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File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ************************************************************************* Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 FCC 96-447 In the Matter of ) ) Implementation of Section 309(j) ) of the Communications Act - ) PP Docket No. 93-253 Competitive Bidding ) TENTH REPORT AND ORDER Adopted: November 15, 1996 Released: November 21, 1996 By the Commission: TABLE OF CONTENTS Paragraph I. .Introduction and Executive Summary. . . . . . . . . . . . . . . .1-5 II. Rules Affecting Designated Entities A. Meeting the Constitutional Standards. . . . . . . . . . . . . . . 6-12 B. Special Provisions for Designated Entities 1. Small Business Definition . . . . . . . . . . . . . . . . . 13-16 2. Bidding Credits . . . . . . . . . . . . . . . . . . . . . . 17-18 III. Upfront Payments. . . . . . . . . . . . . . . . . . . . . . . . 19-20 IV. Other Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 V. Procedural Matters and Ordering Clauses . . . . . . . . . . . . 22-26 APPENDIX AFinal Rules APPENDIX BFinal Regulatory Flexibility Analysis APPENDIX CList of Parties Filing Comments and Reply Comments I. Introduction and Executive Summary 1. In this Tenth Report and Order, we modify our competitive bidding rules for the upcoming auction of Interactive Video and Data Service (IVDS) licenses. Specifically, we amend certain provisions concerning the treatment of small businesses, businesses owned by members of minority groups and women, and rural telephone companies (collectively, "designated entities"), in order to address the legal requirements of the Supreme Court's decisions in Adarand Constructors, Inc. v. Pe¤a (Adarand) and United States v. Virginia (VMI). We also increase the upfront payment amounts for bidding on IVDS licenses in order to encourage sincere bidding. By implementing these modifications, we reiterate that the Commission is committed to fulfilling its statutory obligation to ensure that designated entities are afforded opportunities to participate in the provision of spectrum-based services. 2. As we explained in the Sixth Memorandum Opinion and Order and Further Notice of Proposed Rule Making (Further Notice), we were prompted to reexamine our race- and gender-based IVDS auction rules by the Supreme Court's decisions in Adarand and VMI. We initially adopted these race- and gender-based rules in the Fourth Report and Order in this docket in order to fulfill our mandate under Section 309(j) of the Communications Act of 1934, as amended ("Communications Act"), to provide opportunities for businesses owned by members of minority groups and women to participate in the provision of spectrum-based services. After we adopted these rules, however, the Supreme Court held in Adarand that any federal program that makes distinctions on the basis of race must satisfy the strict scrutiny standard of judicial review. More recently, the Supreme Court held in VMI that a state program that makes distinctions on the basis of gender must be supported by an "exceedingly persuasive justification" in order to withstand constitutional scrutiny. Based on our analysis of VMI in conjunction with Adarand, we conclude that any gender-based preference maintained in the IVDS auction rules must meet the VMI intermediate scrutiny standard of judicial review. 3. Based upon our review of the comments submitted in response to the Further Notice, we also conclude that the present record is insufficient to support either our race-based IVDS auction rules under the strict scrutiny standard or our gender-based rules under the "exceedingly persuasive justification" standard of intermediate scrutiny. We have considered the need to award the remaining IVDS licenses expeditiously and to promote the rapid deployment of new services to the public without judicial delays, as well as the statutory objective of disseminating licenses among a wide variety of applicants, including designated entities. Bearing these factors in mind, we conclude that in order to avoid uncertainty and delay that would likely result from legal challenges to the special provisions for minority- and women-owned businesses in our current IVDS rules, it is appropriate to make our IVDS rules race- and gender-neutral. We believe that our action here is consistent with our obligations under Section 309(j)(3). 4. As explained in the Further Notice, our experience in conducting the initial IVDS auction also led us to examine other aspects of our rules and we have determined that we should take certain steps to minimize the possibility of insincere bidding and bidder default. To achieve these goals, we amend Section 95.816(c)(3) of the Commission's Rules to raise the initial upfront payment for participation in the IVDS auction to $9,000 per Metropolitan Statistical Area (MSA) license and $2,500 per license for Rural Service Area (RSA) markets, for the maximum number of licenses on which the applicant wishes to bid. 5. Finally, a number of the comments addressed other issues which are not within the scope of this proceeding. We defer decisions on those matters until they can be addressed in the appropriate context. II. Rules Affecting Designated Entities A. Meeting the Constitutional Standards 6. Background. In the Further Notice, we explained the history of our race-and gender- based IVDS rules, the statutory objectives they were designed to promote, and the impact of the Supreme Court's decisions in Adarand and VMI. As discussed, an intermediate scrutiny standard of review was applied to federal race- and gender-based programs at the time our IVDS rules were adopted. 