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But What If FCC’s Incentive Auction Flops?

Because the FCC's planned spectrum incentive auction requires the cooperation of at least some large-market broadcasters, and it’s unclear whether enough will agree, there are market-based alternatives to the auction being talked about quietly in Washington that may be more lucrative for broadcasters. There is also risk that the government could take spectrum without giving broadcasters any compensation.

 

If the FCC’s plan to hold an incentive auction to repurpose broadcast spectrum for smartphones and other wireless devices blows up in the agency’s face in the next couple of years, some industry analysts say broadcasters could get another shot to cash out — through a market-based system that might give the broadcasters a bigger payday.

Among market-based alternatives to the incentive auction that are being talked about quietly in Washington policymaking circles, broadcasters would simply be freed to sell or lease parts or all of their TV channels to wireless companies — a concept that even Tom Wheeler, who President Obama has tapped to be the next FCC chairman, once endorsed.

Another approach, also potentially lucrative for broadcasters, would be a so-called overlay auction, in which wireless carriers buy TV spectrum at government auction. The winners get the rights to use the spectrum, but only if they can first persuade broadcasters using that spectrum to vacate it for money.

Not all the incentive auction alternatives are so accommodating to broadcasters.

The experts warn that the federal government could try to meet wireless demand for TV spectrum by slashing interference protection for broadcasters, forcing themto share TV channels — or even allowing existing broadcast licenses to expire and then reallocating the spectrum for wireless auctions, without cutting broadcasters in for any share of the auction proceeds.

“It could go one of two ways,” says Gary Shapiro, president-CEO of the Consumer Electronics Association, whose members include major corporations that want broadcast spectrum repurposed for wireless, including AT&T, Google and Verizon.

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 “It could be that there’s a marketplace solution, and they [broadcasters] are viewed as owning those licenses and they can do what they want with them,” Shapiro says. “Or it could go to the solution where we recognize that there are so few people relying on an over-the-air signal that the licenses just expire and they’re not renewed.”

Broadcasters thinking they have a shot at a bigger payoff if the incentive auction fails could be disappointed, Shapiro adds. “If that’s their strategy, it’s a tremendously dangerous game.”

Under the congressionally-authorized incentive auction that the FCC hopes to conduct as soon as next year, the agency is trying to persuade enough broadcasters to give up their channels in a “reverse auction” so the FCC can sell the spectrum to wireless carriers in a “forward auction.”

Broadcasters who participate in the auction will get paid for turning in their TV channels — but only if the FCC needs their channels and accepts their bids. The FCC also will reimburse the costs of broadcasters that are forced to move to new channels to clear the spectrum for the wireless auction. The FCC is seeking to clear 120 MHz of spectrum — or 20 TV channels — for wireless in the upper UHF band.

But some industry executives are already speculating about what the agency’s backup plan might be, because the incentive auction requires the cooperation of at least some broadcasters in the nation’s largest markets, and it’s unclear whether enough will agree to slake the wireless industry’s thirst for TV spectrum.

Even the one group of about 40 anonymous broadcasters said to be interested in participating in the incentive auction has been emitting distress signals recently in response to rumors that the some at the FCC want to limit the broadcasters’ potential bonanzas.

“Since this is a voluntary auction, the only way it’s going to work is if the FCC promises very substantial rewards to participating stations,” says Preston Padden, the former Walt Disney Co. lobbyist who heads the broadcaster group, Expanding Opportunities for Broadcasters Coalition.

Existing law authorizes the FCC to hold only one incentive auction. So, if that first effort flops, the agency could go back to Congress and seek legislation clearing the way for a do-over. But some analysts say a do-over is unlikely because there would be little reason to expect a second incentive auction to work any better than the first.

The FCC’s 2010 National Broadband Plan — the same document that recommended the incentive auction — suggested freeing up TV spectrum for wireless by aggressively repacking TV stations after slashing their interference protection and/or forcing stations to share TV channels — without giving the broadcasters any share of the subsequent auctions of the spectrum.

But broadcasters and industry analysts say any FCC Plan B is more likely to use a carrot than a stick to persuade broadcasters to give up their channels — because broadcasters would fight efforts that don’t provide them with significant financial incentives at the FCC, in Congress and in the courts, tying up any reallocation for years.

“I find it hard to believe that if the broadcasters are able to tank this auction that any further solution is going to be successful by steamrolling over them,” says Coleman Bazelon, a principal in the consulting firm Brattle Group and a former spectrum-auction analyst for the Congressional Budget Office. “I think the lesson will be that you are going to need their cooperation in any reform you want to do.”

