The next big thing?

Northpoint would compete with cable and DBS. All it needs is a little help from the FCC.

In some ways, it's hard to take Northpoint Technology seriously. The startup's vision of a sprawling wireless TV network combining the advantages of cable and direct broadcast satellite is a grand one. But Northpoint is controlled by neophytes in the television business, and their service, if rolled out nationally, would cost at least $1.5 billion. Moreover, it would be, at best, the fourth multichannel video competitor in every market it enters.

But dismissing Northpoint would be much easier if so many giant companies weren't trying to keep the fledgling company out of the business. DirecTV, EchoStar, Pegasus, Boeing and Alcatel are attacking Northpoint, all weighing in to keep regulators from approving even its first step toward developing a potentially powerful rival to cable and DBS.

More important, the company has been well-received among key legislators and regulators lured by Northpoint's pitch of creating another formidable competitor to cable.

Northpoint is looking to launch DBS without the "S": Instead of satellites, Northpoint would use transmitters on the ground. Half the capacity would be devoted to offering 96 channels of ESPN, MTV, HBO and the like for $20 a month. The other half would be used for high-speed Internet access. The system would use the same 12 GHz microwave band as DBS but in a way, Northpoint executives contend, that would not materially interfere with DBS services.

The DBS companies—DirecTV and EchoStar—harshly disagree, warning that the Northpoint system could leave their 15 million customers plagued by frequent outages. Boeing and Alcatel-backed Skybridge want the spectrum for themselves, primarily for high-speed data. Pegasus, a major rural reseller of DirecTV service, also wants a shot at it.

After six years of review, the FCC faces a Nov. 29 deadline to determine whether Northpoint should get the licenses for the spectrum. Both sides have tested the system; they disagree on what the tests show.

It's a multibillion-dollar showdown. Northpoint could get a slice of valuable spectrum and compete directly with DirecTV and EchoStar. A loss of even a million subscribers would cut $3 billion to $5 billion in value from cable or DBS companies.

FCC insiders say Northpoint—which is not related to DSL telephone provider Northpoint Communications—has a fair shot at approval.

If so, it would be a product of Northpoint's surprising political clout. Controlled by two women—a "socially responsible" money manager and an heir of a renowned, wealthy Texas ranch family—Northpoint and its operating affiliate Broadwave USA have had a warm reception in Congress and at the FCC.

That reception is fueled in part by Northpoint's ownership structure, which would essentially franchise markets to individual operators. So most of the first 66 proposed systems would be owned by 48 "affiliates," mostly local businesspeople and professionals, who generally are also politically connected and many of whom are minorities or women.

It is those affiliates—in a 51%-49% partnership with Northpoint's Broadwave—that are applying for the licenses. A few—such as Don Barden, former owner of Detroit's cable system—have experience in cable or broadcasting. What stands out more are those with obvious political credentials: an ex-aide from Bill Clinton's Arkansas days; the son and sister-in-law of a Democratic senator; and a sizable cadre of lawyers, lobbyists and other political consultants.

That's bolstered by the recent hiring of Toni Cook Bush as executive vice president. A communications lawyer, Bush was formerly senior counsel to the Senate Communications Subcommittee and is stepdaughter of Democratic political heavyweight Vernon Jordan.

Collier contends that Northpoint's political progress comes from the power of its argument for cheap, superior service that would be another competitive check against cable operators—and DBS. "We have gotten unrelenting opposition from the satellite industry," said Collier, who is chairman of both Northpoint and mutual-fund company Citizens Fund.

DBS executives counter that they're worried not about the competition but about the interference. "It's disingenuous for them to tout that this a viable business and get the FCC to look the other way," said DirecTV Chairman Eddy Hartenstein. He's worried that Northpoint's political prowess has the issue being "railroaded" through.

"This is basically a bunch of people who want to get spectrum for free, wrap it in a business plan, and sell it," Hartenstein said. He compared Northpoint's plan to that of wireless cable operators' microwave multipoint distribution systems in the early '90s, which made similar promises and ended in financial free-fall. "This is the son of MMDS. We all know how successful that was."

He and EchoStar Chairman Charlie Ergen are calling for independent testing.

Northpoint says the tests have been conducted to the FCC's satisfaction and point out that DirecTV parent Hughes Electronics also has two applications to secure the part of the spectrum—for free—for high-speed data.