7. In Adarand, the Supreme Court held that all racial classifications, whether imposed at the federal, state or local government level, must be analyzed by a reviewing court under a strict scrutiny standard of review. This standard requires such classifications to be narrowly tailored to further a compelling governmental interest. In VMI, the Supreme Court reviewed a state program containing gender classification and held it was unconstitutional under an intermediate scrutiny standard of review. This standard requires that "[p]arties who seek to defend gender-based government action must demonstrate an exceedingly persuasive justification for that action." Under this test, the government must show "at least that the [challenged] classification serves important governmental objectives and that the discriminatory means employed are substantially related to the achievement of those objectives. " While the Supreme Court has not directly addressed constitutional challenges to federal gender-based programs since Adarand and VMI, our review of the relevant broad language in VMI indicates that the Court does not differentiate between federal and state official actions in its equal protection analysis. Similarly, the Adarand decision definitively eliminated any distinction between federal and state race-based programs in setting its strict scrutiny standard of judicial review. Therefore, we conclude that any gender-based preference maintained in the IVDS auction rules would need to meet the VMI intermediate scrutiny standard of review. 8. In the Further Notice, we noted that judicial precedent indicates that only a record of discrimination against a particular racial group would support remedial measures designed to benefit that group and that generalized assertions of discriminations are inadequate. We tentatively concluded that, although we have some general evidence of discrimination against certain racial groups, the evidence in the record to date does not appear adequate to satisfy the strict scrutiny standard of review. We requested comment on this tentative conclusion. We also requested comment on a number of questions related to this analysis, including whether compensating for discrimination in lending practices in the communications industry constitutes a compelling government interest. We also asked interested parties to comment on other objectives that could be furthered by our minority-based provisions and whether they could be considered compelling governmental interests, such as increased diversity in ownership and employment in the communications industry or increased industry competition. We asked commenters to submit statistical data, personal accounts, studies, or any other data relevant to the entry of specific racial groups into the field of telecommunications, and whether our race-based provisions are narrowly tailored to serve the interests that commenters assert to be compelling governmental interests. In the Further Notice, we also tentatively concluded that the present record in support of our gender-based IVDS rules may be insufficient to satisfy the intermediate scrutiny standard and asked commenters to submit evidence relating to the entry of women into the field of telecommunications. We asked interested parties to comment on whether there are any other goals that would satisfy the "important government objective" requirement of the intermediate scrutiny standard, such as increased participation of women in the FCC-licensing process for auction spectrum, and whether our gender-based IVDS rules are "substantially related" to the achievement of such objectives. 9. In the Further Notice, we also tentatively concluded that we should not delay the IVDS auction for the amount of time it would take to adduce sufficient evidence to support our race- and gender-based IVDS provisions. We also concluded that proceeding with the IVDS auction with these rules intact would not serve the public interest because it might result in litigation that ultimately would further delay the award of the IVDS licenses and postpone the introduction of new competition to the marketplace. We tentatively concluded that in order to meet our Congressional mandate and expeditiously proceed to auction the remaining IVDS licenses, we should adopt race- and gender-neutral IVDS auction provisions, but continue to maintain the provisions for small businesses which we believe adequately benefit most of the businesses owned by minorities and/or women. 10. Discussion. Upon review of the record before us, we revise our IVDS rules to make them race- and gender-neutral, particularly since most of the commenters support this action. The other commenters failed to provide any specific anecdotal or statistical evidence to supplement our record supporting race-based or gender-based IVDS auction rules. IAC takes the position that, because there is a lack of available equipment for constructing IVDS systems, the Commission is moving too quickly in eliminating minority- and gender-based preferences. IAC proposes that the Commission allow parties additional time to establish a full record upon which to decide whether the race- and gender-based preferences should be eliminated. However, IAC does not present any support for the proposition that a record could be developed in this proceeding if more time was available, nor do any of the other commenters. Accordingly, we conclude that making our IVDS auction rules race- and gender-neutral will serve the public interest by enabling us to expeditiously auction the remaining IVDS licenses. Other commenters also requested that the Commission delay the IVDS auction, but not for the purpose of establishing a record to support race- and gender-based rules. Specifically, IVDS Licensees request that the Commission delay the auction until certain technical, regulatory, and administrative issues are resolved. ITV/IALC request that the auction not be held until resolution of all auction default