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File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ************************************************************************* FCC 96- 216 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of) ) Section 257 Proceeding to) Identify and Eliminate)GN Docket No. 96-113 Market Entry Barriers ) for Small Businesses ) NOTICE OF INQUIRY Adopted: May 10, 1996Released:May 21, 1996 Comments Due: July 24, 1996 Reply Comments Due: August 23, 1996 By the Commission: TABLE OF CONTENTS Paragraph I.INTRODUCTION 1 II.BACKGROUND 4 A.Basis for Inquiry 4 B.Small Business Initiatives 7 C.Related Initiatives 18 III.IDENTIFYING MARKET ENTRY BARRIERS 24 A. General Market Entry Barriers24 B.Unique Market Entry Barriers28 IV.ELIMINATING MARKET ENTRY BARRIERS 40 A.Small Businesses Generally 40 B.Minority or Women-Owned Small Businesses43 1.Constitutional Standards 44 2.Possible Incentives56 C.Furthering Section 257(b) Objectives59 V.PROCEDURAL MATTERS AND ORDERING CLAUSE 60 I.INTRODUCTION 1.On February 8, 1996, President Clinton signed the Telecommunications Act of 1996 (1996 Telecommunications Act), the most significant communications legislation since passage of the Communications Act of 1934 (Act). Section 101 of the 1996 Telecommunications Act adds new Section 257 to the Act. Section 257 requires the Commission, within 15 months after enactment, to conduct a proceeding "for the purpose of identifying and eliminating, by regulations pursuant to its authority under this Act . . . market entry barriers for entrepreneurs and other small businesses in the provision and ownership of telecommunications services and information services, or in the provision of parts or services to providers of telecommunications services and information services." In implementing Section 257, the Commission must "promote the policies and purposes of this Act favoring diversity of media voices, vigorous economic competition, technological advancement, and promotion of the public interest, convenience and necessity." Every three years following the completion of the market entry barriers proceeding, the Commission must report to Congress on regulations that have been issued to eliminate barriers and any statutory barriers that the Commission recommends be eliminated. 2.This Notice of Inquiry (Notice or NOI) commences our omnibus Section 257 proceeding. We also will undertake specific initiatives that further the objective of Section 257 to reduce market entry barriers for small businesses. The record developed in connection with these initiatives also will assist us in achieving our 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, as well as in fulfilling our general obligation to serve the public interest. 3.Part II of the Notice explains the basis for this inquiry. Part III requests information regarding the characteristics of small telecommunications businesses and the market entry barriers they encounter, as well as the obstacles that deter individuals from starting small telecommunications businesses. In addition, Part III asks how to define small businesses for the purpose of implementing Section 257. Part III also inquires whether small businesses owned by minorities or women face unique entry barriers. We explore this area because the legislative history of Section 257 suggests that Congress was concerned about the underrepresentation of minority or women-owned small businesses in the telecommunications market and sought to increase competition by diversifying ownership. In addition, Section 309(j) specifically requires that we further opportunities for businesses owned by women and minorities in the provision of spectrum-based services, because a portion of small telecommunications businesses under Section 257 are owned by women and minorities, and because evidence suggests that these entities encounter unique market entry barriers. Part IV of the Notice seeks comment on regulatory incentives for eliminating barriers to entry for small telecommunications businesses. It also seeks information on ways to fulfill our mandate under Section 309(j) to further opportunities for businesses owned by minorities and women consistent with relevant constitutional standards. II.BACKGROUND A.Basis for Inquiry 4. The primary purpose of this inquiry is to fulfill our mandate under Section 257 to identify and eliminate market entry barriers for small businesses in the provision and ownership of telecommunications and information services, and in the provision of parts or services to providers of telecommunications services and information services. We interpret "market entry barriers" to include obstacles that deter individuals from forming small businesses, barriers that impede entry into the telecommunications market by existing small businesses, and obstacles that small telecommunications businesses face in providing service or expanding within the telecommunications industry, e.g., those that inhibit a paging company from expanding into a new geographic area or new service such as cellular. 5.The legislative history of Section 257 essentially parallels the language of the enacted provision. The Conference Report states: "The conference agreement adopts the House provisions with minor modifications as a new Section 257 of the Communications Act." There was no provision in the Senate bill and the House amendment stated: "Section 250 [now Section 257] requires the Commission to adopt rules that identify and eliminate market entry barriers for entrepreneurs and small businesses in the provision and ownership of telecommunications and information services. The Commission must review these rules and report to Congress every three years on how it might prescribe or eliminate rules to promote the purposes of this section." 6.Small businesses play a significant role in the U.S. economy. According to the U.S. Small Business Administration (SBA), in 1992 (the last year for which information is available), small businesses constituted the vast majority of all employers, employed 53% of the private work force, and provided 50% of all receipts. Research also has shown that small firms innovate at a per person rate twice that of large firms, spend more money on research and development (R&D), and more efficiently convert R&D efforts to new products than large firms. Furthermore, small businesses are able to serve narrower niche markets that may not be easily or profitably served by large corporations, especially as large telecommunications expand globally. Despite the role of small businesses in the economy, and the growth of the telecommunications market, small businesses currently constitute only a small portion of telecommunications companies. B.Small Business Initiatives 7.The FCC has undertaken several initiatives to increase opportunities for entry and expansion by small businesses in telecommunications markets. 8.Small Business Advisory Committee. In 1992, the Commission chartered the Small Business Advisory Committee (SBAC) to provide guidance regarding small and minority-owned telecommunications businesses by reviewing the agency's rules and policies, recommending changes designed to promote opportunities for these entities in the telecommunications sector, and reporting to the Commission on its findings. The SBAC also is charged with reviewing and analyzing the implications of proposed FCC actions in various areas and formulating recommendations to facilitate small and minority business opportunities. 