There's some elegance in Northpoint's plan. Signals sent in the 12 GHz spectrum allocated to DBS are highly directional, more like a laser than a flashlight. DirecTV and EchoStar customers dishes must be precisely aligned to just the right spot in the southern sky to get the service. A dish misaligned by just a few inches won't catch a signal.

That allows the spectrum to be "reused." For decades, the FCC has intended that the 12 GHz slot be shared between DBS and ground-based systems, likely for narrowly targeted point-to-point microwave traffic. What a husband-and-wife of broadcast engineers realized in the early 1990s is that there is way to use the frequency for video. Carmen and Saleem Tawil determined that the frequencies could be used to essentially replicate the program slate offered by cable TV and DBS services without dramatically interfering with signals bouncing off DirecTV's and EchoStar's satellites hovering over the equator.

"They came up with the very simple but non-obvious realization that all satellite dishes point south, so the spectrum could be used by pointing north," Collier said. Hence: Northpoint, although it works from the east and west as well.

The Tawils approached Katherine "Chula" Reynolds, a member of the family behind King Ranch, the fabled South Texas ranching, oil and agriculture empire. It was she who roped in Collier, who as chairman of Citizens Funds invests only in "socially responsible" companies: no arms manufacturers or tobacco companies.

Collier and Reynolds teamed up to fund the project because they see two primary advantages. First, unlike DBS, Northpoint would be local and could carry all nearby broadcast stations and tailor program lineups to local tastes. Second, unlike cable, the service would be cheap to transmit and cheap to receive.

The low-powered Northpoint would require one small antenna mounted on a tall building or mast. Because buildings, trees and hills would keep many homes from having a direct line of sight to the antenna, Northpoint would need a series of small repeaters serving parts of a city, much like a cellular phone system.

Collier estimates that the gear to cover a relatively flat, 2 million-home market like Dallas, for example, would cost around $10 million. That excludes operating and marketing costs, but, even so, starting up would be far less than the $1.5 billion it would take to overbuild the Dallas market with a new cable system. Collier says it would take that for Northpoint to blanket the entire country.

Certainly, Northpoint won't achieve the 65% penetration that cable systems average, but, with costs that low, it won't have to. Collier says Northpoint can make money with less than 2% of a market.

The receivers would be relatively inexpensive, using largely the same components as those in DirecTV receivers already stocked on the shelves of Circuit City. Collier and Reynolds believe that consumers are conditioned to buy the receivers, though with heavy subsidies, rather than lease them as cable subscribers do. However, a national system will not be cheaper than DBS.

Analysts say the $1.5 billion Collier says it will take to build out nationwide is roughly triple what it would cost to launch two DBS satellites. In addition, Broadwave would likely face the same $500-per-subscriber marketing cost DirecTV and EchoStar face.

The big game here is getting the real estate. Northpoint and its affiliates must persuade the FCC to give them the spectrum—for free.

The idea of sharing the 12 GHz band dates back almost 20 years, when the FCC initially began licensing it out to abortive DBS services. Northpoint has been pitching the commission since 1994; the current proceeding started in 1998.

That's where affiliates help. The plan calls for affiliates to raise 75% of the money for their local operations. Broadwave would contribute 25%. The locals would own 51% of their system's equity. Broadwave gets an outsized stake for piecing the operation together, establishing a national customer service center, packaging cable networks, and advertising nationally

By structuring itself like a franchise operation, Northpoint presents itself not as single company but as a group of small businesses scattered around the country. That lets Northpoint bring to Congress groups of constituents—often active political donors—to push Northpoint's cause. "It gives them a bigger voice in the process than if it were just one little company," said one satellite executive.

All sides in the Northpoint debate have heavily lobbied the FCC. A central issue is whether Northpoint would be harmful to DBS services and a set of planned satellite data providers.

With broadcast TV, interference generates ghosts or snow. With DBS, too much interference of digital signals means TV screens go black; subscribers already suffer outages during heavy rain storms, about 15 hours a year on average.

No one charges that the Northpoint would have the kind of catastrophic effect as, say, two nearby FM radio stations transmitting on the same frequency. But DBS companies charge that it makes their customers' receivers more susceptible to rain fade.

Collier counters that, in live tests of the system around Washington, D.C., and Austin, Texas, DirecTV and EchoStar can't point to a single customer who lost service.

—Bill McConnell contributed
to this article.



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