issues and action has been taken on the petitions for reconsideration of the Commission's IVDS mobility rulemaking. We deny these requests to delay the auction, and note that applicants should factor the obligations and uncertainties attendant to the auction process into their decision to participate and the amount to bid. 11. While we eliminate the race- and gender-based provisions of the IVDS auction rules, we will retain provisions for small businesses, as agreed to by all commenters. We conclude that nothing in the Adarand or VMI decisions calls our small business provisions into question. Moreover, by retaining small business preferences, we believe we will continue to fulfill our mandate under Section 309(j) to provide increased opportunities for minority- and women-owned businesses, because many minority- and women-owned entities are small businesses who therefore will qualify for the same special provisions that would have applied to them under the previous rules. 12. We also have initiated a comprehensive rule making proceeding to gather evidence regarding market barriers to entry faced by minority- and women-owned firms as well as small businesses. If a sufficient record is adduced that will support race- and gender-based provisions that will satisfy judicial scrutiny, we will consider race- and gender-based provisions for future auctions. Toward this end, we will continue to request bidder information on the IVDS short- form filings as to minority and/or women-owned status. In our analysis of the applicant pool and the auction results, we will monitor whether we have accomplished substantial participation by minorities and women through the broad provisions available to small businesses. This will also assist us in preparing our report to Congress on the success of designated entities in auctions. B. Special Provisions for Designated Entities 1. Small Business Definition 13. Background. In our current IVDS rules, we adopted a definition of "small business," that requires an entity to demonstrate that, together with its affiliates, its net worth is not more than $6 million, and its annual profits are not more than $2 million for the previous two years. In the Further Notice, we stated our belief that the gross revenues of the applicant and its affiliates is a more accurate indicator of its size than is its net worth or annual profits, and we proposed to revise the IVDS definition of small business to match the three-year gross revenues test that we have used to define "small business" for other auctions. We further stated that, because we expect that the capital requirements for IVDS will be relatively low (as compared to, for example, broadband PCS), IVDS may attract greater participation by smaller businesses who lack access to capital. The potential in IVDS for greater participation by smaller businesses also justifies special provisions based on the size of the bidding entity, such as a tiered bidding credits. Therefore, we proposed to redefine a "small business" as an entity with average gross revenues not to exceed $15 million for each of the preceding three years. We also proposed to add a second tier of small businesses, referred to as "very small businesses," and defined as entities with average gross revenues of not more than $3 million for each of the preceding three years. We requested comment on these revised definitions. We also requested comment on whether to implement a five percent attribution threshold for purposes of determining an entity's eligibility as a small business. Alternatively, we sought comment on whether we should only count the gross revenues of the controlling principals in the applicant and its affiliates for purposes of determining small business status. Finally, we sought comment on our tentative conclusion to use a multiplier similar to the one adopted in the CMRS Third Report and Order for the spectrum aggregation cap to determine attribution when IVDS licensees are held indirectly through intervening corporate entities. 14. Discussion. Based upon our experience with spectrum auctions, we believe that gross revenues-based definitions are a more accurate indicator of an entity's size than the net worth/annual profit definition which was previously used. Therefore, we will redefine a "small business" as an entity with average gross revenues not exceeding $15 million for each of the preceding three years, and a "very small business" as an entity with average gross revenues not exceeding $3 million for each of the preceding three years. IVDS Licensees and ITV/IALC support small business definitions based upon gross revenues, and only Progressive takes the position that we should retain our previous small business definition. We further note that the creation of a subcategory of very small businesses enables us to tailor our benefits to better meet the needs of the smaller business entities likely to participate in the IVDS auction. As discussed below, we find that our goals can best be served by offering varying bidding credits tailored to the applicant's size. We also believe that the $15 million/$3 million gross revenue financial thresholds are appropriate and are consistent with the carefully-analyzed approach we took in the auction of 900 MHz Specialized Mobile Radio (SMR) licenses. Indeed, in this auction, we expect participation by a comparable group of smaller businesses that participated in the 900 MHz SMR auction. Because we believe these are appropriate thresholds, we decline to adopt the higher thresholds proposed by ITV/IALC. 15. In determining whether an entity qualifies as a small business at either threshold, we will consider the gross revenues of the small business applicant, its affiliates, and certain investors in the applicant. Specifically, we will attribute the gross revenues of all