9. The SBAC's interim report, submitted on April 21, 1994, concluded that the ready availability of credit to small businesses had generally declined in recent years. Among the factors cited by the SBAC contributing to the lack of credit were unfavorable loan quality perceptions, a bias against small loan amounts, and the inability to collaterize FCC licenses. 10.Spectrum Auction Incentives. Section 257 embodies Congress' intent to facilitate opportunities for small businesses in telecommunications. This intent is also reflected in Section 309(j) of the Act, incorporated in the Omnibus Budget Reconciliation Act of 1993, which authorized the FCC to conduct spectrum auctions. In enacting Section 309(j), Congress found that "unless the Commission is sensitive to the need to maintain opportunities for small businesses, competitive bidding could result in a significant increase in concentration in the telecommunications industries" and that small businesses should "continue to have opportunities to become licensees." To this end, Section 309(j) requires the Commission to establish competitive bidding rules and other provisions to ensure that small businesses, businesses owned by minorities or women, and rural telephone companies ("designated entities") have an opportunity to participate in the growing wireless communications industry. 11.Specifically, Section 309(j)(3)(B) requires that in designing systems of competitive bidding, the Commission "promot[e] economic opportunity and competition . . . by disseminating licenses among a wide variety of applicants, including small businesses . . . and businesses owned by members of minority groups and women." In addition, Section 309(j)(4)(C)(ii) requires that in prescribing area designations and bandwidth assignments, the Commission promote "economic opportunity for a wide variety of applicants, including small businesses . . . and businesses owned by members of minority groups and women." Section 309(j)(4)(D) requires that in prescribing regulations, the Commission "ensure that small businesses . . . and businesses owned by members of minority groups and women are given the opportunity to participate in the provision of spectrum-based services, and, for such purposes, consider the use of tax certificates, bidding preferences, and other procedures." 12.In establishing Section 309(j) competitive bidding rules for small businesses and other entities, the Commission determined that: The record clearly demonstrates that the primary impediment to participation by designated entities is lack of access to capital. This impediment arises for small businesses from the higher costs they face in raising capital and for businesses owned by minorities and women from lending discrimination as well. In this regard, it should be noted that although auctions have many beneficial aspects, they threaten to erect another barrier to participation by small businesses and businesses owned by minorities and women by raising the cost of entry into spectrum- based services. 13.The Commission has taken a flexible approach in establishing size standards for qualifying as small businesses in each spectrum-based service, and in certain instances, has established bidding incentives based on business size. When the Commission issued its first general auction rules under Section 309(j), it adopted the SBA's definition of small business: to qualify an applicant had to show that, together with its affiliates, it had no more than $6 million net worth, and after federal income taxes (excluding any carry over losses) it did not have in excess of $2 million in annual profits for each of the previous two years. The Commission reasoned that in most circumstances the SBA's existing net worth/income size standard would be the appropriate threshold for small businesses to qualify for auction incentives. The Commission recognized, however, that in certain services 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 also were financially capable of constructing and operating systems. To accommodate this situation, therefore, on reconsideration the Commission adopted a more flexible approach, allowing the threshold to be adjusted on a service-by-service basis. 14.For example, the Commission adopted the SBA's $6 million/$2 million definition for the Interactive Video Data Service (IVDS). The Commission adopted a $40 million small business definition for both narrowband and broadband PCS, and the Multipoint Distribution Service (MDS). Under the $40 million threshold, to qualify for the special measures accorded a small business, the applicant -- together with its affiliates (and for PCS its attributable investors as well) -- must not have in excess of $40 million in gross revenues for the three preceding years. For the 900 MHz Specialized Mobile Radio (SMR) Service and the 800 MHz SMR Service, the Commission has adopted a two-tiered approach to the definition of small business: "small" businesses (the applicant, together with attributable investors and affiliates, has average gross revenues for the three preceding years are $15 million or less) and "very small" businesses (the applicant, including attributable investors and affiliates, must have average gross revenues for the three preceding years of $3 million or less). 15.The Commission has designed particular incentives to enhance small business participation in the competitive bidding process for these spectrum-based services. One of these measures is the establishment of "entrepreneurs blocks" in the broadband PCS auctions, in which the Commission limits participants to applicants with $125 million or less in annual gross revenues for the previous two years and total assets of $500 million or less. The Commission reasoned that 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 licensees. 16.Additional incentives to facilitate small business participation in spectrum auctions include reduced upfront payments, bidding credits, installment payment plans with favorable interest rates, and reduced down payments on winning bids. In adopting incentives for designated entities as required by Section 309(j), the Commission also established incentives for businesses owned by minorities and women. We stated that we would decide whether and how to use these incentives on a service-by-service basis. For example, in the regional narrowband PCS auction completed November 8, 1994, a 40% bidding credit was available for minority and women-owned businesses for two of the six licenses in each regional market (five regions). In the broadband PCS proceeding, we initially established various incentives for businesses owned by minorities or women for the entrepreneurs blocks (C and F). After the Supreme Court's decision in Adarand Constructors, Inc. v. Pe¤a, which held that racial classifications are subject to strict scrutiny, however, we revised the designated entity rules to remove race and gender-based incentives in the broadband C block auction. The majority of commenters in this proceeding favored the rule changes to avoid delay and the risk of legal challenges to the auction. We generally extended the pre-Adarand incentives for minority and women-owned small businesses to all small businesses. We found that because many designated entities, including minority and women-owned businesses, would qualify as small businesses and, thus, benefit from the changes, they were consistent with our Section 309(j) mandate. Although the Commission determined that the revisions were necessary under the circumstances, we also recognized that race and gender-based incentives may be sustainable with further development of the record. 