Did Morgan OBrien and Cyren Call Kill Frontline?

I’m getting a number of folks from different walks of life coming forward with the same story: Morgan O’Brien was the direct cause of Frontline’s investors pulling out.

Of course, there is no way I can actually confirm this on the record because the people in the room either can’t talk about it (due to the anticollusion rules) or won’t. Nevertheless, having confirmed this with sources I find reliable and who could not have coordinated with each other, I feel I need to come forward here and put this on the table. D Block and the public safety partnership are far too important to end up falling victim to the combination of insider baseball, manipulation and greed that appears at play here.

I have absolutely not talked to anyone at the FCC about this. No one at the FCC can legally respond to any of this, and I would not ask them to do so. Similarly, in my discussions, I have been at pains to avoid any conflict with the anticollusion rules. Nevertheless, the sources I have are, I believe, reliable, and I have therefore made a decision to go forward with this story. I must also add that because I am on sabbatical, I have not had any discussions about this with my employer, Media Access Project, or with anyone at Media Access Project while developing this story.

Details below . . . .

To review. Back in 2006, Morgan O’Brien (who made billions from founding NexTel) founded a new venture called Cyren Call. Cyren Call proposed a public/private partnership between public safety and a private operator similar in many ways to what the FCC ultimately adopted. But Cyren Call had initially proposed taking 30 MHz from the spectrum designated for auction and giving it to the “Public Safety Spectrum Trust” (PSST) for free — and in addition to the spectrum already allocated for public safety. This plan was roundly criticized by industry folks like Verizon (who wanted to see as much spectrum auctioned as possible) and others like yr hmbl obdn’t (who dislike giveaways of public assets to private companies in exchange for a few crumbs of public service that eventually get whittled away to nothing).

The Cyren Call proposal got a chilly reception in Congress (which needed to pass a statute to give away more spectrum). But it did get the FCC to start a proceeding on creating one national PSST licensee for the 12 MHz assigned to public saftey and not already otherwise allocated. That’s what prompted Frontline to jump in with it’s proposal, offering to create the public/private partnership via the auction rather than by a new allocation, which ultimately evolved into the existing D Block.

Needless to say, Cyren Call and Frontline took to each other like the fabled cats of Kilkenny. Cyren Call and Frontline slugged it out for awhile, but when it became clear that no support existed for taking spectrum away from the auction, Cyren Call began to explore other options. Increasingly during the spring and summer of 2007, Cyren Call worked to position itself as the indispensable agent and go-between for the public safety community and the eventual winner of the D Block (or “E Block” as it was called at the time). Cyren Call also began to align itself with the major carriers to oppose wholesale open access and other aspects of the Frontline proposal opposed by Cyren Call’s former opponents Verizon, AT&T and CTIA (the cellular trade association).

Indeed, as the FCC got closer to a decision, Cyren Call appeared to have reconciled itself both to its new role as agent/adviser, and as go-to-guy for those wanting to do business with the public safety community in the D Block public/private partnership. After the FCC vote on the final rules, O’Brien “aplaud[ed] the FCC leadership” and gave every indication of being reconciled to Cyren Call’s new role. As expected, when the PSST became official, its board of directors swiftly named Cyren Call its adviser.

That started to ring some serious alarm bells on Capital Hill. When the FCC gave PSST the official nod to hold the license for the public safety community, Rep. Henry Waxman wrote Kevin Martin to express concerns about OBrien’s role. Waxman’s letter worried about the extent of O’Brien’s influence and questioned whether the public safety community — acting through a board of volunteers — could effectively supervise Cyren Call. “The relationship between the PSST and these advisers raises questions about the role for-profit entities might have in developing the terms and conditions of the Network Sharing Agreement and influencing decisions about the design, construction, and operation of the public safety communications network,” Waxman wrote.