controlling principals in the small business applicant as well as the gross revenues of affiliates of the applicant. At ITV/IALC's request, we clarify that personal net worth is not included in the determination of eligibility for bidding as a small business. In addition, we will use the multiplier adopted in the CMRS Third Report and Order for the spectrum aggregation cap to determine when IVDS licensees are indirectly held through intervening corporate entities. IVDS Licensees supports this proposal. We thus choose not to impose specific equity requirements on the controlling principals that meet our small business definition. However, we will still require that, in order for an applicant to qualify as a small business, qualifying small business principals must maintain "control" of the applicant. The term "control" would include both de jure and de facto control of the applicant. While we are not imposing specific equity requirements on the small business principals, the absence of significant equity could raise questions about whether the applicant qualifies as a bona fide small business. 16. On a related matter, ITV/IALC seeks clarification in its comments that once an entity qualifies as a small business, it would not lose its status through financial growth in subsequent years, and thereby lose its ability to make installment payments as a small business under 47 C.F.R.  95.816(d)(2). We addressed this concern in our broadband PCS rules. There we emphasized our strong interest in seeing small businesses grow and succeed in the wireless marketplace and stated that growth of the licensee's gross revenues and assets, or growth as a result of a licensee acquiring additional licenses, generally would not jeopardize continued eligibility for designated entity preferences. We believe this policy equally should apply to IVDS licensees and, therefore, incorporate this concept into our IVDS rules. 2. Bidding Credits 17. Background. Under our current IVDS rules, businesses owned by members of minority groups or women are granted a 25 percent bidding credit. In the Further Notice, we proposed to eliminate race- and gender-based bidding credits in our IVDS rules and sought comment on whether we should extend a single bidding credit to all small businesses and, if so, the magnitude of that credit. We asked whether we should offer tiered bidding credits for small businesses of different sizes, e.g., a 15 percent bidding credit for very small businesses and a 10 percent bidding credit for small businesses. We tentatively concluded that given the relatively low bids that IVDS garnered in the July 1994 auction, IVDS may attract smaller businesses, thus justifying tiered bidding credits. 18. Discussion. We will maintain bidding credits for small businesses and will adopt a tiered bidding credit approach, as supported by several commenters. We agree with IVDS Licensees that preservation of the bidding credit is consistent with our obligations under Section 309(j) to "promote economic opportunity for a wide variety of applicants, including small businesses and businesses owned by minorities and women." Furthermore, we believe that a tiered approach, which enhances the discounting effect of bidding credits because not all entities receive the same benefit, will encourage smaller businesses to participate in the provision of IVDS services. We also believe that the 15 percent bidding credit for very small businesses and a 10 percent bidding credit for small businesses are appropriate and consistent with the thresholds used in the 900 MHz SMR auctions. As noted above, we expect auction participation by a group of smaller businesses comparable to those that participated in the 900 MHz SMR auction. Moreover, we do not believe a greater bidding credit is justified here as it was for certain highly capital intensive services, like broadband PCS. Therefore, we decline to adopt the higher bidding credits proposed by IVDS Licensees and ITV/IALC. The two tiered approach and the magnitude of the bidding credits we adopt here are reasonable and equitable and meet the concerns of the commenters. These credits are narrowly tailored to the varying abilities of businesses to access capital and also take into account that different small businesses will pursue different strategies. III. Upfront Payments 19. Background. We recognized in the Further Notice that in order to deter insincere, speculative bidding and guard against the substantial number of defaults that occurred after the July 1994 auction, we need to obtain a higher upfront payment from IVDS bidders than the upfront payment currently required by our rules (i.e., $2,500 for every five licenses a bidder desires to win). In response to several ex parte filings from IVDS bidders supporting increased upfront payments, we proposed to increase the initial upfront payment to $9,000 per MSA license and $2,500 per RSA license, for the maximum number of licenses on which the applicant wishes to bid. 20. Discussion. Based upon the record regarding IVDS upfront payment amounts, we adopt the proposed upfront payment amounts and will amend Section 95.816(c)(3) of the Commission's Rules. Specifically, we raise the initial upfront payments for participation in the IVDS auction to $9,000 per MSA license and $2,500 per RSA license, for the maximum number of licenses on which an entity wishes to bid. We believe that this action is consistent with the underlying purpose for upfront payments -- to deter insincere and speculative bidding and to ensure that bidders have the financial capability to build out their systems. We also believe that the revised upfront payments will continue to attract as many qualified bidders, while providing an adequate deterrent against frivolous bidding. Thus, we decline to adjust the upfront payment amounts as proposed