17.Telecommunications Development Fund. In Section 707 of the 1996 Telecommunications Act, Congress established the Telecommunications Development Fund (the Fund) to promote access to capital for small businesses in the telecommunications industry, stimulate the development of new technology, and support delivery of universal service. The Fund, a non-profit corporation, is authorized to make loans to, investments in, or other extensions of credit to small businesses, provide financial advice to small businesses, and conduct research. Fund accounts will consist of interest on deposits made to qualify for competitive bidding under Section 309(j) of the Act, funds appropriated to the Commission for advances to the Fund, donations, and repayment of credit extended by the Fund. Section 707 authorizes establishment of a seven-member Board of Directors (selected by the FCC Chairman), consisting of four representatives from the private sector, and one each from the Commission, the SBA, and the Department of the Treasury. An Interim Chairperson has been selected and formation of the Board is underway. C.Related Initiatives 18.The Commission has adopted other polices and rules regarding participation by women and minorities in the telecommunications industry. As described below, these rules generally serve to increase diversity of viewpoints, deter discrimination, and facilitate ownership in communications. Thus, these policies inure to the benefit of small businesses owned by women or minorities, and to individual women or minorities in the telecommunications market. 19.Following the D.C. Circuit decision in TV 9, Inc. v. FCC, the Commission adopted a broadcast licensing policy in which the Commission considers a minority applicant's proposed participation in station operation as one of several factors in comparing applicants for mutually exclusive broadcast licenses. In 1978, the Commission adopted the distress sale program, which permits a broadcast licensee whose license has been designated for a revocation hearing to sell its station to a minority-controlled entity at 75% or less of the station's fair market value; and the tax certificate program, which permitted parties that sell broadcast licenses to minorities to defer capital gains. In 1982, Congress required the Commission to establish incentives, rules and procedures ensuring a "significant preference" for minority-controlled applicants in awarding licensees by lottery. Congress found that "the effects of past inequities stemming from racial and ethnic discrimination have resulted in a severe underrepresentation of minorities in the media of mass communications, as it has adversely affected their participation in other sectors of the economy as well," and stated its intention to "further diversify the ownership of the media of mass communications." 20.Later, in 1985, we adopted multiple ownership rules for broadcast services, which permitted a nonminority owner to exceed the caps on national ownership in the form of noncontrolling interests in minority-controlled stations and permitted minority owners to exceed the limits outright. In the FCC's appropriations legislation for fiscal year 1988, Congress prohibited the Commission from spending any appropriated funds to examine or change its minority ownership policies and Congress has enacted similar appropriations measures in subsequent years. 21.In the 1992 Cable Act, Congress required the FCC to prescribe rules establishing "reasonable limits on the number of cable subscribers a person is authorized to reach through cable systems owned by such person," and in 1993, the Commission adopted horizontal ownership rules for cable television, increasing the ownership allowance for minority-controlled stations. The Commission also adopted channel occupancy rules for cable television, which include an increased allowance for carriage of channels in which the operator has an attributable interest but that are minority-controlled. To promote diversity of program sources and to ensure public access to a wide variety of viewpoints, Congress also permitted cable operators to use leased access channel capacity "for the provision of programming from a qualified minority program source . . . whether or not such source is affiliated with the cable operator;" and the Commission adopted implementing regulations. 22.In 1994, in the Minority/Female Mass Media Ownership NPRM, the Commission proposed initiatives to increase minority and female ownership of mass media facilities by facilitating their access to capital. Specifically, we proposed an incubator program whereby existing mass media entities would be encouraged, through ownership-based incentives, to assist new entrants to the communications industry, including small businesses. We also sought comment on how to modify ownership attribution rules to encourage investment in minority-controlled and women-controlled broadcast properties by deeming noncontrolling interests in such properties non-attributable. The Minority/Female Mass Media Ownership NPRM also proposed seeking investment tax credit legislation, streamlining application standards for qualified Specialized Small Business Investment Companies, and relaxing local multiple ownership limits for minorities and women. In another 1994 Notice of Proposed Rulemaking proposing new attribution rules regarding treatment of the equity interest of a member in a limited liability company or a registered limited liability partnership, the Commission sought comment on whether to provide an exception to the proposal to facilitate minority ownership of broadcast stations. 