Broadcasters need to consider carefully the FCC proposal that they give back most of their spectrum in exchange for a share of auction proceeds. My analysis indicates that payments to broadcasters, if any, will come many years from now and are unlikely to be substantial compared to the enterprise value of most leading television stations.
The FCC has created a big stir by proposing that broadcast spectrum be re-purposed for mobile broadband and suggesting that broadcasters might be compensated for vacating the spectrum. Just a few days after Blair Levin floated the idea, the CEA released a study authored by Coleman Bazelon — a beautifully written document that must have been begun long before Levin broached the subject — offering a financial calculus of the value of broadcast spectrum if auctioned for mobile broadband.
Reaction from broadcasters ranges from intrigue to outright rejection.
Well, the toothpaste is out of the tube, so to speak, so broadcasters need to come up with a framework for analyzing the situation and responding to the opportunities and threats presented. The questions broadcasters are asking are the right ones. The answers will be a long time in the making, but this primer offers some starting points. The bottom line is that transition payments, if any, will come many years from now and are unlikely to be substantial compared to the enterprise value of most leading television stations.
This came out of left field. Why, and why now?
The superficial answer is that mobile data demand is growing faster than anyone could have expected. That’s true, but the real impetus is the change in administrations. Almost every item on this FCC’s top-10 list starts with “broadband,” and mobile broadband is a big part of it. The FCC has the backing of the White House on this, so this debate is here to stay.
Is there really a shortage of spectrum for wireless broadband service?
No, in the short and intermediate terms. Yes, in the long term. Demand is growing faster than supply, but a lot of spectrum that has already been allocated, auctioned and licensed is undeveloped or underdeveloped. If the entire television band were vacated tomorrow it would take many years and hundreds of billions of dollars in capital to develop it fully for broadband use. The FCC’s broadband task force is right to look ahead, because no spectrum incumbent is going to go away quietly, but at the moment there is more wireless broadband spectrum available than there is capital to develop it.
That said, wireless spectrum doesn’t have an absolute amount of capacity. Carriers can add more towers, change spectrum re-use patterns, improve filters, update transmission standards and do any number of other things to push more traffic through a fixed amount of spectrum. So even if the swaths of spectrum allocated to wireless broadband remain fixed, there’s a lot more room for growth in existing allocations. More spectrum can lower the cost of development, and ultimately it can provide for more capacity, but spectrum isn’t the only path to capacity growth.
Moreover, while allocations are made nationally, demand is highly correlated to populated areas and major highways. Geographically speaking, in most of the country, there is no shortage of spectrum for wireless services today. Even if stations could “cash in” their spectrum today with minimal hassle, there probably would not be many takers.
Why the television spectrum?
It’s obvious if you look at a spectrum chart. There are two places to find substantial amounts of spectrum that’s good for mobile data: the government and broadcast television. Other spectrum blocks exist, but they are smaller and reclaiming them would amount to trench warfare. As hard as it is to reclaim government and television spectrum, if you succeed, there’s a big payoff.
How much could I get for my spectrum?
That depends on a lot of factors that can’t be predicted. In most cases, both the amount of compensation and the timeframe for getting it are likely to come as big disappointments to any broadcaster that expects a windfall.
The money available to compensate broadcasters will not be higher than the likely proceeds of an auction of the unencumbered spectrum and in all likelihood it will be far less, because the Treasury will take most of the proceeds and the costs of whatever transition plan is devised will consume most of the remainder.
The CEA study floats a benchmark (based on the most recent 700 MHz auction) of $1/MHz/pop, but that spectrum was, in effect, already cleared out by the government-mandated DTV transition. Anybody buying broadcast spectrum is going to have to pay, directly or indirectly, the cost of transitioning existing broadcast stations to other spectrum or some other delivery means, or pay the cost of simply buying out existing broadcast operations and shutting them down.
