But What If FCC’s Incentive Auction Flops?

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.

 “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.”