23.The Commission's equal employment opportunity (EEO) rules also help to promote opportunities for women and minorities. In 1968, we adopted our first minority EEO rules for broadcast services. In 1970, the Commission added women to the coverage of its EEO rules and adopted EEO rules for common carriers. In 1972, we adopted EEO rules for cable, and more recently, for commercial mobile radio services. In 1976, the Supreme Court indirectly endorsed our EEO rules. In the "Cable Communications Policy Act of 1984," Congress prohibited cable entities from discriminating on the basis of race, gender, and other protected member status, and required the Commission to annually review cable systems' EEO programs and certify systems' compliance with the Commission's EEO rules. Congress found that EEO requirements were "particularly important in the mass media area where employment is a critical means of assuring that program service will be responsive to a public consisting of a diverse array of population groups," and that a strong EEO policy is necessary to assure that there are sufficient numbers of minorities and women with professional and management experience who will be able to take advantage of ownership opportunities. Again in 1992, Congress found that minorities and women were not sufficiently represented in managerial positions in broadcast and cable, and that increasing their representation would further the nation's policy favoring diversity in the expression of views in the electronic media. Congress directed the Commission to bolster broadcast EEO enforcement by conducting midterm review of broadcast television stations, endorsed our EEO rule and forms for television licensees by prohibiting the Commission from amending them, and extended its EEO statutory requirements to cover multichannel video programming distributors. III.IDENTIFYING MARKET ENTRY BARRIERS A.General Market Entry Barriers 24.In this section, we first request commenters to provide profile data about small telecommunications businesses, including financing sources and terms, services provided, markets served, geographic areas of operation, and employee workforce. This information will assist us in identifying market entry barriers and designing appropriate measures to eliminate entry barriers. Commenters may submit individualized or aggregated data. We request commenters to provide the following information in as much detail as possible regarding particular services, including but not limited to PCS, cellular, paging, SMR, satellite, radio, television, wired cable, wireless cable, local exchange, long-distance, access, on-line, messaging, and international services, and resale of any such service, as well as information regarding businesses that provide parts or services to providers of telecommunications services and information services: (1) ownership structure, including identity of owner(s) by gender and racial group, as well as percentage of minority or female control; (2)communications service(s) provided; (3)geographic region(s) served; (4)primary markets (e.g., businesses, residences, government); (5) number of employees, job categories (i.e., officials and managers, professionals, technicians, clerical), and employee composition in job categories by race and gender. (6) capital requirements for entry or expansion; (7)funding sources and methods of raising capital; (8) revenue, income and profit levels. 25. To help fulfill our responsibilities under Sections 257 and 309(j), we request comment on the following questions regarding market entry barriers. Comments should be as specific as possible and identify with particularity the types of services and geographic regions covered. (1)What obstacles do small businesses face in accessing capital and credit? (2) Do small businesses obtain capital and credit under terms and conditions less favorable than those provided large businesses? If so, why? (3) What difficulties do small businesses face in their dealings with suppliers, vendors, contractors, or FCC licensees? (4) What obstacles do small businesses face in their abilities to resell, interconnect, or benefit from economies of scale? (5) Do high deposit requirements deter small business entry into resale? (6) Do small businesses have difficulty attracting or retaining clients? (7) Do small businesses have difficulty dealing with trade associations and other private entities? (8) Do small businesses have particular difficulties in obtaining government contracts, licenses, franchises, or other government benefits? Have small businesses faced any such problems regarding FCC policies or rules? (9) Do contracts for a single bidder to serve a large volume and diversity of companies through one contract disadvantage small businesses? (10) Do small businesses encounter difficulties attracting strategic partners? (11) In forming alliances with other entities, are small businesses required to do so under unfavorable terms and conditions for the small business? (12) Are there unique obstacles that small businesses face in entering, providing service, or expanding in the telecommunications field that are not faced by small businesses in other sectors (for example, in the retail or service sectors)? (13) Do small businesses experience difficulties identifying and obtaining access to spectrum? 26.We request comment on how these impediments vary depending on the particular service provided. What particular types of businesses have difficulty getting started, operating, and expanding? Does the cost of capital differ for small broadcast stations versus small wireless providers? Does the cost of capital vary depending on the particular type of wireless (paging, SMR, PCS, etc.) or broadcast (television or radio) service offered? Do any other market entry barriers exist? For what services? Parties should comment on the geographic scope of any identified barrier, i.e., does the barrier exist nationwide, or in particular regions or locales? For any barrier, commenters also should identify whether it is a statutory requirement, government regulation, or external factor, e.g., difficulty obtaining loans. 27.We also request comment on how these difficulties are influenced by size. Are impediments to entry or expansion, or to providing service greater for very small businesses? For example, does the cost of capital increase as the size of a small business decreases? Do very small businesses encounter greater difficulties in dealings with suppliers, vendors, or contractors than larger small businesses? B. Unique Market Entry Barriers 28.In this section, we seek information to help us identify any unique obstacles that small telecommunications businesses owned by women or minorities encounter in forming firms, providing service, or expanding in the telecommunications market. We explore this area because first, the legislative history of Section 257 suggests Congress was concerned about the underrepresentation of minority and women-owned small businesses in the telecommunications market and sought to increase competition by diversifying ownership. Second, Section 309(j) specifically requires that we further opportunities for businesses owned by women and minorities in the provision of spectrum-based services. Third, based on our licensing information and other statistical data, we know that a portion of small communications businesses are owned by women and minorities and there is evidence that these entities encounter unique market barriers. 29.Evidence demonstrates that a principal barrier is difficulty accessing capital because of minority or female status, rather than race or gender-neutral factors, and that this barrier contributes directly to low participation rates. For example, in the 1992 Small Business Act, Congress found that businesses owned by minorities or women have particular difficulties in obtaining capital. In the Women's Business Ownership Act of 1988, Congress found that women as a group are subject to discrimination that adversely affects their ability to raise or secure capital. In 1993, the National Foundation for Women Business Owners found that women-owned firms are 22% more likely to report difficulties with banks than are businesses at large, and that removal of financial barriers would encourage stronger growth among women-owned businesses, resulting in much greater growth throughout the economy. Further, in a 1992 Report to the President and Congress, the National Women's Business Council cited lack of access to capital as the most pervasive barrier to success for women business owners. 