As Auction Nears, Ch. Sharing Interest Grows

Concerned that too many noncommercial TV stations might be tempted sell their spectrum in the FCC’s incentive auction next year, the Association of Public Television Stations drafted, and last December made generally available, a model contract for channel sharing.

Channel sharing offers an alternative for broadcasters that would like to cash in on the auction, but continue broadcasting. It’s also an opportunity for other broadcasters looking to generate extra revenue by leasing excess spectrum.

In essence, it means that a station can sell its spectrum and then lease excess spectrum from another to stay in the game, albeit with limitations on what it can do.

Call it having your cake and eating it, too.

“It’s a way to put everyone on the right path to keep the public broadcasting mission going and yet participate in the auction,” says Jessica Rosenthal, a partner at Wiley Rein in Washington, who worked with APTS in drafting the contract.

“There are a lot of positives,” adds Lonna Thompson, executive vice president, COO and general counsel of the Association of Public Television Stations.

Stations owned by a university, for example, “may think [they] could put this station’s 6 MHz in the auction and use that money to build a new science building,” she says. “But we don’t want our stations to go dark, so we’ve been encouraging them to look at channel sharing. We’ve been working to get our stations to work with their boards and help them understand they can both enter the auction and keep their license.”

The flip side: “It’s not just a breeze to find a channel sharing partner.”

Today, the only widely known channel sharing deal is between two noncommercial stations in Los Angeles, KCET and KLCS. They inked a memorandum of understanding last summer — before APTS began circulating its model contract.

Under their agreement, KCET will be the host; KLCS, the tenant. Roger Knipp, chief operator and broadcast engineer at KLCS, says the deal calls for a dynamic allocation of bandwidth, though it’s intended to average out at 50-50.

“The way we look at it is, if you dynamically share it, you can have a larger piece of the pie,” he says.

The deal works for both parties, he says. KLCS’s transmitter, already located in KCET’s transmitter building, is bigger, and KCET has been running on reduced power. Now, Knipp says, “We’ll [both] be transmitter rich. That’s why it made the decision [to share] for us pretty easy. In a way, we’re already partners.”

With the incentive auction  a seeming certainty to take place early next year, plenty of broadcasters are now considering doubling up on a channel — and it’s not just public TV stations that are interested.

“Right now, we’re trying to determine the markets that we may want to consider channel sharing in,” says Arnold Torres, business administrator at Daystar, a leading religious broadcaster with a string of major-market stations. “We have actually reached out to a few of those folks in the brokerage community about who some of those potential players might be. This looks like an opportunity to maintain … the carriage that we have and monetize spectrum.”

Veteran commercial broadcaster Bert Ellis has been working on a channel sharing deal in Los Angeles that would allow him to sell spectrum, but keep his independent KDOC on the air as a tenant.

“We’re very far along,” Ellis says, indicating that an announcement of the deal could come any time. “We’re trying to keep the deal as simple as possible. We’re hoping we’re going to create a template. We’ve spent the better part of a year putting this together. It works for commercial and noncommercial folks.”

The channel sharing option arose during the second quarter conference calls with securities analysts of at least two major stations groups.

For example, Tribune Media boss Peter Liguori noted that Tribune has been working with Fox, Ion and Univision and the FCC staff on crafting rules that will govern channel sharing and how the contracts are written.

“And we’re leaning forward on potential approaches to the auction, including channel sharing in major markets, which may allow us to monetize spectrum with minimal impact to our operating revenues and profits,” Liguori said, according to a transcript of the call provided by seekingalpha.com.

“As I’ve said before, we have spectrum in very valuable markets, and we’re keenly focused on the potential opportunities presented by the auction.”

Similarly, Scripps CEO Rich Boehne signaled during his conference call that selling spectrum might not be in the cards, but channel sharing could be.

The FCC issued rules governing channel sharing last year, but they did little to spur dealmaking, says Preston Padden, executive director of the Expanding Opportunities for Broadcasters Coalition, a leading cheerleader for the auction.

“After the FCC adopted the [original] rules, some of our members went out into marketplace and attempted to negotiate channel sharing agreements,” Padden says. “They came back and said these rules are completely unworkable.”

Listening to the broadcasters, the FCC revised the rules earlier this year and that has prompted some who may have been on the fence to take a closer look at the option. The FCC continues to refine the rules with input from broadcasters.

Lawyers get paid to disagree, but on channel sharing contracts, there’s considerable unanimity. Following are some of the key points or provisions that communications attorneys agree should be incorporated in a channel sharing contract.

Bandwidth Allocation — First things first: Is it a 50-50 deal, some other ratio or maybe even a variable ratio? Landlord and tenant have to be on the same page.

