TV Auction Moving, But Could Still Be Derailed

Can you feel it? I can.

The momentum for the FCC incentive auction is building.

It was fueled this week by Preston Padden and his band of broadcasters eager to cash out. The Expanding Opportunities for Broadcasters Coalition came up with two studies that found that the auction of the broadcast spectrum to wireless carriers would fetch at least $80 billion. That’s about  four times more than what the entire revenue of the local TV broadcasting business will be this year.

What neither EBOC nor anybody else can tell you right now is how much of the $80 billion will end up in the pockets of the broadcasters who sell spectrum to the FCC (so it can be resold it to the wireless carriers) and how much will end up in the federal treasury.

To a large extent, that will be determined by the rules of the reverse auction — the mechanism the FCC has chosen to buy the broadcast spectrum. Those rules are far from settled.

Still, we are talking billions to be divided by maybe a  few hundred TV stations. The consensus within the industry now is let’s get on with it, let’s make the incentive auction happen.

As of the NAB winter board meeting in Fort Lauderdale, Fla., a month ago, that consensus is now directing the trade group. And it was confirmed when four large stations groups — Tribune, Univision, Ion and Fox — visited FCC Chairman Tom Wheeler on Aug. 6, 2014, to say they had spectrum to sell and argue for reverse auction rules that would maximize how much they would get for it. NAB President Gordon Smith made it official in a phone call to Wheeler that same week.

But as every football fan knows, the Big Mo is ethereal. Progress toward an early 2016 spectrum auction could slow or grind to a halt.

The biggest threat to that progress may be the NAB’s lawsuit against the FCC over the repacking of the FCC band following the incentive auction. The repacking is necessary so that the FCC can separate the spectrum recovered for wireless carriers from the spectrum that will continued to be used for TV.

With NAB leading the effort, broadcasters have been working hard to make sure the repacking doesn’t diminish the over-the-air coverage of TV stations that won’t be selling.

It’s a tough issue. Throughout the long process of writing the repacking rules, the FCC had been rather cavalier about the health of the post-auction stations, even though Congress admonished the FCC to make “all reasonable effort” not to screw up the remaining stations. The NAB’s lawsuit is an strong expression of its dissatisfaction with how the rules came out.

I would hope that at this point, with the NAB joining the FCC in trying to make the incentive auction a go, the two parties can settle their differences in the suit. According to my sources, the NAB and FCC actually made some progress toward a settlement last fall, but it came to naught.

Should settlement talks resume, I would say that the NAB would have the upper hand.

The FCC needs the broadcasters more than the broadcasters need the FCC. Wheeler and company should always keep in mind that the benefits of the incentive auction will not be equally distributed among station owners. Most of the billions will go to stations in major market and smaller adjacent ones. The principal interest of a lot of owners is still simply not to have their stations devalued by the repacking.

So, in addition to rock-solid guarantees about the coverage of post-auction stations, the NAB should get a commitment from the FCC that it will aid the remaining stations in making sure they are fully compensated for the cost of the channel switching involved in the repacking. Congress earmarked $1.7 billion of the auction proceeds to cover those costs, but there is fear that that will not be enough.

To exceed $1.7 billion, the NAB may have to go hat in hand to Congress. It shouldn’t have to go alone.

As the alternative, the FCC should engineer the repacking plan in such a way that costs do not exceed $1.7 billion.

The NAB should also get a commitment that the FCC will assist broadcasters in making the move to the next-generation digital TV standard now being developed at the Advanced Television Systems Committee.

The FCC should promise to adopt ATSC 3.0 as a national standard when it’s ready and help develop and implement a transition plan for consumers (the new standard is incompatible with the current one). It should also agree to sync up the move to ATSC with the incentive auction repacking so the $1.7 billion and any other money obtained for it can cover the costs of both.

A second possible momentum killer would be evidence that the demand for the broadcast spectrum is being grossly overestimated. I read the EBOC studies that pegged the take at $80 billion or more. They were authored by reputable analysts, but based mostly on what spectrum went for in recent auctions.

Even the casual mutual fund investor can tell you that “past performance does not guarantee future returns.”

Neither study offers any real insight into the strategic thinking of Verizon, AT&T and the smaller spectrum buyers.

The day before the EBOC released the first of its two studies, executives of Verizon told investors that they were digesting the $10.4 billion of spectrum they just bought in the AWS-3 auction and are not particularly keen on acquiring more any time soon.

CFO Fran Shammo seemed downright satisfied with the company’s spectrum portfolio. “We have the spectrum to meet the growth needs of our business, and our future plans do not require us to acquire large blocks of spectrum in the near term,” he said, noting that Verizon could also buy fill-in spectrum on the secondary market.

And Tony Melone, the carrier’s EVP of network, was non-committal (and more than a little vague) about participating in the incentive auction. “We will carefully look at the rules and evaluate if, and or how our participation would enhance achievement of our network strategy.”

Of course, such talk could be posturing. At this point, I would expect Verizon to give away nothing about its true interest in additional spectrum. Admitting it had great interest in the broadcast spectrum would only serve to force up the price.

Yet another momentum killer could be the politics of net neutrality. Next Thursday, Wheeler and the Democratic majority are expected to adopt tough, public utility-like regulations intended to make sure that all users of the Internet are treated equally, that large, rich companies will not be able to pay for fast lanes on the Internet and gain unfair advantage.

The move is highly controversial and could push Wheeler into a political morass (if he is not already there) and  bog down his entire agenda, including the incentive auction.

It’s just not the regulations that some people, mostly Republicans, don’t like. It’s how Wheeler came up with the regulations.

Last April, Wheeler proposed a more modest plan, saying that broadband providers could charge more for fast lanes, as long as they also make them available to all comers on “commercially reasonable terms.”

But then, according to an excellent backgrounder in the Wall Street Journal, things suddenly changed in November when President Obama weighed in saying the “strongest possible” regulations were necessary — that is, the public utility regulations — to insure equal Net treatment for all.

“The president’s words swept aside more than a decade of light-touch regulation of the Internet and months of work by Mr. Wheeler toward a compromise,” WSJ reporters Gautham Nagesh and Brody Mullins wrote.

Whatever personal misgivings he might have had, Wheeler quickly lined up behind Obamanet.

Early this month, the House Oversight and Reform Committee, chaired by Jason Chaffetz (R-Utah), opened an investigation into whether the White House had improperly influenced Wheeler in formulating the net neutrality proposal he unveiled on Feb. 4.

Sen. Ron Johnson (R-Wis.) and his Homeland Security and Governmental Affairs Committee soon followed suit. “Since the FCC is an independent agency that derives its authority from Congress and not the White House, it is highly concerning that the White House would seek to take on this level of involvement in the regulatory process of the FCC, or attempt to supplant completely the agency’s decision-making apparatus,” Johnson wrote in the letter to the FCC.

I foresee the lawmakers asking lots of questions and demanding lots of documents and correspondence so that the they determine just far the White House takeover of the FCC has gone. For good measure, they will drag Wheeler and the other Democrats up to the Hill so they can grill them in public. It won’t be pretty and it will all be a distraction from everything else Wheeler wants to do.

It’s a long way to the incentive auction next year, but broadcasters and the FCC will get there, if the momentum isn’t stalled by legal, financial or political friction.

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