell everybody that, if you don't have the money to risk, please don't do it."
The securities division of the Arizona State Corporation Commission alleged in a civil proceeding this month that American National Cellular's selling of license application services violates state securities law. According to a notice containing its allegations against ANC, the securities division contends that ANC's offers to investors are investment contracts and thus should have been registered as securities under state law. The division also alleges that ANC had not complied with requirements requiring securities dealers to register with the state and provide key information to potential investors.
ANC's president, Michael Godfree, said that the company has not violated any securities laws. "I disagree 110 percent with what they are saying," he said. He declined to comment more specifically.
According to the division's Aug. 1 notice, ANC has stated that its program permits "the average man to stand side by side with corporate giants." The notice alleged the company said that, while the charge for preparing an application for a cellular license was more than $150,000 -- too expensive for most individuals -- it would file a "nonexclusive application" on behalf of an investor for only $10,000.
ANC's clients were invited to join an alliance of applicants, the notice said, with each sharing in the return if any of the investors won the lottery and received the FCC license. In this way, a $10,000 investment could generate a return of approximately $150,000 in less than two years, the division's notice said ANC claimed.
FCC officials have asked the Federal Trade Commission, the Securities and Exchange Commission and other federal and state enforcement agencies to investigate whether any cellular promoters have engaged in fraud or in sales of unregistered securities.
The FCC has tried several methods of awarding the franchises since the early 1980s. After a costly review of applications covering the 30 largest cities, the FCC switched to a lottery for the next two blocks of awards, covering the 31st- to the 90th-largest cities. In these markets, there were few lotteries because, in most of the cities, all of the applicants agreed to share licenses. A lottery for another group, covering the 91st- to 120th-largest markets and including cities such as Peoria, Ill., and Shreveport, La., is expected later this year. Licenses have been awarded in 90 cities, and about 70 systems are under construction or in operation.
The commission's warnings concern the next round of cities, the 121st- through the 150th-largest. A lottery for markets 121 to 150 may not take place for 18 months, and agency officials say they do not know when they will begin accepting applications.
Some companies are actively selling application services for these markets, which is not prohibited even though the lottery is not yet scheduled.
FCC officials are concerned that some promoters are making undocumented or inflated claims about potentially large revenues to be earned from operating systems in smaller cities. Experts still believe that the long-term future of the cellular business is bright, but the FCC and many industry officials say big profits may be a long way off, especially in smaller cities for which the licenses are still available.
"It is not by any means clear these systems will ever turn a profit," said Michael Sullivan, chief of the FCC mobile service division. "Any of the systems will engender a negative cash flow for a number of years. . . . Any person who thinks for his $10,000 investment he will get a lot of money back, he is mistaken because he has to come up with a lot of money to make it work." Cellular experts estimate it could cost between $2.5 million and $5 million to build and initially operate a system in smaller markets.
"You might do better in Las Vegas," he said.
Cellular systems in the top 30 markets -- much bigger cities than those currently available -- are taking up to three years to turn a profit, said Norman Lerner, president of Transcomm Inc., a Falls Church consulting firm. "It's going to take succeedingly longer as markets get smaller," Lerner said. "It's conceivable it could take 10 years" to turn a profit in the smaller markets being offered by the FCC lottery, he said. Variables such as population size, median income and ratio of business to residential customers all would influence whether and how quickly a profit could be turned.
To apply for a cellular radio license, an applicant must submit engineering documents and evidence of the financial capability to cover construction costs and operations for one year. Applicants also must demonstrate they intend to build and operate a mobile phone system, according to Sullivan.
Some application services companies attract investors through TV commercials and ads in financial publications, investment seminars and videotapes, according to the trade publication Communications Daily. Services companies will provide applicants with a completed application, which includes bank commitments for loans and engineering specifications.
American National Cellular says it charges $10,000 for an application for two markets and an additional $5,000 per application should an investor win a license or part of a license. An investor may buy into a "blue chip" program that provides applications for 30 markets for $150,000.
Cellular Corp., based in Cleveland, says it charges $5,000 per application and another $10,000 should an applicant win a license or part of a license.