by ITV/IALC. IV. Other Issues 21. Several commenters raise issues beyond the scope of the Further Notice. For example, Progressive and IAC request that we revise the length of the IVDS license terms from 5 to 10 years. This proposal requires formal rule making procedures and is beyond the scope of this proceeding. Similarly, ITV/IALC seeks an exception to the cross-ownership rule. Again, this type of relief falls outside the scope of this proceeding. Finally, a number of policy questions were raised in the comments regarding default issues. We note that the Commission will be addressing default issues in a future proceeding regarding the general competitive bidding rules. V. Procedural Matters and Ordering Clauses 22. As required by the Regulatory Flexibility Act of 1980, Pub. L. No. 96-354, 94 Stat. 1164, as amended by the Contract with America Advancement Act of 1996, Pub. L. No. 104-121, 110 Stat. 847, 5 U.S.C.  601 et seq., the Commission has prepared a Final Regulatory Flexibility Analysis of the expected impact of the rule changes in this document on small entities. The Final Regulatory Flexibility Analysis is set forth in Appendix B. 23. Authority for issuance of this Tenth Report and Order is contained in Sections 4(i), 303(r), and 309(j) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 303(r) and 309(j). 24. Accordingly, IT IS ORDERED that, pursuant to the authority of Sections 4(i), 303(r), and 309(j) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 303(r), and 309(j), this Tenth Report and Order is adopted, and Part 95 of the Commission's Rules IS AMENDED as set forth below. 25. IT IS FURTHER ORDERED that the rule changes made herein WILL BECOME EFFECTIVE 30 days after their publication in the Federal Register. 26. For further information concerning this proceeding, contact Howard Griboff or Christina Eads Clearwater at (202) 418-0660 (Auctions Division, Wireless Telecommunications Bureau). FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary APPENDIX A Part 95 of Chapter I of Title 47 of the Code of Federal Regulations is amended as follows: Part 95 Personal Radio Services Section 95.816 is amended by revising paragraphs (c)(3) and (d)(1), adding new paragraph (d)(4), redesignating paragraph (e) as paragraph (e)(1), and revising it, and adding new paragraph (e)(2) to read as follows:  95.816 Competitive bidding proceedings. * * * * * (c) * * * (3) Upfront payments. Each eligible bidder in the IVDS auction will be required to submit an upfront payment of $9,000 per MSA license and $2,500 per RSA license for the maximum number of licenses on which it intends to bid pursuant to  1.2106 of this chapter and procedures specified by Public Notice. * * * * * (d) * * * (1) Bidding credits. (i) A winning bidder that qualifies as a small business (as defined in 95.816(d)(4)(i) of this section) may use a bidding credit of 10 percent to lower the cost of its winning bid. (ii) A winning bidder that qualifies as a very small business (as defined in 95.816(d)(4)(ii) of this section) may use a bidding credit of 15 percent to lower the cost of its winning bid. * * * * * (4) Definitions. (i) Small business. A small business is an entity that, together with its affiliates and persons or entities that hold interests in such entity and their affiliates, has average annual gross revenues that are not more than $15 million for the preceding three years. (ii) Very small business. A very small business is an entity that, together with its affiliates and persons or entities that hold interests in such entity and their affiliates, has average annual gross revenues that are not more than $3 million for the preceding three years. (iii) Gross revenues. Gross revenues shall mean all income received by an entity, whether earned or passive, before any deductions are made for costs of doing business (e.g., cost of goods sold), as evidenced by audited financial statements for the relevant number of most recently completed calendar years, or, if audited financial statements were not prepared on a calendar-year basis, for the most recently completed fiscal years preceding the filing of the applicant's short-form application (Form 175). If an entity was not in existence for all or part of the relevant period, gross revenues shall be evidenced by the audited financial statements of the entity's predecessor-in-interest or, if there is no identifiable predecessor-in-interest, unaudited financial statements certified by the applicant as accurate. When an applicant does not otherwise use audited financial statements, its gross revenues may be certified by its chief financial officer or its equivalent. (iv) Controlling interest shall be attributable. Controlling interest means majority voting equity ownership, any general partnership interest, or any means of actual working control (including negative control) over the operation of the licensee, in whatever manner exercised. (v) Multiplier. Ownership interests that are held indirectly by any party through one or more intervening corporations will be determined by successive multiplication of the ownership percentages for each link in the vertical ownership chain and application of the relevant attribution benchmark to the resulting product, except that if the ownership percentage for an interest in any link in the chain exceeds 50 percent or represents actual control, it shall be treated as if it were a 100 percent interest. (e) Unjust enrichment. (1) Any business owned by minorities and/or women that has obtained a IVDS license in the IVDS auction held in July 1994 through the benefit of tax certificates shall not assign or transfer control of its license within one year of its license grant date. If the assignee or transferee is a business owned by minorities and/or women, this paragraph shall not apply; provided, however, that