Rick Kaplan, the NAB’s point man on the incentive auction, tells TVNewsCheck that the proposals that would simply take broadcaster spectrum away are “purely hostile” to broadcasting and non-starters. “Nobody has taken any of those recommendations seriously,” he says.

One of the selling points for an overlay auction, which was also floated in the National Broadband Plan, is that it would not force any broadcaster to sell or move to a new channel, saysThomas Hazlett, a former FCC chief economist.

“The program I am talking about would be entirely voluntary,” says Hazlett, who is now a professor of law and economics at George Mason University. “The broadcasters would have no mandate to move. There’s nothing forcing them off except economics. It’s their own decision.”

Hazlett also says that TV stations “almost certainly” would reap a larger payout from an overlay scheme than they could get from the incentive auction. “There would also be much more cleared spectrum for mobile operators,” Hazlett adds.

“One would hope it [the overlay auction] would be on the short list for Plan B,” says Blair Levin, the former FCC executive who spearheaded the national broadband plan for the Obama administration.

NAB’s Kaplan, however, said an overlay auction is too complicated and would require the coordination of too many players. “There’s so many problems with that approach,” Kaplan says.

Harold Furchtgott-Roth, a former GOP FCC commissioner, is a proponent of simply clearing the way for wireless operators to buy broadcasters out directly — something he says he believes the FCC could authorize immediately without additional legislation.

Furchtgott-Roth, now senior fellow at the Hudson Institute think tank in Washington, said he is “fine-tuning” a market-based spectrum-clearing plan, under which “most broadcasters” would stand to reap a larger financial reward from a direct market-based approach than they would from an incentive auction.

“You can do everything consistent with the new law, and essentially de-zone spectrum and let broadcasters sell it today and let wireless buy it, and then every year or two you would do some repacking to get [additional] broadcast spectrum to the wireless industry,” Furchtgott-Roth says. “This is entirely consistent with the current statute.”

Furchtgott-Roth said he is no fan of the incentive auction. “This is a really goofy way of getting an asset from one private party to another, and candidly, the only reason that we’re going through this is so the government can collect some money,” he says. “The big loser is the American consumer.”

However, he says, it is possible that the FCC could figure out a way to turn the incentive auction into a success. “They’ve got a lot of bright people working on this, and maybe they’ll make it work.”

Wheeler, who could not be reached for comment for this article,  has indicated his support for the direct sales or leasing of broadcast spectrum in a 2009 entry in his Mobile Musings blog, and he will have a major say over any Plan B, if needed, assuming his Senate confirmation.

Wheeler, who is currently a managing director for Core Capital Partners, a venture capital firm, wrote that clearing the way for broadcasters to sell or lease their excess spectrum directly to wireless companies—perhaps even allowing the broadcasters to hold their own auctions — could help meet the wireless industry’s demand for additional spectrum.

The pooling of the broadcast spectrum could create a nationwide footprint. “Delivering national coverage of major population centers would mean the whole is greater than the sum of the parts,” Wheeler continued. “The valuation multiple of such a footprint would justify the major effort this would require.”

“One would hope …  that the FCC and Congress would look kindly on such innovation since the result would be a two-fer that … helps solve the spectrum crunch while maintaining the viability of local television,” Wheeler wrote.

“The beauty of digital television is that in most markets the major broadcast outlets can be squeezed into one or two license allocations,” Wheeler continued. “This would assure continued access for the 10% of homes without cable or satellite connections while making the newly vacated spectrum available for sale.”

At the FCC, agency officials declined comment on potential Plan B scenarios.

“I’m not contemplating that hypothetical, because failure [of the incentive auction] is not an option,” FCC Commissioner Ajit Pai said in an interview.

“We are focusing on the 2014 incentive auction and are determined to make it a success,” added Gary Epstein, chairman of the FCC’s incentive auction task force, in a statement.

NAB’s Kaplan says that if the incentive auction fizzles, any governmental follow-up is likely to focus more on reallocating spectrum to wireless from the federal government than from broadcasters.

“What you are more likely to see in the future is us working together cooperatively [with wireless] as opposed to broadcasters getting out of the business and transferring their spectrum over to wireless companies … so our spectrum is complementary,” Kaplan says.

NAB’s Kaplan adds that the broadcasting association is “supportive” of the incentive auction, as long as auction participation is truly voluntary and the FCC’s auction rules protect broadcasters who choose not to participate.

“There is certainly a great chance that this auction can be a success,” according to Kaplan. “If for whatever reason the FCC chooses a path where it doesn’t end up being successful … we’ll go to Plan B.”