Cyren Call declined to respond because of the anticollusion rules. Ultimately, the PSST responded in a general way that it had used an open process and had selected Cyren Call from a pool of ten applicants. In addition, the short time given PSST to get things ready for the auction meant it needed to make a decision quickly. But this explanation has not calmed concerns on the Hill. “The way the Cyren Call talking points and public safety talking points meshed together, the way this is shaping up, is very disturbing” a Hill source told me on condition of anonymity. “No one’s been happy with Morgan O’Brien’s role in this.” The same source also said that Cyren Call’s relationship with the major carriers — particularly Veizon — raised fears. “Even when he [O’Brien] was up here fighting for his plan, some of us wondered if he wasn’t just hoping to go far enough for Verizon to buy him out,” the source said. And as fellow Wetmachiner Gregory Rose pointed out in his masterful analysis of the auction strategies, the information packet for D Block bidders distributed by PSST on the basis of Cyren Calls advice lines up very nicely with the existing national carrier networks.

All of which, on its own, means squat. Of course one expects a national public safety network to resemble a large carrier network. It is a large carrier network, built to far greater levels of reliability than a standard commercial network. No, none of this meant anything until I started getting contacts over the last few days.

Role In Frontline Collapse

My first anonymous source had some fairly explicit information. Frontline’s investors had asked O’Brien for some kind of estimate of how much they expected to receive in compensation for use of the PSST spectrum (remember, the winner of the D block, in additional to building and maintaining the network, pays the PSST for any use of the public safety spectrum). O’Brien told them it would come to $50 million/yr for ten years (the life of the license), for a total of $500 million in operating costs over and above the cost of the license, the cost of the build out, and the cost maintaining the network.

O’Brien’s conduct apparently made the Frontline backers extremely worried that even if they won the license, they could never expect to negotiate a deal. Under the terms of the FCC’s service rules, if the PSST and the D Block winner cannot reach agreement, then the FCC gets to decide and can impose whatever remedy it deems necessary — including canceling the D Block license or requiring the D Block licensee to abide by whatever obligations the FCC deems necessary to ensure that a suitable public safety network gets built. If the D Block licensee tries to surrender the license and back away, or if the FCC cancels the license, the FCC will treat that as a forfeiture and and require the D Block licensee to pay the forfeiture penalty in accordance with 47 CFR 1.2104(g). (This is in Par. 508 of the FCC’s Order.) The forfeiture amount is the difference between the bid the D Block licensee made and the next highest bid. So if Frontline won D Block by bidding $1.3 billion, and the next highest bid was only $1 billion, Frontline would pay $300 million as a penalty for refusing to pay whatever Cyren Call “advised” PSST was reasonable — if the FCC sided with the PSST and canceled the license.

My source told me that level of potential exposure proved too much for Frontline’s backers, particularly in the face of O’Brien’s purported demands. My source also said that Frontline asked Martin for reassurance that the FCC would not place the D Block licensee in a position of such exposure and warned that this would be a deal breaker. Martin (properly in my opinion) told Frontline that the FCC was not going to change the Order language at this late date and they would just have to trust that the FCC would operate in a reasonable fashion but — as the FCC had made clear in the Order — it would always see its role as promoting the development of a national interoperable public safety network. Faced with too many factors it couldn’t control, with an exposure risk impossible to estimate, and what backers perceived as either O’Brien’s hostility to Frontline or a ridiculous over-estimation of what the D Block winner could pay, Frontline’s backers decided to fold rather than take the risk.

I then did some checking. My Hill source could not confirm details, but said that Frontline “couldn’t make it work” because of O’Brien’s demands and that the Frontline backers were “scared off by the handcuffs on D Block.” Another source close to the matter confirmed that meetings had taken place between Frontline and O’Brien and that the Frontline people had come from these meetings convinced that they could never make an agreement with O’Brien.

Did O’Brien Kill Frontline? And If So, Why?

Assuming the validity of my sources (which I confess is easier for me than for people reading this), it would seem that O’Brien, by accident or design, was the straw that broke Frontline’s backers backs. But if so, why? Sure, O’Brien was probably sore at Frontline for helping kill Cyren Call’s original plan. But the world of business and politics is filled with people trying to destroy each other who then turn around and do business to their mutual advantage. It seems extremely unlikely that O’Brien would try to destroy Frontline out of spite.

It’s also possible that O’Brien simply took an aggressive opening position and the Frontline backers misconstrued it or lost their betting courage. With no way to talk to other potential bidders or possible intermediaries without violating the non-disclosure rules, and with Frontline’s financial backers already frustrated by the uncertainties of federal regulatory fights and the increasing risk in the financial markets, Frontline’s backers may have misread the situation and folded too soon.

