Jessell Alert: Spectrum Auction Terribly Sick

I’m terribly sorry to inform you that the FCC incentive auction has progressed to Stage 4. But all is not lost. An aggressive course of radiation and chemo may still be able to save it.

Can you believe this? A year ago, the FCC teased broadcasters with prospective opening bids for TV stations ranging from $900 million for WCBS New York to $1.2 million for KXGN in tiny Glendive, Mont., with an average of $155 million per, and a median of $125 million.

If you added them all up, as I took the trouble to do, the bids totaled $341.7 billion. That’s about four times what you would pay if you called Kalil & Co. and Larry Patrick and told them you wanted to buy every TV station in the land at the prevailing broadcast cash flow multiple.

Everyone knew (or should have known) that those opening bids would be nowhere near what the government would end up paying for the stations in the reverse auction where the prices go down as the auction proceeds.

Still, the big numbers enticed a lot of broadcasters to participate in the auction just as a half-billion-dollar prize will get folks who normally don’t bother with the lottery to buy a ticket or two despite the trillion-to-one odds.

It did appear for a moment last summer that many broadcasters would get rich after the first reverse auction with a clearing target of 126 MHz closed at $86.4 billion. But the hopes of many were dashed when the first complementary forward auction yielded bids of just $23.1 billion from the wireless carriers.

In Stage 2, the FCC lowered its clearance target to 114 MHz. In the reverse auction, broadcasters offered up the requisite spectrum for $54.6 billion, but, in the forward auction, the wireless carriers said they would pay only $21.5 billion. Still a big gap.

Stage 3, with an even lower target (108 MHz), ended this week with an even worse outcome. The broadcasters offered up the spectrum for $40.3 billion, but the carriers bid only $19.6 billion.

So, we are on to Stage 4 with an ever lower clearing target, 84 MHz.

Wells Fargo securities analyst Marci Ryvicker, who has been a bear on the auction from the start, says in a note to investors that the auction is foundering not because the spectrum is losing value, but because it is ill-timed, coming too soon after the carriers exhausted themselves financially in January 2015 bidding up AWS-3 spectrum to nearly $45 billion.

More important, Ryvicker suggests that the auction’s condition at this point might be terminal.

“The good news is that should this thing fail, it is likely to do so sooner rather than later,” she says. “And we wonder if the whole regulatory landscape might change the broadcasters’ desire to even ‘sell’ their spectrum. Meaning, if there is a good chance that the [FCC’s ownership] cap will be lifted and the local ownership rules eliminated, some of these broadcasters might want to keep their valuable spectrum for deals, as well as ATSC 3.0.”

I suspect that at some point, at some clearing target, in some future stage, the FCC will match up the bid and ask and a smaller-than-expected chunk of spectrum will move from broadcast to wireless as a smaller-than-expected chunk of money moves from wireless to broadcast.

But if the auction does die without that happening as Ryvicker intimates, I would propose that the wireless industry be made to reimburse the FCC for the millions (tens of millions?) of dollars that the agency has spent creating, designing and executing the auction over the past seven years.

If the carriers had little appetite for the broadcast spectrum, the individual carriers and their Washington reps should have made that crystal clear five years ago, three years ago, even one year ago.

Instead, they egged on the FCC, reinforcing the ideas that America was facing a “spectrum crisis” and that the country’s high-tech leadership goals were tied to a massive shift of spectrum from broadcast to wireless.

And let’s not forget the broadcast RF manufacturers. They’ve begun tooling up for the TV band repack that is to follow the auction. If the auction dies, there will be no repack. And if there is no repack, shouldn’t the manufacturers be made whole, too?

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