Comments (10)

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Kristi McReynolds says:

May 15, 2013 at 9:06 am

No mention here about the elephant in the room – MUST CARRY/Retransmission Consent.
This appears to be the overwhelming reason to keep these full power DTV Transmitters on the air.
Disband this long standing FCC mandate and more than enough spectrum will appear!

c munc says:

May 15, 2013 at 9:19 am

How about a very simple plan, like, the FCC says that by 20XX, in DMA’s 1-30, UHF channels 50-38 will be auctioned for wireless usage. Any affected full power and Class may before then file for a channel between 2-36, which is not already occupied by a full power or Class A. After the auction happens, and the funds are immediately paid to the government, the qualifying stations are paid to move. Since LPTV are not authorized to participate or be paid to move they will still be stuck paying for their own moves, but after that they would be required to fulfill all of the obligations of the full power and Class A services and would have must-carry or retrans rights, have their spectrum protected, and all classes of services could adopt the new ATSC 3.0 flex-use model as it develops. The stations which want to get paid int he auction would get a % share of the cleared spectrum in that market based on their coverage pops, not on the exact spectrum they vacated and moved from. Same auction plan, it just is structured and sequenced differently, and LPTV would know that after they paid for their own moves they will be consider equal to full powers and Class A’s. A national 50-38 band is cleared, and everyone is happy.

Bobbi Proctor says:

May 15, 2013 at 9:47 am

No, not everyone will be happy. No matter what plan is adopted, the over-the-air viewer will be negatively impacted. There seems to be little regard for those viewing TV via antenna as interference will increase (it has already done so as a result of the recent loss of channels 52-69) as will the quality of the signal if stations are repacked. We are between two markets (one large and the other medium). The ABC in the smaller market also has two sub-channels while the larger market station has two with one being primarily B&W reruns which by the way we watch quite often. The larger market station airs ABC in 1080i and the smaller in 720. Guess which one we watch. If stations are repacked the quality will be reduced. Yes, there are a relatively small number of homes that rely totally on OTA, but they are increasing again and there are many who have satellite or cable pay TV which also use a set(s) that are not hooked to pay TV–some for the better quality OTA signal and some for the convenience of being able to locate a set anywhere. That is especially important during emergencies when cable can be disrupted or the electrical service down. Only a battery powered set with an antenna will work. And, don’t forget, there are some who cannot afford to subscribe to pay TV. For others cable channels are seldom viewed and are a waste of money. The article refers to the “upper UHF channels.” The upper UHF channels (52-83) are long gone already. Anything below channel 50 is not a “lower UHF channel.”

Maria Black says:

May 15, 2013 at 4:04 pm

So, how many homes rely on OTA signal? The only number I’ve heard is according to Dennis Wharton a year or so ago, and it was 46 million viewers. Are we just going to discount them? And how many people get cable and freak out if they don’t have the local stations? The broadcasters have legal rights to their channels: they were given use of them and have money invested in that specific bandwidth. This auction, or whatever they decide, should be done to best accommodate them as well as viewers. The hungry spectrum gluttons should get no say, and Congress also should get no say as they are just in it for a paycheck.

    Ellen Samrock says:

    May 15, 2013 at 6:22 pm

    Sing it out, SalesGrrl! The NAB just produced a study showing how many stations would need to participate in the auction and how many would lose their channel if the FCC attempted to reclaim 120 MHz of spectrum. According to NAB figures; 391 stations in 86 DMAs would have to voluntarily participate in the auction. So far, only a fraction of that number have shown an interest in cashing out. Most full power stations have translators and many of these would have to go off the air. For example, Utah has 1154 translators, over half or 652 would be forced to go dark. And then there are the interference problems that would affect both TV viewers and wireless users should the band plan as outlined by the FCC be adopted. No, the auction and repack is not daunting but doable as the FCC wishfully thinks, it’s a disaster. Thankfully, at least so far, very few stations are taking the incentive auction bait. So the Commission is going to have to consider a plan B, like reducing their goal to 60 MHz, spectrum sharing or broadcast overlay.

Joanne McDonald says:

