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How Phil Falcone scored airwaves for iPhones

Struggling financier Phil Falcone hopes to build a new $8 billion “4G” network  that could speed up wireless service for everyone. Thanks to the big gift of airwaves the FCC just handed him, he might just pull it off.

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Verizon (VZ) and AT&T (T) value their airwave licenses at a stunning $122 billion, so its no wonder they pitched a fit last year when financier Phil Falcone asked the Federal Communications Commission to give his start-up a cut-rate pass into their wireless club. Yet despite those objections, the FCC just did exactly that.

Last week FCC decided that a big chunk of the airwaves that Falcone’s wireless startup had bought for next to nothing—since at the time those airwaves couldn’t legally connect ordinary cell phones—will be usable by iPhones, Droids and Blackberrys after all. In an instant, Falcone’s airwaves became vastly more valuable.

Such airwave alchemy—buying the rights to cheap, non-cellular airwaves and convincing the government to turn them expensive, cellular-capable airwaves—is the key to Falcone’s plans for his new company, Lightsquared.

The FCC first approved Lightsquared’s acquisition of a bunch of cheap airwaves last March. They came cheap because while the airwaves could be used to connect iPhones, regulations had restricted their use to satellite communications. As part of that deal regulators agreed to also let Lightsquared use those same airwaves to run a network of regular cell towers around the U.S. as an “ancillary service,” thus allowing it to support a new type of wireless phone that offers both satellite and cellular connectivity.

Lightsquared commissioned two high-tech satellites that would be able to connect cell phones anywhere in the continental U.S. (Anywhere outdoors, at least. Satellite connections quickly die out in buildings.)  Still, the company assured regulators that the satellites were the main focus and the cellular towers on the ground merely an “ancillary terrestrial component.”

It was regulatory kabuki. Everyone knew that the most valuable use of the airwaves was the ostensibly “ancillary” part—the network of ordinary cell towers that could zip phone calls and data to smartphones. Officially, however, that was just an afterthought.

Then in November, just after the successful launch of its first $600 million satellite, Lightsquared informed the FCC that its plans had “evolved.”

From the beginning, Lightsquared never planned on selling wireless service directly to consumers, a fact which suddenly came in very handy. Lightsquared was still committed to offering integrated satellite-cellular service, the company told regulators, but what if the companies Lightsquared sold wholesale capacity to then turned around and offered only the cellular service to owners of Apple’s (AAPL) iPhone and other smartphones?

Competitors like Verizon Wireless howled, alleging a transparent sham that sought to end run FCC rules. “There is no support for such a proposition, as the Commission has clearly stated that the integrated service requirement is intended to ensure that the public receives the benefit of an integrated [satellite plus cellular] offering,” Verizon fumed in a brief with the FCC.

It did no good. Through guile or good luck, Falcone had managed to time the national political mood just right. Lightsquared has vowed to spend $8 billion on the new network, mostly on putting up of traditional cell towers. (All of Lightsquared’s towers will run “LTE,” the newest generation cellular technology.)  That spending will create 100,000 jobs the company says. Thus Falcone offered the Obama administration three of the things it most wants now: new jobs, increased corporate spending and investment in America’s digital infrastructure.

Also, unlike existing cell carriers, Falcone vowed to run Lightsquared as an “open” wholesale network. That appealed to the network neutrality fans such as FCC chairman Julius Genachowski, who has pushed for wholesale service in the past.

And so it was that the FCC decided last week that ordinary (non-satellite capable) smartphones will be allowed to use Lightsquared’s network after all.

Was that a good decision?  Freeing airwaves to be used by the people that value them most highly—iPhone, Droid and other smartphone users—will produce two things. The first is better wireless service for regular Americans. The second is instant riches for whoever owns the airwaves that get freed up.

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