But it is impossible to ignore the possibility that, as Waxman feared, Cyren Call is influencing PSST in ways contrary to the public interest. In particular, the possibility that Cyren Call may be looking to see a major carrier and ONLY a major carrier win D Block (either in the belief that a major carrier would be the best fit or for more nefarious reasons) raises a good deal of concern.

I don’t know if these concerns prompted Rep. Jane Harmon (D-CA), Chair of the House Homeland Security Subcommittee on Intelligence, Information Sharing, and Intelligence Risk Assessment, to write to Martin warning that “[a]ny mid-course correction could be perceived as a ‘sweetheart deal’ favoring a small number of companies” and asking Martin ”not to amend any of the underlying rules, modify the terms of the partnership, or indicate any change to the FCC’s intent to vigorously oversee it.” Harmon wrote separately to Rep. Ed Markey (D-MA) and Rep. Cliff Stearns (R-FL), Chair and Ranking Member of the House Commerce Subcommittee on Telecommunications, calling on them to “not let the FCC undertake wholesale policy changes without Congressional input and oversight.” (You can see text of both letters here.)

Harmon is absolutely right (as I wrote previously) that the FCC must avoid any panic moves to try to lure bidders and Congress should remain engaged in the process ready to crack the whip if the FCC veers off course. But the need for Congressional oversight of the D Block public/private partnership will not end with the conclusion of the auction — even if someone does win and pays the reserve price or better. Once the anticollusion rules lift, Congress should investigate whether O’Brien and Cyren Call did push Frontline over the edge, and if so why. But more importantly, Congress must maintain its vigilance and conduct regular oversight as the D Block partnership evolves. The FCC — both because it is itself a participant in the process and because of the current level of mistrust for the agency — cannot conduct this oversight alone. Only a long-term commitment by Congress to make sure that all parties play fairly — and through the holding of regular public hearings to let the rest of us know what goes on behind the closed doors of the D Block winner, PSST, and the ever present O’Brien, can we hope to ensure a process that gives the American people what we deserve. Through the donation of the public airwaves to PSST and the public interest obligations imposed on D Block, we have collectively invested billions of dollars to build a network that will help our police, EMTs, fire fighters, and other public safety workers do their job of protecting and rescuing us in our time of need. We owe it to them, and we owe it to ourselves, to see this job done right. And given what my sources have told me, we appear to be off to a rather shaky start.

Stay tuned . . . .

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4 Comments

  1. John says:

    Wow, some story.

    Hope it gets noted by the right parties. Congressman Waxman, are you listening? Representative Harmon, are you hep?

    Harold, this is some fine citizen journalism. Keep it up.

  2. Anonymous says:

    Cyren Call is planning to be an MVNO (Mobile Virtual Network Operator) for the PSST. Under this model, Cyren Call assumes the roles of an out-sourced sales force, provisioning and billing system, and 24/7 call center operation. These are functions that an operator like Frontline would not have to build, develop and maintain. Nationwide broadband networks today charge $60-70 per month for unlimited data. A portion of that revenue is absorbed by the cost of subscriber acquisition (sales commissions), customer care and billing. If you assume the public safety broadband network captures only a third of the 1.5M first responders, there would be about 500K subscribers. The $50M per year works out to be only $8.33 per month per subscriber which would be a variable expense. If Frontline were to build these capabilities internally, it may cost a little less per year due to scale and synergies, but it would be a fixed expense and much riskier. While I believe being forced to work with an MVNO is scary to an operator as they would own the customer, there are many other things to scare off investors besides Cyren Call: the cost of the public safety spectrum lease, the 99.3% coverage requirements, the cost of hardening the network, and the financial penalties for failing to negotiate the network sharing agreement with the PSST, to name only a few.

  3. Anonymous 1 says:

    When it comes to Mr. O’Brien, nothing would surprise me.

  4. SAS says:

    Looks like Morgan O’Brien is working to ensure the D block goes to the big boys without the public service requirement…if minimum is not met rules/requirements will be changed by FCC. Then look for Mr. O’Brien to save the day for PSST and Sprint by purchasing the IDEN Network and its remaining 900MHz spectrum for Public Safety/Homeland Security. We suspect this was the original plan years ago, Sprint could not execute fast enough with the 800 rebanding so a whole lot of dancing has been going on…and here we are.

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