30.As to communications businesses specifically, the American Women in Radio and Television, Inc. asserts that "[b]ased on their gender, women today confront significant barriers in raising the amount of capital necessary to seize the ownership opportunity. This lack of access to capital has contributed directly to the low level of female ownership of mass media facilities." The Commission has recognized that "considerable evidence has been presented showing that the primary impediment to minorities seeking to enter the communications industry or to increase their mass media holdings has been lack of access to capital." In April 1995, the National Telecommunications and Information Administration (NTIA) found that "there are real barriers to minority participation in telecommunications, and that minorities often lack access to the types and amount of capital required to form and expand telecommunications businesses." Congressional testimony regarding minority discrimination in telecommunications shows that controlling for education, work experience, age, gender, and other factors, bank loan dollars, per dollar of owner equity investment, are 160% higher for white firms ($1.85) than black firms ($1.16). 31.The relatively low representation of women or minority-owned communications businesses also suggests that these types of businesses encounter unique obstacles in entering the telecommunications industry. According to the U.S. Census Bureau, in 1987 women owned and controlled 1.9% (27) of 1,342 commercial television stations and 3.8% (394) of 10,244 commercial radio stations in the United States. In 1994, minorities owned and controlled 2.7% of the commercial television stations and 2.9% of the commercial radio stations in the United States. According to the Census Bureau, in 1992, Blacks owned 3.5% of the entities characterized generally as communications firms and women owned 31%; and most of these businesses were solely-owned. 32.Finally, the participation level of minority or women-owned businesses in the Commission's spectrum auctions so far suggests that these entities may face unique obstacles. Because auctions will continue and various factors influence participation, we are not able to fully assess participation by women and minorities. Figures preliminarily indicate, however, that participation in auctions without bidding incentives for minorities and women is lower than participation in auctions with incentives. For example, in the broadband PCS auction for A and B blocks, which concluded in March 1995, no minority-owned businesses won a broadband PCS license and only one license (for one of the lower-priced markets) was won by a woman-owned business. In the MDS auction, which concluded on March 28, 1996, 7.7% of the eligible bidders claimed woman-owned status; 8.4% of the eligible bidders claimed minority-owned status. Of the 67 winners, 5.9% indicated they were women-owned; 7.5% indicated they were minority-owned. In the 900 MHz SMR auction, which concluded on April 15, 1996, 7.8% of the eligible bidders claimed woman-owned status and 3.9% claimed minority-owned status. Of the 80 successful bidders, 6.3% indicated they were women- owned; 5% indicated they were minority-owned. Statistics for the PCS C block auction, which ended May 6, 1996, were higher, even though no competitive bidding incentives were available for businesses owned by minorities or women: 13.3% of the eligible bidders claimed woman-owned status, 18.0% claimed minority-owned status; and of the 89 successful bidders, 16.9% indicated they were woman-owned; 28.1% indicated they were minority-owned. 33.By comparison, auctions that offered incentives for women and minority-owned businesses yielded higher participation by those entities (both as bidders and winners). For example, in the July 1994 IVDS auction, 22.5% of the registered bidders claimed status as minority-owned, and 33.2% as women-owned; of the auctioned licenses, 23.6% were awarded to bidders claiming minority-owned status, and 38.2% to bidders claiming women-owned status. In the nationwide narrowband PCS auction, also held in July 1994, of the 29 qualified bidders, 20.1% claimed minority-owned status and 10.3% claimed women-owned status. None of the winners were minority or women-owned businesses. In the Fall 1994 regional narrowband PCS auction, which offered a larger bidding credit than was available in the nationwide narrowband PCS auction, of the 28 qualified bidders, 35.7% claimed minority- owned status, and 28.6 % claimed women-owned status. Of the nine winners, 22.2% claimed minority-owned status, and 33.3% claimed women-owned status. 34.We seek a broad and comprehensive record from which to determine whether the experiences of women and particular minority groups in entering and participating in the telecommunications market warrant adopting more significant gender or race-based incentives for minority- or women-owned small businesses. Parties may submit personal accounts of individual experiences, studies, reports, statistical data, or any other relevant information. 35.Commenters should address whether there are particular barriers to entry and expansion based on a small business owner's race or gender. If so, for which services? Do barriers differ by service, e.g., radio, television, advanced television, DBS, PCS, equipment manufacturing? What specific obstacles do women and minorities encounter in trying to start small communications businesses? Are there problems endemic to small women and minority- owned telecommunications businesses but not to small businesses owned by women and minorities in other industries (e.g., retail, real estate), and if so, why? Are any such difficulties the result of race/gender neutral factors such as economic status, geographic location, level of experience? Are differences in capital requirements determinative? What other factors play a role? Commenters should address to what extent any impediments are unique to small businesses owned by women or minorities, rather than small businesses generally. 36.Discrimination can be a market entry barrier. Parties may submit evidence of past or current discrimination based on race or gender. Judicial findings of discrimination are not required. Evidence of discrimination can be derived from a variety of sources, including academic research studies, adjudications, legislative findings, statistical data, and personal accounts. To the extent possible, evidence should relate to a particular racial, ethnic, or gender group. 