About two million people live in the Kansas City Metropolitan Statistical Area. Assuming a Kansas City station is credited with covering them all, auction of its 6 MHz channel at $1/MHz/pop would yield $12 million. A lot of this would be spent on whatever transition mechanism is used and the Treasury will keep a substantial portion of the remainder. Perhaps $1 million to $3 million would be available as an “incentive” payment to the station.
Of course, when you’re selling spectrum the underlying franchise value isn’t relevant, so a marginal noncommercial station would have the same spectrum value as the leading network affiliate, even though the business risk of the transaction would be much higher for the more valuable station. Perhaps someone can devise a mechanism for rationalizing payments depending on the value of the station for broadcasting purposes as opposed to the raw spectrum calculation, but that would entail a long, complicated battle that would extend the timeframe for resolution and proportionally reduce the present value of the transaction.
How would a reclamation process work? How long would it take?
There are many different ways to proceed, each with its own set of challenges. They can be split roughly into two different categories, depending on whether we assume that another round of re-packing will occur.
Without belaboring the point, there’s very little auction value in any individual license if the spectrum isn’t re-packed. Viewed from the perspective of someone planning a terrestrial service, the current usage of the TV bands is wholly irrational. The usage today spreads across hundreds of MHz, but each 6 MHz block is only used here and there. Without repacking, a wireless carrier couldn’t aggregate a coherent block of spectrum by purchasing broadcast license. Even if you buy every ch. 26 in the country (very unlikely), you still don’t get full coverage, probably well under half the pops.
Carriers don’t want a hodgepodge of 6 MHz circles since current technology doesn’t allow a single tuner to tune across hundreds of MHz. Something in the range of 20-30 MHz per band is more like it. Carriers won’t put discreet frequency bands into devices just for occasional use. It’s too expensive. They need to know what blocks they have, and they need those blocks everywhere they can get them.
Because the spectrum really needs to be re-packed to yield any licenses useful for auction, it’s unlikely that any quick exit scenarios exist. That means broadcasters are unlikely to see any dislocation payments for many years. The idea on the table seems to be that some or all broadcasters would voluntarily commit to turn in their existing licenses on a date certain. Those licensees would be promised a share of the proceeds of any subsequent auction.
Presumably the FCC would adopt some mechanism to modify the licenses of stations that did not consent to the plan. The FCC would then draw a new broadcast band using a far smaller swath of spectrum and consolidate all television stations in that band, presumably using shared 6 MHz ATSC facilities.
There probably would be little or no room for high definition, mobile or multicast, although if multiple ownership relief came as part of the deal, some broadcasters may be able to consolidate enough shared spectrum to provide differentiated services. There have been suggestions that stations could provide high-definition feeds to cable and satellite distributors, but (as explained below) any spectrum reclamation would jeopardize must-carry rights.
With the band plan final, the FCC would auction the spectrum and set a transition date, and the process would proceed much like the one just completed. Auction winners would likely be responsible for paying transition costs and completing the transition. Either the auction winner or the Treasury would make some sort of dislocation payment to broadcasters.
At present there is no mechanism to guarantee that broadcasters would be paid anything or that any promised payments would actually materialize. So at one level, this would be the digital equivalent of giving Wimpy a hamburger today in exchange for payment on Tuesday.
Is the broadcast spectrum really underutilized? Should it really be reallocated and auctioned for wireless broadband?
The answer is not as simple as some people contend. Although Coleman Bazelon is an excellent economist, he’s also an advocate with a job to do, just like a lawyer or any other consultant. His study for the CEA makes a lot of assumptions, many of them explicitly stated in the text, that may not or simply will not hold true in practice.
But let’s assume we conclude that the broadcast spectrum is underutilized. There’s a big jump from that point to the conclusion that the spectrum should be reclaimed and auctioned for wireless broadband use.
We should first understand why it is underutilized and whether that is a temporary or a permanent condition. It’s true that not many people directly receive television broadcasts today, but the reason is more likely to be archaic technical rules and ownership restrictions that simply don’t allow broadcasters to fit into the way people want to consume video today.
If today’s mobile devices still looked like first-generation cell phones and if it were impossible to roam nationally there wouldn’t be 270 million cell phones and we may well conclude that, by modern standards, the wireless service bands are underutilized.