“As a general matter, that’s huge,” says Rosemary Harold, a partner at Wilkinson Barker Howard. “The FCC requires both parties have access to sufficient bandwidth to put out one free over-the-air channel in standard definition. Beyond that, the FCC is leaving it up to the parties to figure out who has how much at any given time.”

Changes To Allocation — A subset of bandwidth allocation, this provision is designed to anticipate a change in modulation technology by the host and ensure that the allocation ratio remains the same.

Commitment To Provide Capacity — Another subset of bandwidth allocation, this means the host won’t change content provided by the tenant except to enable statistical multiplexing, or statmux as it’s otherwise known.

Encoding — Host and tenant can have separate or shared encoding facilities. But the two parties have to be able to monitor encoding to ensure that bandwidth allocation adheres to the contract. While the business side likely will be on the front lines of negotiations, Rosenthal says, capacity and encoding issues require engineers from the host and tenant be on the same page too. “The earlier you can get the engineers involved, the better,” she says.

Payment For Capacity Use — The spectrum seller, or sharee, would essentially rent spectrum from the host station, or sharer. That payment could come from a pre-auction agreement on how the sharee and sharer will split auction proceeds.

Control — Clearly a crux issue. In effect, the host controls its station while the tenant controls its station. Simple on paper, potentially complex in practice. The APTS model contract spells it out: “Neither sharer nor sharee shall hold itself out as the licensee of the other’s television station using the shared channel, and nothing in this agreement shall give either party an ownership interest in the other party’s station. Neither sharer nor sharee shall use the call letters of the other’s television station in any medium.”

Fees — Host and tenant each are responsible for paying their own FCC fees. If there are joint fees, each party is responsible for a proportionate amount generally based on the bandwidth allocation split.

Capital And Cost Allocations — “The FCC is not going to get into parsing every clause in a business arrangement,” Harold notes. “But they want to see how you’re going to split operating costs.” Host and tenant both will hold FCC licenses and while the commission intends to review each sharing contract, as Harold and others note, it’s likely to be benignly indifferent to contract terms as long as it’s a legitimate deal. Typically, some portion of auction proceeds will be used for capital and cost allocations. Broadcasting is a dynamic environment, though, and “the parties need to have an agreement on how they’re going to upgrade things over time,” she says. With ATSC 3.0 on the horizon, costs allocation will be particularly important if the host station upgrades. “It would be nice to have ATSC 3.0 dovetail with repacking, but it probably won’t,” Harold adds.

Term — How long is the contractual obligation? A host of factors influence this provision. The APTS model puts the term at 20 years, with an automatic renewal unless either party decides to opt out and and informs the other within a specified time.  

Operational Rights And Responsibilities — Basic playground rules — who does what, what’s shared equipment, what’s exclusive. In essence, what do the parties cooperate on and what’s the host’s alone. The original FCC channel sharing rules called for agreements to be consummated before the auction but in its revision, the commission opened the door to post-auction deals. That approach presents some challenges. If parties cut a deal before the auction, they can coordinate on the auction. For instance: Both parties might want to put spectrum up for sale. By coordinating, they could sell the spectrum that fetches the top price. The post-auction laundry list of contract provisions ranges from transmission facilities to force majeure and termination.

Transmission Facilities — Parties have an option to put transmission facilities into a joint venture. That raises the issue of how operations and operational costs would be shared.

Force Majeure — If something occurs that neither the sharer nor sharee can control — fire, flood, earthquake, etc. — then neither party can be held liable by the other for non-monetary obligations.

Termination — A key provision. Like a pre-nuptial agreement, the termination clause would spell out details of how the break up would happen, who gets what and when.

Taxes — A key consideration. Noncommercial stations need to structure contracts in a way that protects their tax-exempt status. Conversely, commercial stations will want to ensure their tax liability is kept to a minimum. Who the parties are and how the contract is structured are crucial.

When the FCC first announced the spectrum auction in 2012, many broadcasters were skeptical if not downright hostile.

A few, like Ellis, saw it as a golden opportunity. Along with stations he owns, he’s a partner in NRJ Ventures, which was formed several years ago with the express idea of buying underperforming stations in bigger markets to cash out at the auction.

“There’s no harm-no foul to participating and not selling,” Ellis notes. “I think most CEOs of public companies are going to find it very hard to tell shareholders they’re not going to participate under any circumstances.”

Many broadcasters remain noncommittal — at least publicly — but nearly all acknowledge they’re taking a hard look at the numbers.

And, as the FCC has massaged the rules for channel sharing to encourage greater participation, more broadcasters are showing interest.

“This is a very complicated process with a lot of moving parts,” says the EOBC’s Padden. “I want to give the FCC credit for being tremendously responsive when we came in and pointed out problems.”

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