37.Women and minority owned businesses may have experienced discrimination or difficulty in obtaining government licenses. These experiences may have impeded the ability of such entities to enter the communications market, and consequently, impeded subsequent opportunities. We seek evidence of discrimination or unfavorable treatment by any governmental or public entity with respect to communications-related licenses, contracts or other benefits. It has been argued to the Commission that as a result of our system of awarding broadcast licenses in the 1940s and 1950s, no minority held a broadcast license until 1956 or won a comparative hearing until 1975 and that special incentives for minority businesses "are needed in order to compensate for a very long history of official actions which deprived minorities of meaningful access to the radiofrequency spectrum." We solicit comment on this particular argument. 38.Race or gender discrimination in employment may impede participation and advancement in the communications industry. Employment provides business knowledge, judgment, technical expertise, and entrepreneurial acumen, and other experience that is valuable in attaining ownership positions. For example, the Commission has found that employment in the broadcast industry is a valuable stepping stone to broadcast ownership. 39.We seek any evidence that employment discrimination in the communications industry has been a barrier to entry in the telecommunications market by small businesses owned by minorities or women. Submissions should be detailed and should explain why the commenter believes the conduct at issue (e.g., failure to hire or promote) was based on race or gender discrimination, rather than the result of a race or gender-neutral factor (e.g., no job vacancy, job applicant not qualified for the position). IV.ELIMINATING MARKET ENTRY BARRIERS A. Small Businesses Generally 40.Section 257 requires that after identifying market entry barriers, we prescribe regulations to eliminate those barriers. In implementing this mandate, first, how should we define small businesses under Section 257? By number of employees, gross revenue, net revenue, assets, or any other factor? Should we adopt a general size standard or specific standards for particular services (e.g., broadcast, PCS)? For example, the Commission's current Section 309(j) definitions are based on gross revenues and assets. Are there other factors the Commission should consider in defining what constitutes a small business? Should the Commission explore minimum capital requirements, debt/equity ratios, cash flow, net worth or other indicia of a business' ability to enter and compete in the marketplace? To formulate a policy using such indicia, the Commission would need specific financial information for small businesses generally, and requests that commenters recommending new approaches indicate the type of information needed by the Commission. 41.Second, we seek comments and proposals regarding ways to eliminate market entry barriers and enhance opportunities for small businesses in telecommunications services, including, e.g., wireline, wireless, mass media, cable, satellite. What types of incentives or requirements would be most effective in eliminating market entry barriers? Commenters may propose new initiatives or suggest changes to existing rules or make any other recommendation. Proposals may address, for example, sale of subscriber lists to independent directory publishers as recognized by Congress in enacting Section 257, or any other area. Commenters should provide data to support their proposals. Because Section 257 states that in prescribing rules to eliminate barriers we must rely on our rulemaking authority under provisions of the Act other than Section 257, we also request that commenters identify specific rulemaking provisions in the Act, e.g., Section 4(i) that would support any such proposals. 42.Our Section 309(j) competitive bidding incentives for small businesses are examples of the types of mechanisms we could adopt in furtherance of our Section 257 mandate. Have bidding credits, installment payments, and reduced upfront payments enhanced opportunities for small business participation? Did the Commission's outreach efforts in providing information to prospective bidders enhance small business participation in each auction? If commenters believe the Commission's existing mechanisms could be modified to enhance opportunities for small businesses, please explain how, or suggest new approaches. In addition, we seek preliminary views on how the Section 309(j) incentives have operated in the five completed auctions employing small business incentives. For example, we are aware of concerns that due to the high level of bidding in the PCS C Block auction successful bidders may find it difficult later on to secure the necessary financial resources to build out their systems, and may ultimately encounter problems in the market against established competitors like incumbent cellular providers and the generally large, well-financed winners of PCS A and B block licenses. How do we balance the desire to do more with the need to ensure that larger businesses do not usurp measures designed to aid small businesses? Do we need to do more to make sure that small businesses have meaningful opportunities to participate in the provision of spectrum-based services? B. Minority or Women-Owned Small Businesses 43.In Part III.B. above, we request data to identify whether small businesses owned by minorities or women experience unique market barriers. In this section, we explore whether there is sufficient evidence of market barriers to justify special incentives to eliminate those barriers. We do so because governmental action that takes race or gender into account is subject to particular constitutional standards: strict scrutiny for race-based incentives; intermediate scrutiny for gender-based incentives. We discuss these standards below and then seek comment on possible incentives that would satisfy the standards while at the same time furthering the mandate of Section 257. 1. Constitutional Standards 44.The Constitution limits the power of government to classify individuals based on race or gender. Thus, federal incentive programs that take race or gender into account must satisfy constitutional standards. Courts reviewing government programs have applied different standards of review and reached various results depending on whether the classification covers race or gender and whether the classification burdens or benefits its subjects. Race-based programs must be narrowly tailored to further a compelling governmental interest. Gender- based programs must be substantially related to serve an important governmental interest. 45.In Adarand Constructors, Inc. v. Pe¤a, the Supreme Court held that the federal government's use of race-based criteria for decisionmaking must satisfy the requirements of strict scrutiny. The Court wrote: [W]e hold today that all racial classifications, imposed by whatever federal, state, or local governmental actor, must be analyzed by a reviewing court under strict scrutiny. In other words, such classifications are constitutional only if they are narrowly tailored measures that further compelling governmental interests. By this decision, the Court rejected its earlier legal analysis in Metro Broadcasting, Inc. v. FCC, which had applied the intermediate scrutiny standard of judicial review to the Commission's broadcasting distress sale and comparative preference policies for minorities. 