JESSELL AT LARGE

Auction Stage 1, Not Exactly FUBAR, But…

Having produced an ask-bid gap wider than the Grand Canyon, round one of the FCC's incentive auction suffered from some big miscalculations and it left some broadcasters sadly disappointed and others continuing to wonder whether they will have to join the eventual mass channel migration. 

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.

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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.


Comments (14)

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Fred E Walker says:

September 6, 2016 at 9:15 am

Great article and insights Harry. the Speculators can lose all their $ as far as I’m concerned. I only care about real broadcasters. But the fact that viewers are expected to migrate over with new channel positions? it’s too easy not to watch as is, expecting non core viewers to do the work and follow the programming (teeming with way too much ad inventory), is detrimental to an already fragmented, oversaturated and challenging biz.

Julien Devereux says:

September 6, 2016 at 10:38 am

You don’t suppose it could be something as simple as the bidders realizing if they don’t bid right away, the prices will come down and they’ll get what they want at a bargain?

    Andrea Hogben says:

    September 6, 2016 at 11:42 pm

    thats not how this auction works… if you don’t bid in Stage 1 – you can’t bid in Stage 2…

John Stelzer says:

September 6, 2016 at 10:42 am

A significant problem in this Stage was the degree of “impairment” of wireless spectrum blocks in the most congested markets, caused by some TV stations being “orphaned” into the “new wireless band” during the hypothetical repacking of the reverse portion of the auction. “Impaired” spectrum is worth less to the WBB industry, of course. Both WBB interests and the NAB made this point to the FCC long ago, but it was ignored. Offer prices will likely go up as the clearing target is reduced, fewer TV stations are “orphaned”, impairments are fewer, and competition for the WBB blocks available effectively increases. Offer prices may eventually reach values that informed analysts have predicted, above the Stage 1 bids but far below the clearing price of that Stage.

Don Richards says:

September 6, 2016 at 1:16 pm

I don’t think there was ever any reason for wireless companies to “jump” at the first (and admittedly, ridiculously high) price the FCC offered. I don’t think the second round will be significantly different. The demand for wireless is a top 10-25 market problem. There’s no reason to think that the TV spectrum is the only/best way for carriers in those markets, to solve their spectrum issues. This is a great example of an academic solution to a real world problem. The wireless guys know there will always be other options and that participating in a sacrificial offering is probably the worst option.

Patrick Burns says:

September 6, 2016 at 2:08 pm

” Doubtful, well said. There are kids at MIT & RPI etc maybe 17 years old now who will write code that amps up the crunching of files even more. We have the pipe it just needs constant tune ups & new thinking .

As economists always teach the marketplace is cruel & effective, it punishes anyone or thing that ignores ” supply & demand ” Auction mgrs seem to have missed that class at university !!

Ellen Samrock says:

September 6, 2016 at 6:34 pm

“I believe that the biggest threat to the future of mobile in America is the looming spectrum crisis.” That was Genachowski and his fellow Dems at the FCC blowing smoke out their collective tail pipes. The problem with this so-called “beachfront” spectrum is that the ocean is too far away. It’s desert spectrum. 600MHz might be good for WiFi and backhaul but its useless for cellphones. As it is, the wireless companies are continually improving compression technology to double and triple the quantity of data being sent through existing pipes and at faster speeds. The need for this desert spectrum is, at best, modest by the major players as evidenced by the tepid bidding and that a couple of the majors are missing from the auction altogether. No, the goal of the Obama FCC has primarily been to cripple broadcasting and its power to influence not to open up spectrum for wireless companies.

    Ellen Samrock says:

    September 7, 2016 at 9:36 pm

    Well, Tom Wheeler was gassing on today about 5G, promising members of the CTIA that the FCC would exercise a “light touch” in regulating its development (as opposed to the ham-fisted slam they’ve meted out to TV broadcasters). Guess where much of the development of 5G is focused on? The GHz bands, very little on the UHF band, according to a report by 4G Americas. Yep, wireless providers can’t wait to get their mitts on this so-called “beachfront” spectrum. In this case, they’re saving their pennies for the real beachfront spectrum, waiting for the government to open up its own storehouse of underused high-band spectrum and letting the incentive auction slip into quiet disgrace.

Andrea Hogben says:

September 6, 2016 at 10:01 pm

carriers spent some $40 million in early 2015 = should be Billion?
FCC will seek one of two fewer stations = OR?

    Linda Stewart says:

    September 7, 2016 at 10:49 am

    Good catch. I fixed.

Andrea Hogben says:

September 6, 2016 at 10:06 pm

Speculators weren’t all bad – if you got hard cash in 2011 that’s better than uncertainty in 2016 😀

Andrea Hogben says:

September 6, 2016 at 11:46 pm

The problem was the FCC tried to outdo themselves… their own simulations peaked at 120 Mhz but they tried to buy up 126 Mhz… on the supply demand curve they jumped the shark – 120 Mhz would cost $100 Billion to buy at open, so 70-80% got bought at open and 10-20% got near nothing :-). Now the real fun comes as prices fall off the cliff….

Andrea Hogben says:

September 7, 2016 at 12:07 am

Dallas will be interesting. 19 UHF stations. FCC needed 6 stations. If only 6 volunteered, each one got the ~$300 million, $1.8 billion to clear the market. Ignoring suburbs, that spectrum only sold for $859 million. (net spread of a little under a billion). Now the FCC says we’ll only need 4 @ 114 Mhz. So the six stations bid each other down till 2 drop off, and published estimates think that may be only 25% of open, or roughly $300 million for all 4 of them. If Charlie gets cold feet on Dallas and wants the new LA slot and moves his BUs over, the spectrum’s down to $773 million, but instead of the market being $950 million drain on the country, it’s now subsidizing the northeast $473 million. And that’s just Stage 2. The Opportunities Book only predicted a value of $60 million for a Dallas station in a high end… meaning somewhere between Stage 2 and Stage 3… If it goes to Stage 4 – Dallas becomes “Not Needed” and if bidding starts going up in Stage 3 and 4 to $1 billion, not one cent would stay in Dallas…

Doug Smith says:

September 7, 2016 at 2:55 pm

” there came into Egypt a Pharaoh who did not know” All those “smart” guys at FCC, the US government today is FUBAR!


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