For broadcasters to take the FCC’s proposed spectrum auction seriously, they needed hard dollar figures as to their stations’ value. Now that the commission has delivered that, it looks like billions of dollars could be up for grabs and station owners need to carefully calculate a strategy: They can sit it out, they can give up some spectrum and stay in the business by doubling up on channels, they can sell their UHF channels and move to VHF channels or they can just sell it all and head for the beach.
It’s been five years since our reporter Kim McAvoy broke the news that the FCC wanted to shift TV spectrum to wireless broadband by acting as a middleman — buying spectrum from broadcasters and selling it to wireless carriers.
It was a bold and innovative idea that conceded — highly significantly — that broadcasters for all practical purposes owned their TV channels. And it raised all kinds of questions about the long-term prospects for broadcasting and what the over-the-air dimension of the business is really worth.
But the idea was an abstraction for many broadcasters — something to think about, but nothing that could be plugged into a spread sheet so that hard business decisions could be made.
That all changed this week. We’ve got what looks to be billions of dollars on the table.
FCC contractor Greenhill & Co. released a report on Wednesday with estimates of how much TV channels in every market may be worth in the planned incentive auction, the FCC’s spectrum reallocation mechanism. The incentive auction is really two auctions in one. The agency intends to buy spectrum from broadcasters in a reverse auction and then turn around and sell it to wireless broadband carriers in another near simultaneous forward auction.
The Greenhill report has been described as a pitch book since FCC reps will be taking it around to broadcasters in the coming months in the hope that the estimates are big enough to entice them to participate in the voluntary auction.
I’d certainly say they are big enough.
The pitch book figures that the wireless carriers will pay $45 billion to buy 100 MHz of primo TV spectrum in the forward auction. That’s works out to an average of $1.50 per MHz per pop. Pop is wireless talk for person.
After some subtractions — $5 billion for the FirstNet public safety network, $1.75 billion to reimburse broadcasters who have to move to new channels in the wake of the auction and $250 million to cover the costs of the auction itself — $38 billion will remain to be split among participating broadcasters.
Stations in large markets where broadband demand is highest stand to gain the most.
In New York, the Greenhill book says, the median payout will be $410 million with the best-situated stations commanding up to $490 million. In Los Angeles, the medium drops to $340 million, but the max soars to $570 million.
Philadelphia is the third most lucrative market. The median there is $230 million with a max of $400 million.
Big numbers for big markets are what you would expect. What’s really interesting is the enormous auction value being attached to stations in relatively small markets adjacent to the major markets because of daisy-chain effects and the desire of the FCC to offer spectrum buyers clear, interference-free spectrum.
So you have maximum prices like $180 million for Palm Springs, $160 million for Providence, $150 million for Wilkes-Barre/Scranton, $100 million for West Palm Beach and $95 million for Youngstown.
There is something for just about everyone, but the numbers generally shrink as the market size falls. The FCC has nothing for poor Glendive, Mont., DMA 210.
You can see the book here. The table of max and median payments for full power and Class A low-power stations is on pages 30-34.
For station owners, the table is irresistible. It’s a whole new way of evaluating stations without any thought of spot revenue, retransmission consent fees and multiples.
The Big Four O&O and affiliates in most markets won’t be tempted to sell.
Take WNBC New York, for example. According to BIA/Kelsey, it reaped spot revenue of $262 million in 2013. Assuming a 40% margin and nine times cash flow multiple, the station is worth $943 million on the basis of spot sales alone. Add in tens of millions in additional cash flow from retrans and the station’s value bounds way beyond $1 billion.
We noted in our profile this week of DuJuan McCoy that he is buying WEVV, the CBS affiliate in Evansville, Ind., from Nexstar for $18.6 million. The Greenhill book says that the maximum price for spectrum in the market is $16 million and the median price is just $10 million. For him and many others in a similar situation, the incentive option is not an option.
But some Big Four affiliates will be tempted, particularly those in those markets adjacent to large markets. Citadel’s Phil Lombardo bought WLNE Providence in 2011 for $5.8 million and must compete not only with other stations in the market, but with the ABC signal coming from Hearst’s WCVB Boston. To him, Greenhill’s $160 million max estimate must be looking pretty good.