46.Overruling this aspect of Metro Broadcasting, the Court in Adarand clarified the permissible scope of affirmative action. First, the Court rejected the notion that the characterization of a racial classification as "benign" should entitle it a lower level of judicial review. Second, the Court applied to federal minority preference programs the strict scrutiny standard it had applied to a local contracting set-aside program in City of Richmond v. J.A. Croson Co. Yet in doing so, the Court emphasized its intention not to impinge upon the federal government's ability to actively combat both the practice and the continuing effects of discrimination. A majority of the Court rejected any notion that strict scrutiny review is "strict in theory, but fatal in fact." As Justice O'Connor stated in Adarand, "[t]he unhappy persistence of both the practice and the lingering effects of racial discrimination against minority groups in this country is an unfortunate reality, and government is not disqualified from acting in response to it." In rejecting the Metro Broadcasting standard, the Court nonetheless reasoned that because the Constitution protects individuals rather than groups, any governmental action based upon a racial group classification should be subject to "detailed judicial inquiry." 47.Thus, Adarand established a new strict scrutiny standard for federal minority programs, based upon the two prong analysis of Croson: (1) the governmental interest underlying the affirmative action measure be "compelling;" and (2) the measure adopted must be "narrowly tailored" to serve that interest. Because a federal minority program has not yet been subjected to strict scrutiny pursuant to Adarand, judicial guidance regarding the strict scrutiny standard thus far is limited to Croson and lower court decisions applying strict scrutiny to state and local programs. 48.Under these cases, the most clearly permissible compelling governmental interest is remedying the effects of present or past discrimination. Thus, federal minority incentive programs that serve a remedial interest are likely to satisfy the compelling governmental interest prong. Discrimination can be that committed by the government itself, or by private actors within the government's jurisdiction (such that the government was a "passive participant" or facilitated the perpetuation of a system of exclusion). The government must identify with some precision the discrimination to be redressed, including evidence of discrimination against particular minority groups. General, historical discrimination is an insufficient predicate. "[A]n amorphous claim that there has been past discrimination in a particular industry cannot justify the use of an unyielding racial quota." In addition, the government should have a "strong basis," approaching a "prima facie case of constitutional or statutory violation" of the rights of minorities. Croson permits remedial relief on the basis of "evidence of a pattern of individual discriminatory acts . . . supported by appropriate statistical proof." Post-Croson cases have held that statistical evidence can be probative of discrimination in the remedial setting, and that anecdotal evidence can buttress statistical evidence. 49.Courts generally give more deference to Congressional race-based remedial action than to state action because of Congress' special remedial powers under the Fourteenth Amendment. Thus, it is possible that the Croson standards for remedial action, e.g., the degree of discrimination required to justify remedial action, might be lower where Congressional findings are involved. 50.A government may adopt race or gender based programs for reasons other than to remedy discrimination. Such objectives are nonremedial. For example, in Regents of the University of California v. Bakke, the purpose of the state of California's college admissions program was to diversify the student body. No majority opinion of the Court has addressed the sufficiency of nonremedial objectives. Because Croson addressed the authority of a local government to engage in remedial action, it did not decide the sufficiency of nonremedial objectives as a compelling interest. In Croson, Justice O'Connor stated that affirmative action must be "strictly reserved for the remedial setting." In Justice Stevens' dissent in Adarand, however, he stated that Adarand does not expressly adopt the view that past discrimination is the only valid compelling governmental interest; nor does it prohibit nonremedial objectives. In Bakke, Justice Powell found that a university has a compelling interest in taking the race of applicants into account in its admission process in order to foster greater diversity among the student body to enhance the exchange of ideas on campus, and in Wygant v. Jackson Board of Education, Justice O'Connor expressed approval of that view. 51.The second prong of strict scrutiny analysis requires that the use of any racial classification be "narrowly tailored," to ensure that "the means chosen 'fit' [the] compelling goal so closely that there is little or no possibility that the motive for the classification was illegitimate racial prejudice or stereotype." In Adarand, the Court identified two factors in determining whether the use of a racial classification is narrowly-tailored: (1) whether race-neutral alternatives were considered, and (2) whether the measure is appropriately limited in duration so that it will not continue longer than purposes for which it was adopted. Additional factors, identified in post-Croson cases, are: (3) the flexibility of the program, e.g., whether it contains a waiver provision that may narrow its scope; (4) the manner in which race is used, whether as a determinant, or as one of several factors; (5) whether any numerical target is compared to the relevant number of qualified minorities or to the population of minorities as a whole; (6) the extent of the burden on nonminorities. 52.Since Adarand, the Supreme Court has not ruled on the standard of review for federal gender-based programs, although the issue is before it in a pending case. Prior to Adarand, the Court applied intermediate scrutiny; that standard currently applies. Under the intermediate scrutiny standard, "[t]o withstand constitutional challenge . . . classifications by gender must serve important governmental objectives and must be substantially related to those objectives." 53.In applying intermediate scrutiny to invidious gender-based classifications, the Court has expressed concern that such classifications are, in fact "reflective of 'archaic and overbroad' generalizations about gender" or are "based on 'outdated misconceptions concerning the role of females in the home rather than in the marketplace and world of ideas.'" 