Do Your Homework Before The Auction

Last month we saw some significant developments in the FCC’s spectrum auction plans. They include the FCC’s first documentation on how much it may pay a TV station as part of the “reverse auction” that will occur before that spectrum can be sold in a “forward auction” to wireless carriers for an estimated $45 billion.

Later in the month, the FCC announced it was postponing the timeframe for accepting applications for the auction until the fall of 2015; it now expects to start the auction in early 2016. While the delay is designed to allow time for the courts to address some of the thorny issues surrounding the process, all stations would be well served to take advantage of this time to conduct their own due diligence.

That point was brought home in an in-depth article prepared for MFM’s member magazine, The Financial Manager (TFM), by Meredith Senter, a member of the law firm Lerman Senter PLLC which specializes in media-related issues. Senter is also a past board member of MFM and currently serves on the editorial board for TFM. The November-December issue of our magazine includes a special report on the future of media and we asked him to update our members on the spectrum auction.

A copy of the November-December issue of TFM including Senter’s article, “Exploding TV’s Status Quo” will be available on our website soon. I hope you will take a few minutes to give it a full read. To give you some added impetus, here are a few of the questions facing both auction applicants and stations affected by spectrum repacking.

WHO CAN PARTICIPATE IN THE AUCTION?

While all full-power and Class A television stations will be eligible to participate in the auction, the FCC is likely to auction the 600 MHz band, which includes UHF stations operating on channels 38-51. In this scenario, television stations operating on those channels will need either to sell their spectrum rights to the FCC or move to channels 2-36 (excluding spectrum not allocated for use by broadcast television).

Senter believes the FCC is likely to buy channels from only 200-250 TV stations to meet its goals. The greatest demand will be for UHF channels in the most densely populated and congested markets. The commission may not need to purchase the spectrum of television stations that operate on VHF channels in more than a handful of markets.

WHAT ARE MY CHOICES?

Stations that choose to participate in the auction will be given four options:

• Sell their entire spectrum rights.

• Agree to share a license with another TV station, so that two outlets will end up licensed to operate on a single channel.

• Exchange a UHF channel (channels 14-51) for a VHF channel (channels 2-13).

• Accept a low VHF channel (channels 2-6) in lieu of a high VHF channel (channels 7-13).

The FCC will issue a license to each of the stations electing to share. The stations will be treated like any other television station (must carry/retrans, sell to a third party, etc.) but sharing the same spectrum means they have less bandwidth for transmitting data.

WHEN DO I NEED TO DECIDE?

Stations opting to share a channel must reach an agreement in advance of the auction. With the FCC planning to hold town hall discussions and meetings with individual owners over the next several months, now is the time to start thinking about whether or not your station wants to pursue this option.

By agreeing to take part in the auction, stations agree to accept the amount of the FCC’s initial bid for the sales option that the station elects. The FCC will keep the identity of the stations participating in the auction confidential.

In addition, stations will be prohibited from discussing their strategies and their bids with other stations. Senter warns this requirement could hamper station mergers and acquisitions leading up to and during the auction.

HOW ARE THE FCC’S PRICES DETERMINED?

The FCC’s prices are not based upon conventional valuation metrics, such as broadcast cash flow. Instead they address the FCC’s need for the channels to clear sufficient spectrum and minimize repacking costs. The FCC will not necessarily offer all stations in the same market the same price and some stations may not receive an offer.

The FCC’s offers are higher in markets where it needs stations to relinquish spectrum. It is also important to look at the density of TV stations in neighboring markets, since the use of a channel in one market may preclude its use in an adjacent market.

If you haven’t received the FCC’s estimates for your market, you can look them up on this chart on the commission’s website.

HOW WILL MY STATION BE AFFECTED BY THE FCC’S REPACKING PLAN?

When the auction is complete, the FCC will announce new channel positions for stations that will be repacked. Stations not on this list do not have to do anything.

However, if it looks like your station will be required to relocate due to repacking, it’s time to get busy. Stations that are required to change channels will have three months from the date of the FCC’s notice to apply for a construction permit for the new channel. This can involve retaining a consulting engineer, designing a new facility, re-negotiating tower leases and ordering/installing new equipment.

When the FCC announces the new channel positions, it will also give each station a deadline for completing the move. The deadlines may vary from market to market, however all stations being repacked must vacate their channels within 39 months of the issue date.

WHAT EXPENSES WILL BE REIMBURSED?

The FCC is required to set aside $1.75 billion to reimburse television stations (as well as cable and satellite systems) for expenses incurred as a result of the repacking. As Senter warns, that amount is a cap; if it’s not enough, then television stations will have to fund the shortfall.

Stations are required to submit an estimate of expenses that they will incur to the FCC within three months of the date that they are notified of their new channel assignments. The commission is developing a schedule of reimbursable expenses; a station may agree to accept the amount on the FCC’s schedule or submit a different estimate.

The FCC will create an account with the U.S. Treasury for each station that applies for reimbursement and fund these accounts with up to 80% of the estimated reimbursement amount, assuming that the $1.75 billion set-aside is sufficient to fund all requests.

Stations will be allowed to draw on their accounts after submitting sufficient documentation of reimbursable expenses. A final accounting will take place upon completion of construction; it’s then that the FCC may reimburse any amounts not previously paid. 

Reimbursements must occur within three years following completion of the auction. There are allowances for stations that have not completed construction prior to the deadline.

WHAT ELSE DO I NEED TO KNOW?

Senter’s article includes a deeper discussion on how the reverse and forward auctions will work that is worth noting. And since additional changes and clarifications are likely to arise from the pending court cases, it will also be important to monitor those developments closely.

The more you read about the auction, the more likely you are to agree with our TFM editorial board that it’s one of the coming year’s greatest challenges for media companies. We hope Meredith Senter’s article helps you to begin preparing for it. 

Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary. She can be reached at [email protected]. Her column appears in TVNewsCheck every other week. You can read her earlier columns here.