Game On For Broadcast: Auction, Repack, 3.0

Well, here we go.

Next Tuesday, the FCC will launch the reverse auction, in which it will offer station owners millions of dollars to give up rights to their UHF spectrum so that it can turn around and sell that spectrum to wireless carriers in a regular forward auction.

The FCC’s goal is to reallocate 126 MHz from broadcasting to wireless, which it concluded long ago is a more worthy user of the spectrum.

My expectation, which is based on the expectations of those really in the know, is that the incentive auction will work, if not in the first stage than in subsequent ones. (If the FCC fails to obtain 126 MHz is the first reverse auction-forward auction round, it will lower its spectrum target and go through a second round or stage.)

Hundreds of broadcast licenses will be relinquished, billions of dollars will pass from wireless carriers into the pockets of station owners and spectrum that had been used to deliver a free TV service will be used to support a pay wireless data service.

Hopes among broadcasters for a lucrative reverse auction were raised on Monday when the FCC switched on the online bidding dashboard for the first time and some broadcasters could see that one or more of their stations had been “frozen” at the opening bid prices — that is, the FCC was prepared to buy them at those prices.

The next day at an auction workshop, an FCC official in response to a question declined to say how many stations had already been frozen, tacitly confirming that some had.

That some stations will be getting their opening bids is a big deal.Prior to Monday, the conventional wisdom was that the opening bid prices were nothing more than come-ons like those half-price discounts at Sleepy’s and that the actual prices that broadcasters would get would be much lower in all cases.

So, the broadcasters will play. The whole thing, I think, hinges on enough carriers showing up in the forward auction with enough lust for spectrum to bid up prices into the tens of billions of dollars so that the FCC can pay off the broadcasters.I’ve seen nothing compelling to suggest they won’t.

The reverse auction is expected to take about four weeks. When it’s over, the FCC will announce how much it has pledged to all the “winning” broadcasters, but not who the winners are. That announcement will not come until the entire incentive auction is completed and the FCC knows it will have enough cash to cover its commitments to the broadcasters.

Broadcasters were wary of the proposal when it was first floated in 2009, but once it became clear that billions were on the table, they slowly started coming around. Here was an opportunity to sell stations for more than they were worth as broadcasting businesses.

And it will not be just weak independents and speculators who will be selling. CBS and Fox, for instance, have duopoly stations in the largest markets where wireless demand is greatest and prices will be highest. Expect some of their stations to go.

Keep in the mind that the FCC has wisely given broadcasters the option of selling their spectrum and remaining in the business by doubling up with other broadcasters in channel-sharing arrangements on moving to VHF channels.

So, some broadcasters will get rich, but most will get nothing and continue to do what they do now — sell spots and a little digital and try to keep their retrans revenue ahead of their reverse comp payouts. Perhaps the selling of spots will get a little easier after the FCC winnows the ranks of stations in the auction. If supply goes down, prices should go up, right?

Let’s pause to give the FCC credit. The incentive auction is an example of bold and innovative public policy. I try to think of other mechanisms the FCC might have used to efficiently move a great swath of spectrum from broadcasting to wireless and I come up empty. And I’ve asked other deep thinkers for alternatives to no avail.

Because of some great NAB lawyering and lobbying in the 1990s, broadcasters obtained what amounted to a property right to their spectrum, even though, technically, it still belongs to the public. The policymakers rightly concluded that the only way to get it was to buy it or, more accurately, to act as a broker so that wireless carriers could buy it.

Obama’s first FCC chairman, Julius Genachowski, got the ball rolling and his successor, Tom Wheeler, is bringing it to fruition. As I write that, it occurs to me how slowly the government wheels grind. It will have taken — love the future perfect tense — an entire two-term presidency for the incentive action to go from conception to completion, assuming all goes well.

On the other hand, the legal and regulatory groundwork was daunting and the bidding system itself is horribly complicated. It’s a wonder we have gotten to this point.  

It’s helped that the auction is one of those rare initiatives that enjoys broad bipartisan support.

