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Incentive Auction: Back to the reverse auction drawing board

By Karen Brown, Oct 31, 2016

Issue: After failing to come even close to the
$88.4 billion clearing target for aggregate bids, the
Federal Communications Commission was forced
halt the 600 MHz broadcast TV forward auction and
restage the reverse auction.


Background: It wasn’t even close. Bidding virtually
ground to a halt Aug 30 at the $23 billion mark, a
little more than a quarter of the way toward the
massive $88.4 billion clearing target that assured
participating broadcasters a big payday for their
6 MHz local broadcast spectrum licenses. So the
FCC halted the auction and re-opened the reverse
auction Sept. 13, this time reducing the number of
paired licenses offered per market from 10 to nine,
in hopes of lowering the clearing target.


Implications: The FCC and National Association of
Broadcasters expressed disappointment, but virtually
no one else was expecting the forward auction to
reach the sky-high clearing target. Most don’t think
the clearing target will be lowered enough in the
next round, making it likely there will be several
start-and-stop forward and reverse auctions. The
bottom line may be a lose-lose for everyone — some
broadcasters may be forced to accept less for their
licenses while forward bidders will gain less 600 MHz
spectrum real estate.

To the chagrin of the Federal Communications Commission and
broadcasters — and to the surprise of virtually no one else in the wireless
industry — the 600 MHz forward auction generated a little more than a
quarter of the revenue needed to hit the $88.4 billion clearing target,
forcing a return to the reverse auction drawing board.


Let’s start with the facts. After 27 rounds, the forward auction was halted
Aug. 30 after bidding slowed to a crawl at the $23 billion mark. Under the
auction rules, the FCC will go back and restage the reverse auction, in
which broadcasters offer up their licenses for sale.


However, this time around the FCC will cut the number of paired
5 MHz-wide channels per market from 10 to nine. With that smaller batch of
spectrum, the commission will try to reduce the clearing target, which is the
minimum amount of aggregate bidding revenue collected in the forward
auction. Once completed, a second forward auction will begin.


The process itself highlights the complexity of this auction, as well as the
inflated assumptions that drove it. So with a second reverse auction under
way, what went wrong?


Plenty. At its core, the FCC over-estimated and overpromised broadcasters
a big payday, based on the naïve belief that wireless players desperate for
spectrum would bid any price to win a slice of this valuable 600 MHz prize.
Fundamentally, this thinking was flawed on two counts:


Bidders will spend amazing amounts of money in this auction. Nope.
When the FCC set the original $88.4 billion clearing target, it didn’t take
analysts long to point out how unrealistic that was. Even generously
handicapping AT&T, Verizon, Dish and Comcast’s possible auction budgets,
it wasn’t expected that the participating bidders would shell out more than
$30 million to $40 million in all.


T-Mobile had made financial moves earlier this year that indicated its
auction budget was about $10 billion, and there were reports AT&T could
spend a similar amount. Verizon, which already has a big bank of low-band
700 MHz spectrum, was estimated to spend no more than about $5 billion.

Despite this information, at the close of the forward auction the National
Association of Broadcasters seemed dismayed by the result.


“NAB is surprised by the modest participation by wireless carriers in the
first stage of the TV auction,” said Dennis Wharton, NAB’s executive vice
president of communications, in a statement. “Perhaps the notion of a
‘spectrum crisis’ pedaled in Washington for the last seven years is not as
acute as policymakers were led to believe. We look forward to the second
round of the auction where wireless carriers will be afforded another
bidding opportunity.”