the assignee or transferee shall not assign or transfer control of the license within one year of the grant date of the assignment or transfer. (2) A licensee's (or other attributable entity's) increased gross revenues due to nonattributable equity investments (i.e., from sources whose gross revenues are not considered under 95.816(d)(4)(iv) of this section), debt financing, revenue from operations or other investments, business development or expanded service shall not be considered to result in the licensee losing eligibility for preferences as a small business or very small business under this section. APPENDIX B: Final Regulatory Flexibility Analysis Tenth Report and Order As required by the Regulatory Flexibility Act of 1980 (RFA), 5 U.S.C.  603, an Initial Regulatory Flexibility Analysis (IRFA) was incorporated in the Sixth Memorandum Opinion and Order and Further Notice of Proposed Rule Making in the FCC's Competitive Bidding docket, PP Docket No. 93-253, FCC 96-330 (rel. September 10, 1996) (Further Notice). The Commission sought written public comments on the expected impact of the rule changes proposed in the Further Notice on small entities, including on the IRFA. The Commission's Final Regulatory Flexibility Analysis (FRFA) in this Tenth Report and Order conforms to the RFA, 5 U.S.C.  604, as amended by the Contract with America Advancement Act of 1996 (CWAAA), Pub. L. No. 104-121, 110 Stat. 847 (1996). A. Need for and Objective of the Rules This Tenth Report and Order adopts rule changes regarding the Commission's auction of Interactive Video and Data Service (IVDS) licenses. The rule changes are appropriate because laws have changed since the rules were originally adopted. The Supreme Court's decisions in Adarand Constructors, Inc. v. Pe¤a, 115 S. Ct. 2097 (1995) and United States v. Virginia, 116 S. Ct. 2264 (1996) raised questions about the level of legal scrutiny that must be met by some of the designated entity provisions in our rules which take race and gender into account. The objective of the rule changes in the Tenth Report and Order primarily is to ensure that the competitive bidding rules comply with the appropriate legal standards by making the rules race and gender-neutral, while at the same time instituting further rule changes that continue to promote participation of small businesses in auctions for licenses to provide spectrum services. Further, a secondary objective of some of the rule changes, such as the small business definition, availability of bidding credits, and increased upfront payments, is to apply the benefit of our experience from the first IVDS auction to subsequent IVDS auctions, and to increase the flexibility and opportunities available to small businesses to participate in the provision of the services. B. Summary of Issues Raised by Public Comment on the Initial Regulatory Flexibility Analysis There were no petitions or comments which solely discussed or addressed the Initial Regulatory Flexibility Analysis. However, a number of commenters raised and discussed issues effecting small businesses in their comments on the Tenth Report and Order. Those comments are addressed and discussed, where applicable, in the detailed sections below. C. Projected Reporting, Recordkeeping and Other Compliance Requirements of the Rules The small businesses which choose to participate in these services will be required to demonstrate that they meet the criteria set forth to qualify as small businesses (or very small businesses), just as was required by the prior rules. The changed rules will include more businesses in the category of small businesses, which will be eligible for designated entity preferences such as bidding credits. Any small business applicant wishing to avail itself of those provisions will need to make the general financial disclosures, as well as applicant and affiliate disclosures, necessary to establish that the small business is in fact small (or very small). The changed rules have eliminated the requirements that small businesses owned by women or minorities demonstrate that their owners are women or minorities. However, we request voluntary reporting of minority and women ownership to comply with our mandate to report our efforts to Congress. Accordingly, there are no additional reporting or recordkeeping requirements being imposed by these rules. D. Description and Estimate of Small Entities Subject to the Rules The Commission is directed by the Communications Act of 1934, 47 U.S.C.  309(j), to make provisions to ensure that smaller businesses, and other designated entities, have an opportunity to participate in the auction process. To fulfill this statutory mandate and comply with the current legal standards, these rule changes are designed to ensure compliance with the new legal standards while promoting participation by small entities, including minorities, women, and rural telephone companies. The small businesses who will be subject to the rules would be those which choose to operate IVDS, a class of wireless communications services with a wide variety of uses. The services will generally be offered to consumers who wish to subscribe to those services. IVDS is a communications-based service subject to regulation as a wireless provider of pay television services under Standard Industrial Classification 4841 (SIC 4841), which covers subscription television services. The U.S. Small Business Administration (SBA) defines small businesses in SIC 4841 as businesses with annual gross revenues of $11 million or less. 13 C.F.R.  121.201. In this Tenth Report and Order, we extend special provisions to small businesses with annual gross revenues of $15 million or less and additional benefits to very small businesses with annual gross revenues of $3 million or less. We observe that this rule