And there are loads of MNT and CW affiliates, true independents, religious stations, foreign-language stations and other broadcasting odds and ends in markets of all sizes that are sitting out there right now praying that the Greenhill estimates are somewhere close to reality.
Major groups might deal some of their duopoly stations. While CBS may have no intention of letting WCBS New York go, it might not be so attached to WLNY, which it bought for $55 million as a companion for WCBS in 2011. Despite its best efforts, I’m not sure the station is worth much more now. A couple hundred million might take it.
The Wall Street Journal quoted Kevin Adell, co-owner of WADL, an independent in Detroit, as saying he is considering selling out in light of the Greenhill estimates ($170 million max, $110 million median). “It might be time to take the chips off the table,” he said, adding that the estimates might be low.
The TV spectrum speculators who have been buying up failed major market stations in anticipation of the auction certainly like what they are seeing in the Greenhill numbers.
And they were talking up the Greenhill estimates in the WSJ and elsewhere this week hoping to encourage widespread participation in the auction. If too few broadcasters show up for the auction, it won’t happen. And the speculators will be stuck will a bunch of lousy stations, some little more than sticks.
“I think it’s a potentially fantastic opportunity for broadcasters,” said Bert Ellis, who has teamed with Larry Patrick and Ted Bartley in one of the speculative spectrum aggregators, NRJ Ventures. “Everybody needs to study it very seriously. They’re reasonable numbers, they’re achievable numbers and buyer demand is there.”
The big question today is, are the Greenhill estimates, in fact, reasonable or even believable?
I don’t know. I am not privy to the business strategies of Verizon, AT&T, Sprint and other wireless carriers that Ellis and a lot of others are counting on to come up with the $45 billion.
If you look closely at the Greenhill book, you don’t come away with a lot of confidence in the $45 billion. It comes not from a team of economists drilling down into the history of spectrum auctions and supply-and-demand projections of the wireless industry, but from the Expanding Opportunities for Broadcasters Coalition, the group representing the spectrum speculators, the very folks who have the most the gain from a successful auction and the most to lose from a failed one.
The EOBC didn’t pull the number out of thin air. It is based on AT&T’s assertion that it is prepared to buy 20 MHz of spectrum for $9 billion. Well, the arithmetic says, if 20 MHz is worth $9 million, then five times the spectrum or 100 MHz is worth $45 billion.
Despite the dubious provenance of the $45 billion, it cannot be dismissed. Mark Fratrik, chief economist for the financial consulting firm BIA/Kelsey, a trusted source, said that the Greenhill estimates are similar to ones that he has been generating for private broadcast clients over the past two years based on his own analysis.
Still, the incentive auction skeptics among broadcasters believe the $45 billion is wildly optimistic based on what they know of the wireless industry and spectrum auctions.
They point to a 2011 study by the Congressional Budget Office that suggests that the auction would yield just 70 cents per MHz/pop, less than half of what the Greenhill book says.
They also point to the speech that FCC Chairman Tom Wheeler gave at the CTIA gathering of wireless carriers in Las Vegas earlier this month, in which he betrayed concern that not enough spectrum bidders would show up to make the incentive auction work. AT&T, Dish, Sprint and T-Mobile have indicated their interest, he said, but the rest of the wireless industry “has been strangely silent.”
Wheeler urged others wireless carriers to speak up. Broadcasters read the trade press, too, he said. “[W]ireless carriers showing interest in the incentive auction is the predicate to broadcasters showing interest.”
Many broadcasters, I’m sure, have already done their homework. By either delegating employees to the task or hiring experts like Fratrik, they have figured out what the incentive auction might generate and what they want to do.
Broadcasters have options. They can sit it out, they can give up some spectrum and stay in the business by doubling up on channels, they can sell their UHF channels and move to VHF channels or they can just sell it all and head for the beach.
The release of the Greenbill book should spur all broadcasters to go through the same process.
And in doing the analysis, I would hope that they would go beyond simply comparing the value of their stations on the spectrum auction block against the current value of their stations on the station trading block. Other factors should be weighed.
It’s hard to predict where technology will take us. Engineers are developing a new broadcasting standard — ATSC 3.0 — that could transform the business by facilitating new services and extending the reach of broadcasting into every smartphone and tablet. But the new standard requires spectrum.
Spectrum is a rare and valuable thing. Once it’s gone, it’s gone.