The FCC imposed the ATSC standard, which is (from a consumer’s perspective) very, very hard to use. By contrast, the FCC does not mandate which standard wireless carriers use. Consumers want and expect their services and devices to be engineered for plug and play and they expect services that can only exist when a return path exists. ATSC does not fit the bill. Moreover, ownership limits prevent anyone from providing a consistent coast-to-coast service or introducing a game-changing service in any local market. If people find broadcast spectrum hard to use, Part 73 of the FCC’s rules is the first place to look for some of the reasons.
Broadcasters are working within the FCC-imposed constraints to improve utilization. Mobile and multicast services are being launched. The digital transition was completed just a few months ago, and over-the-air usage is actually up a bit by many measures. Equally important, television broadcasting does not actually “use” 294 MHz of spectrum nationally. Depending on how one counts, much or even most of the television broadcast band is already open for unlicensed wireless broadband use.
Auctioning reclaimed broadcast spectrum would require also reclaiming vast areas of spectrum now reserved for unlicensed use. The net effect would be to capture spectrum that now provides or soon will provide a wide range of free services to the public — multichannel video, mobile video, and unlicensed wireless services — and sell it to entities that operate subscription services.
It is almost certainly true that the broadcast spectrum can be better used than it is today, and starting from a clean slate, re-allocating some of the band for licensed mobile service makes sense (especially if those carriers were required to provide a return path for remaining broadcast services). It would probably be a healthy thing for the industry if some broadcasters sold out and signed off. But it is logical fallacy to conclude, based on the success of the recent 700 MHz auction, that the great majority of the television broadcast spectrum should be reallocated and auctioned for licensed mobile services.
To make the right policy choices, we need to think about the best way to provide digital services to a mobile population, and free, advertising- or viewer-supported noncommercial services are undoubtedly part of the mix. Projections of exponential growth of wireless broadband demand are based in substantial part on growing demand for unicast video. Most of that demand can be met much more efficiently through broadcast services, especially five or 10 years from now, when any mobile device will have enough memory to store hundreds of hours of video.
People consume services, not bandwidth, and not all bits have the same value. Arguments that proceed from the premise that we have to provide the greatest number of bits-per-Hertz to the exclusion of all other considerations are far too reductionist. Just because the FCC (with the support of several industries) made some poor choices about the digital television standard, it does not follow that video broadcasting services are no longer relevant.
What else do broadcasters need to consider?
Although most people don’t get their TV over the air, many of the legal constructs that help make television stations valuable — including must carry, compulsory copyright and even network non-duplication and syndicated exclusivity — are tied to the spectrum one way or another, and if you take the spectrum away, those legal constructs are more vulnerable to being dismantled by the FCC, Congress or the courts.
Must carry survived 5-4 in the Supreme Court last time around. If the FCC pursues a protracted proceeding in which the basic premise is that free over-the-air broadcasting is much less important to the public than it used to be, it will be interesting to see how the Supreme Court reacts the next time it chooses to review the issue.
Is there anything good about this for broadcasters?
There’s actually a lot to like. The FCC appears to think that broadcasting is undervalued as a service. If this motivates an open debate about how broadcasting can be improved then the FCC and perhaps even Congress may take a fresh look at archaic regulations that are binding broadcasting to a model defined by its overwhelming technical and market success in the last century.
Thomas Jefferson observed, “We might as well require a man to wear still the coat which fitted him when a boy as civilized society to remain ever under the regimen of their barbarous ancestors.” Television broadcasting is not in need of euthanasia, but it may be time to shop for a new coat.
John Hane is counsel in Pillsbury’s communications group. Formerly a broadcaster and in-house counsel for NBC and a major television broadcast group, Hane currently represents clients in complex spectrum allocation and licensing proceedings. He holds three patents, including one addressing DBS spectrum re-use and another disclosing a method of asynchronous broadcast video distribution. He can be reached at 202-663-8116 or [email protected].