Cellular Application Services Inc. of Washington was charging investors "as little as $5,000" for an application last April, but currently is not selling applications, said the firm's principal, Joseph Hennessey.
ANC President Godfree said the price is fair because the applications come with engineering specifications and financing also arranged. American National Cellular has sold about 1,200 applications, according to Godfree.
Cellular Corp. has sold a roughly equal amount, said President Nicholas R. Wilson. Wilson said the price was quite fair for professionally engineered applications.
Hennessey, of Cellular Application Services, said he did not know how many applications had been sold.
Tom Gutierrez, a local lawyer now providing application services, says a fee in the $15,000 range for a winning application is "outrageous." Gutierrez is a former FCC staff attorney who drafted the first cellular regulations. "The cellular applications are only good if you pay about $1,000," he said. It is possible to get applications filled out for $3,000 or less, other communications industry sources say.
Other issues also have surfaced.
Marilyn Gardner, an actress living in Largo, Md., who saw American National Cellular ads on Financial News Network 10 months ago, said that, when she called the company, she understood she would get her money back if she did not win a cellular license.
Gardner said she asked, " 'If you didn't get the license, do you get your money back?' They said 'yes.' " Gardner asked her financial planner to check the situation, and she said American National Cellular explained to him that she would get her money back in 20 years.
This reimbursement arrangement "was a test-marketing device we thought of using," Godfree said. ANC determined the refund arrangement to be "inappropriate" for the marketing of the product and it was dropped, he added.
The company will not refund anybody's money if the lottery is not won, he said. "The gist of it is, if you lose, you lose," Godfree said.
Investors sign an agreement that makes that explicit, said Dobin, the former marketing director of ANC, adding, "We are like Caesar's wife, beyond reproach."
In reaction to concerns about the sales of applications, the FCC tightened its rules on cellular license applications in May. The new rules apply to applications for the 121st- to 150th-largest cities when those applications are filed -- a date not yet determined -- and do not apply to the current round of applications already filed for markets 91 to 120.
While FCC rules required that an individual file only one application in each market, prior to May 3, they allowed individual applicants to agree in advance to share a license if one of them won the lottery. The technique, thus, gave an applicant multiple chances to win the lottery as part of a group.
Under the new rules, applicants no longer may work in groups to win a license by filing separate applications with the intention of sharing the license if anyone in the group wins. Beginning with the lottery for markets 121 and above, groups may apply using only one application. Should groups form after separate applications are filed, all but one application must be withdrawn from the lottery.
A second change involved the financial requirements for an application. Under the old rule, applicants needed a "letter of reasonable intent." Under the new rules, applicants need a firm bank commitment. The new rule is intended to ensure that applicants have the financial resources to build and operate a mobile system, agency officials said.
A winner may sell up to 49 percent of the license without constructing or operating a system. A winner who wants to sell a controlling interest in the license must demonstrate to the FCC that he or she did not apply for a license just to "speculate," said Sullivan of the FCC.
Applicants still may form agreements with other applicants to avoid a lottery altogether, as was done in previous lotteries held in 1982 and 1983. In many of the larger cities, the rival bidders settled their differences by agreeing to share the licenses after each had filed separate applications. That happened in the Washington area, where four multimillion-dollar media companies combined to form Cellular One. The firm is owned by Metromedia Inc., The Washington Post Co., MetrocCall Inc. and Graphic Scanning Corp. Bell Atlantic also provides cellular phone service in the Washington area.
The idea of forming an alliance to avoid a lottery was possible in previous lotteries because of the small number of applicants -- five to 15 -- per market, Sullivan said. Now the huge increase in the number of applications makes that idea economically and logistically prohibitive in most of the smaller cities, he said. Some 300 applicants have been filed for San Diego. In San Juan, Puerto Rico, more than 200 investors have applied for the single license.
"I think it is extremely unlikely that the applicants will come to agreement to avoid the lottery," Sullivan said. If the applicants split a license 200 ways, "These licenses are unlikely to be worth enough to really make a profit in your investment."