change is consistent with our approach in other wireless services, see e.g., the 900 MHz specialized mobile radio service, and is narrowly tailored to address the lower capital requirements for IVDS. SBA approval for the small business definitions is pending for this and other auctionable services. The Commission's estimate of the number of small business entities subject to the rules begins with the Bureau of Census report on businesses listed under SIC 4841, subscription television services. The total number of entities under this category is 1,788. There are 1,463 companies in the 1992 Census Bureau report which are categorized as small businesses providing cable and pay TV services. We know that many of these businesses are cable and television service businesses, rather than IVDS licensees. Therefore, the number of small entities currently in this business which will be subject to the rules will be less than 1,463. The first IVDS auction resulted in 170 entities winning licenses for 594 Metropolitan Statistical Area (MSA) licenses. Of the 594 licenses, 557 were won by entities qualifying as a small business. For that auction, we defined a small business as an entity, together with its affiliates, that has no more than a $6 million net worth and, after federal income taxes (excluding any carry over losses), has no more than $2 million in annual profits each year for the previous two years. In the upcoming IVDS re-auction of approximately 100 licenses in MSA markets and auction of 856 licenses in Rural Service Area (RSA) markets (two licenses in each of 428 markets), while we make our rules race and gender-neutral, we also modify our definition of small business to include a second tier of very small businesses, adopt tiered bidding credits, and continue to include provisions for installment payments in our rules to encourage participation by small and very small businesses. We cannot estimate, however, the number of licenses that will be won by entities qualifying as small or very small businesses under our rules. Given the success of small businesses in past IVDS auctions, and that small businesses comprise over 80 percent of firms in the subscription television services industry, we assume for purposes of this FRFA that all of the licenses may be awarded to small businesses, which would be affected by the rule changes we have made. Some companies may win more than one license, as was the situation in the earlier IVDS auction. Applicants seeking to participate in the auction also will be subject to these rule changes. It is impossible to accurately predict how many small businesses will apply to participate in the auction. In the last IVDS auction, there were 289 qualified applicants. We do not anticipate that there will be significantly more participants in the subsequent IVDS auction. However, because of the lower capital requirements for IVDS in general, there may be a greater number of very small businesses participating. E. Steps Taken to Minimize the Burdens on Small Entities The changes made in the Tenth Report and Order are designed to ensure compliance with the current legal standards applicable to federal programs implemented to benefit minority and women-owned businesses, while minimizing burdens on small businesses and promoting participation of small businesses in spectrum auctions. The extension of a two-tiered definition for small businesses, as well as the provision for tiered bidding credits will assist businesses owned by women and minorities. Based upon experience to date, most of the businesses owned by women and minorities which have participated in the Commission's auctions are small businesses or very small businesses which, in the end, will benefit from these rule changes. As discussed below, the Commission considered and rejected alternatives, such as providing parties additional time to supplement the record or to afford the industry more time to develop technology and equipment, because there is no evidence that, given additional time, the record will be sufficiently supplemented or the industry will develop the technology any faster. While some may argue that the increase in upfront payments may raise some entry barriers, such concerns are outweighed by the need to maintain the integrity of the auction process to ensure sincere bidders and, thus, create increased opportunities for sincere small business bidders. Furthermore, the rule change increasing the upfront payment amounts will ultimately benefit the entities participating in the IVDS auctions, by ensuring that the participants have the financial ability to pay for the licenses for which they bid. F. Significant Alternatives Considered and Rejected Eliminating the Race and Gender-Based Provisions In the Tenth Report and Order, the Commission concludes that the possibility of legal challenges to the rules due to the race and gender-based provisions could cause lengthy delays in issuing licenses in this service and, therefore, revises those provisions in its competitive bidding rules to make them race and gender-neutral. The Commission has not been able to consider other alternatives to the rule changes given that no alternatives were proposed by any of the commenters, and the record was not supplemented during this proceeding with any additional evidence of market entry barriers, anecdotal or statistical evidence or any other factors which directly adversely effect small businesses owned by minorities and/or women. Although one commenter requested that the Commission provide parties with additional time to supplement the record, and another requested that the Commission delay any rule making determinations to afford the industry additional time to develop equipment and technology for implementing IVDS, the Commission rejected these requests, because there is no