May 15, 2013 at 4:41 pm

I’m seen to know how to understand the entire spectrum situation. I would take a bet that Daystar, Trinity, Ion and all the other religious and minor broadcast network plus all the diginets multicast networks would round up being regulated to cable only network that would be made available to customers with FTA systems and be made available on all cable systems as well as on both Directv and Dish Network and also be allowed to stream their programming online for internet users at no cost. It would likely force the majority of the stations mainly in all the highest ranked markets and mid size to small size markets in which for example NBC stations on 1080 HDTV share their channel with Telemundo on 480 in widescreen or 1080 HDTV , CBS stations on 1080 HDTV with CW 702 or 1080 in widescreen, FOX stations on 720 sharing with MyNET on 720 in widescreen, Univision and UniMás share a channel together on either 480, 720, or 1080 in widescreen, and ABC would continue to not have to worry about sharing their stations with another network or another station and still on 720 in widescreen, but could likely share it with other network affiliated channels on either 480, 720, or 1080 in widescreen. The stronger PBS stations would end up sharing the channel space with the weaker PBS stations in markets where there are multiple PBS affiliates in the same market. PBS stations would likely be forced to merged and share it’s stations on the same channel frequency and still be able to transmit in 1080 widescreen. The mid-sized and smaller TV markets could end up carrying 2 to 3 subchannel feeds in widescreen SDTV or HDTV on the same channel frequency. There may be a time in which a broadcasting station could be able to transmit 3 HDTV channels feeds in either 720 or 1080 in a single 6 megahertz channel all at the same time within a few years. I would recommend that all the TV stations that are now on the UHF 14-51 band in digital that were on 7, 8, 9, 10, 11, 12, and 13 in analog be forced to move on 7, 8, 9, 10, 11, 12, and 13 in digital and all the TV stations that are now on the UHF 14-51 band in digital that were on 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, and 30 in analog be forced to move back to those channels in digital plus all the TV stations that are now on the VHF 7-13 high band with different RF physical channel numbers on the VHF high band in digital that were on 7, 8, 9, 10, 11, 12, and 13 in analog to be forced to move back to those channels in digital as the best way to not mess up on frequency assignments in the future maybe by around 2020. I like the idea of all the TV stations be allowed to transmit all HDTV and SDTV as well as mobile programming in the MPEG 4 format in the future maybe by around 2020. I like the idea of both IVI TV and FilmOn HDi be allowed to go in business again and be able to transmit all the local stations to the viewers on the net for free without any interference from the government for violating any copyright laws with benefits for online viewers that want to watch their favorite stations programming such as local news and shows even after the spectrum auction and plan becomes very mandated and very hard for TV stations to be able to stay on the air without being able to stream all their programming online to the viewers online. Me wanting IVI TV and FilmOn HDi transmitting the locals online for free to the viewers on the internet would be very beneficial when it comes to very severe weather outbreaks and breaking news that the viewers would want to be very informed the sooner and the better as a public service to all online users and all television stations in the future. I’m afraid that my take of what channels the TV stations ought to be on with the planning of an spectrum auction. BTW, my comment might help the readers understand my concerns with the spectrum auction and channel repacking entirely.

Warren Harmon says:

May 15, 2013 at 7:40 pm

Hello; doesn’t anyone remember what a disaster it is to copy 8VSB on the VHF band with all the base band noise?

Blair Faulstich says:

May 16, 2013 at 1:22 pm

What the FCC and CEA are afraid of is the increasing viewership of OTA TV. If OTT continues to erode satellite and cable numbers, OTA will benefit greatly, which is why they are pushing as fast as they can to pull off the auction in 2014. Any delay and if the planned auction as much as “hiccups” then all bets are off. Not to mention the obvious lawsuits that will ensue when all broadcasters wake up and stridently call for a spectrum inventory. AT&T bought a 12MHz paired band from Aloha Partners a couple of years ago, as well as the defunct MediaFlo spectrum; in addition Verizon is sitting on a large swath of spectrum from the CableCo purchase. All of these considerations will culminate in a powder keg, unless cooler heads prevail and the FCC actually takes a different approach. The different approach would be to include LPTV in the auction. This could be through participation in the auction or in buying out LPTV operators. The nonsensical talk of “free” broadcast spectrum needs to be shelved; what LPTV operators would receive would be compensation for “loss of business opportunity”. Bring LPTV into a spectrum auction dialogue and the odds of a successful auction increase exponentially…’jus sayin’.

Rick Soltesz says:

May 18, 2013 at 12:34 am

A good portion of this public debate is just broadcasters posturing for a stronger negotiating position with the FCC. Of course they’re going to piss and moan about how the incentive auctions could screw them. If they didn’t, they wouldn’t be fulfilling their fiduciary duty to their shareholders. But that doesn’t mean it’s not fundamentally BS. I’d love to know how many of the supposedly independent analysts cited in this article aren’t sucking at some broadcaster’s tit.

Blair Faulstich says:

May 18, 2013 at 12:37 pm

There may be a few analysts sucking at some broadcaster’s teat, but the wireless industry has 10-to-1 odds against any broadcaster when it comes to their own “tool” analysts and paid lobbyists. Regardless of posturing, all the wireless carriers want is to control as much spectrum as they can, deploy when they choose and continue to charge $100 for a product that should be $20.


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