Auction Stage 1, Not Exactly FUBAR, But…

When news broke last week that the FCC’s forward auction of TV spectrum to wireless carriers had fallen a whopping $66 billion short of what it needs to pay off  broadcast sellers in the reverse auction and cover administrative and repack costs, communications attorneys Scott Flick and Jessica Nyman in their blog cited TV secret agent Maxwell Smart: “Missed it by that much.”

With uncharacteristic speed, the FCC announced the next day that it would commence Stage 2 — a repeat of both the reverse and forward auctions — on Sept. 13. In other words, the FCC asked: “Would you believe 114 MHz?”

We kid the FCC. You know we love them.

But something clearly went wrong to produce an ask-bid gap that huge, although I wouldn’t go so far as saying “FUBAR” as one broadcast attorney did.

In the reverse auction that ran earlier this summer, the FCC “provisionally” agreed to pay broadcasters $86.4 billion to clear 126 MHz of spectrum. Setting aside spectrum for guard bands and such, it then offered 100 MHz to the carriers in a conventional forward auction. 

But, to borrow from Neil Young, that auction “sort of [started] out slow and fizzled out all together.” The FCC called if off after just two weeks and $23.1 billion in total bids.

The commission appears to have made two miscalculations.

First, it may have set the opening prices for stations in the top markets higher than necessary and, because the FCC needed to clear a lot of spectrum in those markets, those high prices got locked in. That grossly inflated the total owed broadcasters.

Second, it overestimated demand from the wireless carriers. This was reflected in those big opening bids for the reverse auction as well as in the big initial clearing target of 126 MHz.

We might want to forgive the FCC for setting the opening bids high. It needed to entice skeptical broadcaster to participate in the auction. And it certainly accomplished that. Once broadcasters saw the numbers, suggesting in many cases that their stations might be worth many times more than they were as broadcasting enterprises, owners could not afford not to join the auction to see what happens.

That said, I don’t see how the FCC could get the demand side so wrong. From the start, the commission was convinced that the carriers had an insatiable appetite for spectrum and would pay plenty for it, especially “beachfront” TV spectrum.

The FCC had also convinced itself that it had a patriotic duty to shift more spectrum to wireless to insure the country doesn’t slip into the technology dark ages. “I believe that the biggest threat to the future of mobile in America is the looming spectrum crisis,” said former FCC Chairman Julius Genachowski, who got the ball rolling on the incentive auction in 2009.

The FCC was encouraged in these notions by the carriers’ Washington reps. In a speech last October, Meredith Atwell Baker, the head of CTIA, the wireless industry’s principal lobby, said that carriers spent some $40 billion in early 2015 for spectrum in the so-called AWS-3 auction. “To my broadcast friends, rest assured we have billions more for the next auction.”

All this talk seems a little foolish in light of the poor forward auction turnout and the lackluster bidding. Major players like AT&T and Verizon spent less than expected. Another, Sprint, sat it out, and no substantial new players emerged to drive the bidding. According to the auction rules, it’s too late for new bidders to join the auction.

So what happens now?

As noted above, the FCC will do it again — reverse auction-forward auction — starting Sept. 13 with a clearing target of 114 MHz.

In general, I’m told, this means the FCC will seek one of two fewer stations in most markets, which will tend to depress the prices of stations. The combination of fewer stations and lower prices will reduce the aggregate.

In the forward auction that follows, with supply curtailed, bidding should be more spirited even if the demand remains more or less the same. The total should go up.

And if Stage 2 doesn’t bring supply and demand in equilibrium at a certain number, it will be on to additional stages, each time with a lower clearing target, until one does. It could go as low at 42 MHz.

That Stage 1 flopped so badly means there are many unhappy stations owners out there, some of whom will have to scrap plans for a sparkling new home on a real beachfront.

Some of the Stage 1 provisional winners will be forced to accept lower payments in subsequent stages or they might be told their stations are no longer needed. For them, it will be back to the grind of selling spots.

I have no sympathy for speculators who bought stations over the past several years hoping to make a killing in the auction and now find their investments in jeopardy. Speculation carries risk, and they contributed little to the public or the business.

But I do feel for struggling broadcasters who saw the auction as a way to cash out of a business that really has no place for them anymore.

My concern is for the many other broadcasters for whom the incentive auction is simply a headache. When the auction finally closes, the FCC will reorganize or repack the TV band, forcing hundreds of stations to move to new channels. While the government will pay for the migration out of the auction proceeds, broadcasters will have just 39 months to complete their moves. If they miss the deadline, they risk being knocked off the air.

The repack will involve not only broadcasters, but also transmitter and antenna manufacturers, consulting engineers, structural engineers, experts in towers and tower crews. To meet the 39-month deadline, planning is critical. But planning really cannot begin in earnest until the auction closes. Until then, it will not be known which stations have to move and to what channels they will have to relocate.

How is an antenna manufacturer supposed to tool up if he doesn’t know how big the market is going to be, what kind to make or whether his existing customers will be among those who have to move?

The FCC can give no answers. The answers come only when the auction closes — and nobody knows when that will be. Given the gap, the uncertainty could run through several more stages and stretch into next year.

Delay is not all bad. As we reported Aug. 28, some vendors welcome the extra time, saying they can use it to gear up and train. And proponents of the Next Gen TV standard — ATSC 3.0 — say a delay will help to sync up the repack with the deployment of the new standard so broadcasters and their viewers  have to cope with only one transition.

I would add that the time could be used to write a phased-in, regional repack plan that makes optimum use of limited repack resources and to lobby Congress for more time and more money for the repack.

Stretching out the auction continues the hobbling of the broadcasting business. To prevent collusion among broadcasters in the reverse auction, the FCC imposed a “quiet period” — severe restrictions on what broadcasters who chose to participate in the auction can say to each other — that runs until the auction is closed.

Among other things, they can’t as a practical matter negotiate with each other to buy or sell stations.

The FCC ought to ease the rules for broadcasters who participated in the auction, but are now clearly out of it. It’s time to lift, at least somewhat, the cone of silence.

Harry A. Jessell is editor of TVNewsCheck. He can be contacted at 973-701-1067 or [email protected]. You can read earlier columns here.