Post-auction, broadcasters’ goal must be two-fold:

• Make sure that they do not lose coverage as they move to new channels in the repacking of the TV band, and
• Make sure that nothing interferes with the swift introduction of the next-generation broadcast standard, ATSC 3.0, and the advanced services it promises.

The NAB seems to be on top of things on both fronts. From the start, it has made the repack its focus. In addition to preserving coverage, the NAB has pushed to insure that broadcasters are given sufficient time and are fully reimbursed for their channel moves. Right now, the government says broadcasters get 39 months and $1.75 billion. Not enough.

Yesterday, the FCC received the first round of comments on the NAB’s petition for a rulemaking that it hopes will lead the agency granting broadcasters the right to broadcast 3.0 on a voluntary basis. And in those comments, the NAB received its first hint that the rulemaking will not be without some controversy.

As we reported, the National Cable & Telecommunications Association expressed concerns about what channels operators will have to carry during the transition from the current DTV standard to 3.0 and who will cover the costs of 3.0 carriage.

The broadcasters’ transition plan is to set up a host station in each market. Its job would be to simulcast in DTV the signals of all the stations in the market that opt to broadcast in 3.0. In that way, reception by consumers watching off-air with DTV sets and cable systems would not be disrupted.

That’s fine, the cable guys say, just don’t require us to carry the 3.0 signals during the transition or allow broadcasters to reopen retrans agreement to force them to. “It would be manifestly unfair to allow broadcasters to expand their retransmission consent rights by moving signals around from station to station.”

In addition, NCTA says, the FCC should require broadcasters to air their DTV simulcast channels in HD. This could be a real problem for 3.0 proponents. They envision stacking many DTV simulcast channels on the host station, easy enough in SD, but not in HD.

NCTA also doesn’t believe broadcasters should have the unilateral right to declare when the transition ends by stopping their DTV simulcasts. All stakeholders should have some input on that decision, it said.

The American Cable Association of small operators also weighed in with concerns about carrying 3.0 signals, but also with doubts about whether the FCC had the authority to allow a second incompatible standard to exist in the TV band.

We’ll have to see how this plays out. Like everybody else, cable operators don’t want to be forced into anything by anything. But they could kill 3.0 by simply refusing to carry it during the transition.

More damaging to 3.0’s immediate prospects was what wasn’t in the FCC online 3.0 comments folder — a single encouraging word from the broadcast networks or their O&Os. Up to this point, the best thing you can say about their attitude toward 3.0 is that they are indifferent.

You have to wonder how far 3.0 can go if four of the top eight station groups (ranked by revenue) with the most popular stations in the largest market, choose not to play.

Although the incentive auction and 3.0 could be busts, I don’t think they will. I see them as two powerful forces that will reshape broadcasting. One diminishes the medium; the other enhances it. The net effect cannot not yet be imagined.

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P.S. As a lobbyist for a major industry, National Cable & Telecommunications President Michael Powell is supposed to play it cool on presidential politics. You don’t know who is going to win and you have to be able to work with the administration and appointees of whoever does win.

Yet, Powell couldn’t resist taking a poke at Donald Trump, the presumptive nominee of Powell’s own party.

“I have a lot of difficulty with how he has styled his candidacy,” he said in an interview with CNET earlier this week that started with cable’s on-going squabbles with the Wheeler FCC, but digressed into the presidential realm.

“As a person who grew up in a family of public servants [Colin is his father, in case you didn’t know], I have a deep belief in civility and a deep belief that you fight with ideas and not emotion,” he said.

“I have a deep belief that your client is the American people, not yourself or a party or anything else. I believe in a society that will only thrive through inclusion, not division. And I think leadership is about trying to connect the better nature of people and not profit from the worst nature in people.

“I won’t just make that comment about Mr. Trump. The political system is letting us all down. Somebody once told me that the way most people vote for president is they want the person who exhibits the qualities that they wish they fully were. You should want them to be better.”

I wonder how NAB President Gordon Smith would answer if the question of Trump were put to him.

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