evidence the record will be sufficiently supplemented or the industry will develop the technology any faster. We note that the Commission is currently gathering evidence, through a Notice of Inquiry proceeding pursuant to the Telecommunications Act of 1996, on barriers to market entry for small businesses, including those owned by women and minorities. The Commission believes that the rule changes discussed below (for example, offering bidding credits based upon an entity's size) will more than adequately benefit small businesses that are owned by minorities or women. Adoption of Two-Tiered Definition for Small Businesses The Tenth Report and Order adopts a two-tiered definition to define small businesses: (1) a small business is a business with average gross revenues for each of the preceding three years that do not exceed $15 million, and (2) a very small business is one which has less than an average of $3 million in gross revenues in each of the last three years. See supra  14. We adopt this two-tiered definition because our ongoing experience with spectrum auctions has affirmed our belief that gross revenues-based definitions are a more accurate indicator of size than a net worth/annual profit definition. Also, this definition is consistent with the carefully- analyzed approach used in other auctionable mobile radio services such as 900 MHz specialized mobile radio services. Although one commenter suggested altering the financial thresholds for determining whether an entity is a "small business" or "very small business" under the proposed definition, we believe that the adopted two-tiered definition is appropriate given the likely participants in this auction and the Commission's desire to maintain consistency between auctions. In determining whether an entity qualifies as a small business under either tier, we will attribute the gross revenues of all controlling principals, as well as the gross revenues of affiliates of the applicant. Also, we will use the multiplier adopted in the CMRS Third Report and Order for the spectrum aggregation cap to determine when IVDS licensees are indirectly held through corporate entities. While we chose not to impose specific equity requirements on the controlling principals of qualifying small businesses, we will still require that qualifying small businesses are actually "controlled" by their principals. See supra  15. Adoption of Tiered Bidding Credits We adopted tiered small business bidding credits for the upcoming IVDS auction as follows: (1) 10 percent bidding credits for small businesses and (2) 15 percent for very small businesses. See supra  18. Although a few commenters proposed higher percentages for each tier of bidding credits offered (for example, 15 percent for small businesses and 25 percent for very small businesses), we decline to adopt their proposals because we do not believe a greater bidding credit is justified here as it was for certain highly capital intensive services, like broadband PCS. We believe the extent, magnitude and range of the bidding credits adopted meet the varying needs of small and very small businesses who will participate in the IVDS auctions. Increase in Upfront Payment Amounts The Tenth Report and Order adopts increased upfront payment amounts of $9,000 per MSA license and $2,500 per RSA license for businesses participating in IVDS auctions. See supra  20. These increased amounts are designed to maintain the integrity of the auction by minimizing the adverse impact of participation by speculators and other frivolous bidders in the IVDS auction. Commenters agree that the previous upfront payment was too low, and no other alternatives were suggested to deter speculative or frivolous bidders who do not meet the commitments they make in bidding in IVDS auctions. Based upon the record regarding IVDS upfront payment values, we believe that the revised upfront payment values are set at appropriate levels and provide an adequate deterrent against frivolous bidding, and therefore, we declined to adopt the approach of one commenter who suggested we modify the multiplier for the MSA payment to an even multiplier of the RSA payment. Moreover, the impact that increased upfront payments may have on designated entities will be offset by the fact that eligible entities may elect to make payments for their licenses via installment payments, which eligibility shall not be jeopardized due to normal projected growth of gross revenues and assets. See supra  16. G. Commission's Outreach Efforts to Learn of and Respond to the Views of Small Entities Pursuant to 5 U.S.C.  609 The Commission sought specific comments regarding the views of small entities with respect to the changes being made through solicitation of comments and reply comments to its Further Notice, and the IRFA that was contained therein. Although there were no comments on the IRFA, there were a number of comments received in connection with the Further Notice as noted herein. Further, the Commission's Office of Communications and Business Opportunities has undertaken additional outreach efforts through newsletters and other mailings to learn of the views of, and respond to, small entities. H. Report to Congress The Commission shall send a copy of this Final Regulatory Flexibility Analysis, along with this Tenth Report and Order, in a report to Congress pursuant to the SBREFA, 5 U.S.C.  801(a)(1)(A). A copy of this Final Regulatory Flexibility Analysis will also be published in the Federal Register. APPENDIX C Comments 1. ITV, Inc. and IVDS Affiliates, LLC (ITV/IALC) 2. Interactive America Corporation, Inc. (IAC) 3. Loli, Inc., Trans Pacific Interactive, Wireless Interactive Return Path, L.L.C., and IVDS On-Line Partnership (collectively, "IVDS Licensees") 4. Progressive Communications, Inc. (Progressive) Reply Comments 1. IAC