Alert on interactive TV license investment

Promoting high-tech investments based on information superhighway hype is one of the most common investment frauds among unscrupulous telemarketers. The latest of these scams involves licenses for wireless interactive television, also called Interactive Video and Data Service (IVDS).

Many companies are using telemarketing to sell interests in general partnerships, limited liability companies or other entities that supposedly will obtain valuable IVDS licenses and develop highly profitable wireless interactive television systems. These companies claim they already have the appropriate licenses from the Federal Communications Commission or that they will obtain the licenses at the next auction of FCC frequencies. They also may claim to have the expertise to develop and operate wireless interactive television systems.

The truth is that consumers who invest in IVDS licenses typically pay too much. Most of the funds invested go to the promoters of the investment, not to licensing and development, leaving consumers with insufficient capital to develop the business. In addition, IVDS licenses by themselves have limited interactive television capabilities. Moreover, holders of these licenses face strong competition from large, well financed cable and telephone companies.

In conjunction with the Federal Trade Commission, we would like to explain how interactive television is licensed, how interactive television investment scams work and how consumers can avoid them.

In 1992 the FCC proposed licensing IVDS with plans to issue two licenses in each of 734 markets throughout the country. Most of the licenses for the country’s top 300 markets have been issued already. The first nine were awarded by lottery; the rest were sold to the highest bidders through auction in July 1994. The FCC has not scheduled an auction to award the remaining licenses.

An IVDS license covers a sliver (one-half megahertz) of the radio spectrum. It has one-twelfth the capacity of a standard broadcast television station. Therefore, an IVDS license by itself cannot broadcast a single movie or television program. It will be used primarily as a “return path” for subscriber responses to advertisements, polling questions and game shows that are broadcast on free television, cable or satellite networks. To develop a successful interactive television business, an IVDS licensee likely will have to forge alliances with cable or free television networks, local affiliates, advertisers or other video programming providers.

Unscrupulous promoters use radio advertisements, mail offerings and telemarketing pitches to solicit potential IVDS investors. Some promoters say they have acquired an IVDS license and are selling interests in a general partnership on a limited liability company (LLC) to develop an IVDS business. Others claim they are putting together a partnership on LLC that will bid for and acquire IVDS licenses at the scheduled FCC auction.

The sales materials often are slick, glossy brochures filled with sophisticated charts and colorful graphics and peppered with out-of-context quotes from well-known and respected leaders of high-tech companies. The promoters frequently refer to astounding returns or investments in unrelated telecommunications fields, such as cellular telephone licenses. Fraudulent telemarketers often remark that consumers should invest in these partnerships of LLCs to get in on a ground floor opportunity of a lifetime.

Promoters also tout the “limitless possibilities” of interactive television, including movies-on-demand, different camera angles for sports events and various shopping opportunities. The sales presentations often include projections of significant returns of the investments, with little disclosure of the risks.

In fact, some of these representations are very deceptive. When claims are made about other telecommunications fields (such as cellular) or about “interactive television” in general, they may not apply to IVDS in particular. IVDS is a relatively limited form of interactive television that must affiliate with a video programming provider. It will face significant competition for interactive television users from large, well financed cable and telephone companies, which have far greater capabilities than IVDS, including the ability to broadcast many channels of video programming.

The FCC requires licensees to contract (or “build out”) an IVDS system. Build out and development of a system takes millions of dollars per market. An IVDS investment is affected by the amount of the invested funds that go to promoters of the investment rather than to licensing and build out. The promoter may allocate only a fraction of the proceeds for acquiring licenses from the FCC and for developing an ongoing business. For example, a promoter who is raising $5 million (by selling 1,000 partnership interests at $5,000 apiece), may allot only $2 million for acqusition of the license and build out of the system. With the rest earmarked for “commissions,” “management fees,” “operations,” “promotions” or other miscellaneous items, it is likely that 60 percent of the invested funds will be siphoned off by the promoters and their agents. A profit for an investor in this type of arrangement seems difficult, if not impossible, to realize.

If sufficient funds from the investment are not set aside for the build out and development of a system, the investor may be required to make up the shortfall. This shortfall could be significant, depending on the size of the market. Failure to build out the IVDS system may result in forfeiting the license back to the FCC.

Before you invest in an interactive television partnership, get solid answers to the following questions.

Does the partnership own the license? If so, ask for the FCC records to prove it. You can get IVDS information from the FCC by calling 202-632-4964. The FCC also has the amount of the winning bid. This is important to know because some promoters profit by artificially inflating the cost of the license to investors over the actual auction price.

If the partnership plans to bid for IVDS licenses in an upcoming auction, know that most of the remaining IVDS licenses are in smaller, less populous markets than previously auctioned licenses.

How many partnership interests is the company selling? How much does each interest cost? The answer will tell you how much money is being raised. Find out how the funds will be allocated. Beware of any investment where most of the funds go to “commissions,” “fees,” “promotions” and the like. This will increase the risk of the investment and decrease the return, if any.

Does the company or partnership have the necessary technical or business expertise to develop an IVDS system? Ask the company about its expertise and verify the answers. How much more money, above the initial investment, may be necessary for build out and development of the IVDS system? Investors may be required to increase their contributions later or face the possibility of losing their license.

Are there any complaints against the company or is it under investigation by any state or federal agency? The best place to check is with the State Attorney General’s office, security regulators or Northeast COMBAT.

We have had this problem brought to us by consumers in the Bangor area within the past few months. Always check into this first before investing. Your savings could be at stake.

Consumer Forum is a collaborative effort of the Bangor Daily News and Northeast COMBAT. Send your questions to Consumer Forum, Bangor Daily News, P.O. Box 1329, Bangor 04402-1329. COMBAT is a membership organization with basic dues of $10 a year. For membership information write to the above address. Please enclose a large, stamped, self-addressed envelope.