54.It is unclear what standard would apply to benign gender classifications. In Adarand, the Court refused to apply a less strict standard to benign race-based classifications than the standard applied to "invidious" race-based classifications. Although Adarand did not address gender, its rejection of a lower standard for benign action in the race context suggests that the same standard applied to invidious gender classifications should apply to benign gender classifications. This conclusion is supported by the Court's analysis in Mississippi University for Woman v. Hogan, which held that a state university's exclusion of men from its nursing program violated the Equal Protection Clause under a test of intermediate scrutiny. Rejecting the state's assertion that the all-female program was a form of affirmative action, the Court explained: In limited circumstances, a gender-based classification favoring one sex can be justified if it intentionally and directly assists members of the sex that is disproportionately burdened. 55.In evaluating the second prong of the intermediate scrutiny test -- whether a gender classification is substantially related to the government's objective -- courts consider several factors, including the correlation between gender and the actual activity the government seeks to regulate and the practical effect of the program. 2. Possible Incentives 56.As described above, a record of discrimination against a particular group is necessary to support remedial measures to remedy such discrimination. We seek comment on whether under the compelling governmental interest prong, there is sufficient evidence of discrimination in the communications industry against any particular minority group to support race-based incentives to eliminate market entry barriers for such group. As discussed above, minority groups include African Americans, Hispanics, American Indians, Alaskan Natives, Asians, and Pacific Islanders. We also ask whether there is sufficient evidence of discrimination against women in telecommunications to justify remedial-based mechanisms to eliminate market entry barriers for women, under either the compelling governmental interest prong (strict scrutiny) or important governmental interest (intermediate scrutiny). Parties may use any data submitted in response to Part III above to support their comments. 57.We also seek comment on any nonremedial objectives that would justify the use of race and gender-based incentives and also serve the Section 257 mandate of decreasing market entry barriers for small telecommunications firms owned by minorities and women. Nonremedial objectives could be in addition to the objective of remedying past discrimination; thus, they may provide a separate basis for governmental action that takes race and gender into account. For example, the Commission has sought to fulfill the nonremedial objective of increasing diversity of voices and viewpoints over the airwaves through various minority and women-based programs. Those programs also decrease market entry barriers by providing new opportunities for women and minorities and by increasing incentives for other firms to do business with those entities. Other nonremedial objectives that could justify taking race or gender into account in Commission programs and also help eliminate market barriers might include favoring diversity of media voices as required by Section 257(b), promoting economic opportunity and competition as encouraged in the legislative history of Section 257 and Section 257(b), and as required by Section 309(j), or promoting the public interest. We seek comment on these nonremedial objectives and request commenters to suggest other nonremedial objectives that would satisfy the governmental interest prong under strict (race) or intermediate (gender) scrutiny. 58.We also request that parties propose incentives to meet these remedial or nonremedial objectives. Commenters may address incentives that the Commission has adopted in the past that eliminated or reduced barriers to market entry, e.g., designated entity rules for Section 309(j) services, as well as propose new incentives. We also seek comment on whether incentives that foster ownership or employment of women or minorities in telecommunications would further these objectives. Parties should explain what objective an incentive is intended to achieve and explain how it is either narrowly tailored (to meet strict scrutiny) or substantially related (to meet intermediate scrutiny) to achieve that objective. Parties should support their proposals with data and should identify specific provisions of the Act that would authorize us to implement those proposals. C. Furthering Section 257(b) Objectives 59.As described in the Introduction to this NOI, in Section 257(b), Congress required that in implementing our market entry barriers initiatives, the Commission must "promote the policies and purposes of this Act favoring diversity of media voices, vigorous economic competition, technological advancement, and promotion of the public interest, convenience, and necessity." We ask for comment on how the Commission should foster these objectives in its efforts to eliminate market barriers for entrepreneurs and small businesses. V.PROCEDURAL MATTERS AND ORDERING CLAUSE 60.This proceeding is exempt from ex parte restraints or disclosure requirements, as provided in Section 1.1204 (a)(4) of our rules. 61.Interested parties must file initial comments on or before July 24, 1996 and reply comments on or before August 23, 1996. To file formally in this proceeding, interested parties must file an original and six copies of all comments. If interested parties want each Commissioner to receive a personal copy of their comments, they must file an original plus ten copies. 62.Interested parties should send comments to: Office of the Secretary, Federal Communications Commission, Washington, D.C. 20554. Parties also should send one copy of any documents filed in this docket with the Commission's copy contractor, International Transcription Services, Room 246, 1919 M Street, N.W., Washington, D.C. 20554. Comments will be available for public inspection during regular business hours in the FCC Reference Center (Room 239) of the Federal Communications Commission, 1919 M Street, N.W., Washington, D.C. 20554. For further information, contact Linda L. Haller in the Office of General Counsel at (202) 418-1720 or S. Jenell Trigg in the Office of Communications Business Opportunities (202) 418-0990. 63.We also ask parties to submit comments and reply comments on diskette in addition to and not as a substitute for the formal filing requirements stated above. Parties submitting diskettes should submit them to S. Jenell Trigg, Office of Communications Business Opportunities, Federal Communications Commission, Suite 644, 1919 M Street, N.W., Washington D.C. 20554. Submissions should be on a 3.5 inch diskette formatted in an IBM compatible form using WordPerfect 5.1 for Windows software. The diskette should be submitted in "read only" mode. The diskette should be accompanied by a cover letter and clearly labelled with the party's name, proceeding, type of pleading (comment or reply comment) and date of submission. 64.Accordingly, IT IS ORDERED that, pursuant to our authority under the Communications Act of 1934, 47 U.S.C.  4(i) and 403, an inquiry IS COMMENCED to identify and eliminate market entry barriers for small businesses in the provision and ownership of telecommunications and information services in the telecommunications market. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary