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January 16, 2013

The FCC TV Incentive Auction

The FCC TV Incentive Auction is looming ahead. It is the first spectrum auction in more than four years. The last auction raised $19 billion and sold off the A, B, and C Upper 700MHz blocks. Today, the C block spectrum is being used for LTE – a success story for the FCC and for spectrum policy. The 2008 auction did not require that the FCC “buy back” spectrum from exclusive licensees like TV stations. The upcoming FCC TV Incentive Auction is much more complex. The FCC outlined the proposed process in the Oct. 2, 2012 Notice of Proposed Rule Making (NPRM) entitled “Expanding the Economic and Innovation Opportunities of Spectrum Through Incentive Auctions.” The FCC will first conduct a “reverse auction” to buy back spectrum from TV stations. Congress was responsible for the high-level process as set forth in the February 2012 Spectrum Act. However, the FCC is responsible for making it happen. The complexity of buying TV spectrum, then selling the same spectrum to mobile carriers, setting a band plan acceptable to all constituents, making a significant profit for public safety’s FirstNet ($15 billion+) and for the U.S. Treasury ($3 billion), and then clearing the purchased spectrum will not be easy. The complexity has led to the first extension for “Comments” due on January 25, 2013, rather than the original date of December 21, 2012. Reply Comments are due on Mar. 12, 2013.

The FCC is working to explain the complex, new auction process to the public and to industry. The FCC conducted an Event Workshop on Oct. 26, 2012, entitled Incentive Auctions LEARN (Learning Everything About Reverse-Auctions Now Program). On Dec. 19, 2012, FCC Senior Advisor, Media Bureau, Rebecca Hanson, participated in a three hour video taped industry webinar produced by Crossfire Media, “Incentive Auctions: What Broadcasters Need to Know,” along with more than a dozen economists and attorneys including former FCC Commissioner Harold Furchtgott-Roth. 

It was made clear during the webinar that prior spectrum auctions were relatively simple and used well-tested auction methodologies such as “descending clock” auctions. This auction will be complex because the FCC will first buy back the TV stations’ spectrum and then turn around and sell the spectrum to mobile carriers. Buying the spectrum back from TV stations is not simple because there has been no market in the past for TV spectrum. Stations received their spectrum for no cost (just as the original mobile providers). After years of building the TV station business, each TV station will have unique valuation characteristics related to TV valuation methodologies and also to mobile spectrum valuation methodologies. Each TV station serves unique geographies and populations. TV station valuations, up until the Spectrum Act, have been valued based on typical business valuations for the broadcast industry, and not on mobile spectrum values such as dollars per population per mega-Hertz served (POP/MHz). When the FCC makes offers for TV station spectrum, using a “reverse auction” process described in the NPRM, many options will be available to the FCC in considering: the amounts to offer each station, determining which stations to offer the bids to, determining which stations can be “repacked” to lower UHF channels without paying the stations for the vacated spectrum, determining which stations can share in what geographies, and anticipating which TV spectrum geographies will be most sought after by the mobile carriers and thus valued higher than other TV spectrum. 

Rebecca Hanson explained some of the issues for broadcasters. A broadcaster can go off the air and contribute all of its 6 MHz of spectrum. The FCC does not have a bid contribution mechanism for channel sharing. Channel sharing is where two or more stations share a single transmitter and antenna using one 6 MHz channel. If 2 or more TV stations want to “channel share,” the stations themselves can collaborate on the sale of the spectrum by one or more stations and use the single channel of one of the stations for both stations. Or, all three can move to a new channel and share it. The FCC believes that stations will save OpEx and CapEx by sharing a single transmitter and antenna. The stations will also make money by selling off one (or more) of the station’s 6 MHz. Stations that channel share will also keep their must-carry rights with cable companies.

There are two types of bidding processes the FCC is considering. Ms. Hanson commented that the FCC is leaning towards using a “Descending Clock,” multiple-round auction method. Bidders can see prices for each bid option offered by the FCC during the auction, prices will decline round by round (as the FCC lowers the offers), and bidders (the TV stations) can exit the auction (permanently) when the prices are too low. 

While the FCC works through the various options, it is a difficult business because the FCC will want to purchase spectrum in urban areas used by very healthy TV stations. The FCC, it seems, would rather have that healthy station voluntarily sell its spectrum rather than be forced to move to a new channel (repacking). However, TV stations that are financially healthy may be in a position to ask for more than even a mobile provider will offer. The FCC’s goal is to raise $15b-$25b for public safety and for the Treasury and not to conduct a mere “swap” of spectrum between TV stations and mobile providers. Thus, the FCC has to spend much less for the spectrum it buys from TV stations than it will sell the spectrum to mobile carriers.TV stations are working with economists and auction experts to make well-informed, and valuable decisions about what actions to take. This auction brings together for TV stations a combination of mobile auction experts and TV station valuation economists and attorneys. The use of such cross-expertise is also a first for TV stations and cannot be undervalued. Economists and attorneys participating in the Dec. 19, 2012 Crossfire Media webinar included: John Hane, Pillsbury Law; Brian Madden, Lerman Senter; Marty Stern, Moderator, K&L Gates; Prof. Thomas Hazlett, George Mason Law School; Coleman Bazelon, Brattle Group; Mark Fratrik, BIA / Kelsey; Armand Musey, Summit Ridge Group, LLC Moderator; Dr. Preston Marshall, Information Sciences Institute, USC; Dan Kirkpatrick, Partner, Fletcher, Heald & Hildreth; Trey Hanbury, Partner, Hogan Lovells; and, Barlow Keener, Principal, Keener Law Group.

Edited by Brooke Neuman

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