Scalise Exactly Right On TV Bill

As the former President of an association of local TV Stations, former President of Network Distribution for Fox, former President of the ABC Television Network, former Executive VP of The Walt Disney Company and a former Law Professor, I write to strongly support House Majority Whip Steve Scalise’s Bill, The Next Generation Television Act.  This Bill gets it exactly right.  His Bill would repeal a steaming pile of outdated, conflicting and unnecessary government interventions into the market for distributing television programming.  Of all the critical functions for which we need the Federal Government, managing and pricing the distribution of TV programs is not one of them!  The Scalise Bill would enable perfectly capable market forces to assure that consumers have access to the widest possible array of television programming from the widest possible array of distribution platforms.  And it would be fair to all industry segments.

 

History

 

In the late 1960’s several Court cases held that Cable retransmission of the programs broadcast by TV Stations did not constitute a “performance” of those programs under the then extant 1909 Copyright Act.  The Supreme Court urged the Congress to write a new law. And the Congress urged the Broadcasters, Cable companies and Programmers to agree on a framework for a new law. In 1972, at an historic meeting where I was present (as a young Law Student), the three industry segments reached the “Consensus Agreement”.  A copy of that Consensus Agreement can be found as Appendix B to a 1992 Report Of The Copyright Office. https://www.copyright.gov/reports/cable-sat-licenses1992.pdf

 

In 1976 Congress adopted a new Copyright Act that made Cable retransmission of broadcast TV shows a “performance”.  But, because it was thought that it would be burdensome for then fledgling Cable systems to negotiate with myriad program owners, Cable was given a government granted compulsory copyright license.  And the FCC adopted numerous Regulations (including Network Non-Duplication and Syndicated Exclusivity) designed to ameliorate the market disrupting effect of the compulsory license.  Later, compulsory licensing was extended to the Satellite TV industry segment.

 

Note that a key feature of this issue that has persisted since the early 1970’s is that it straddles Copyright and Communications Policy issues.  That means that it straddles the jurisdiction of the Judiciary and the Commerce Committees.  [In one meeting on Capitol Hill in the early 1970’s I (a young law student) opined that we should not let Committee jurisdiction get in the way of doing what was right.  In a stern rebuke that I will never forget, then House Commerce Chair John Dingell informed me “There is no issue more important than the scope of the jurisdiction of the Committee on Energy And Commerce”.]

 

Shortly after the 1976 Act, Cable systems began carrying both broadcast TV Stations and hundreds of non-broadcast channels – channels like Discovery, History Channel, HBO, Showtime, etc.  Because compulsory licensing does NOT cover the hundreds of non-broadcast channels, their carriage is proof that the Cable operators CAN secure performance rights without the need for a compulsory license.

 

By 1992 Congress found that Cable systems were paying carriage fees to the non-broadcast channels but not to the Broadcasters and that this was unfair to the Broadcasters.  The simple way to fix this would have been to repeal the compulsory licenses as then suggested by The Copyright Office and by Fox Broadcasting Company where I was employed.  But the legislative vehicle moving through Congress was a Commerce Committee Bill.  So, instead of repealing the Copyright Act compulsory licenses, Congress simple layered over them a Communications Act Retransmission Consent right requiring Cable/Satellite operators to negotiate and pay for the right to use the Broadcast “signal” carrying the compulsorily licensed programs.  In effect, Congress giveth with the right hand and then taketh with the left, creating a huge government bureaucracy.  Cable/Satellite operators get the program rights through the compulsory license but must negotiate and pay for the “signal”.  It is a ridiculous “legal fiction” that the Cable/Satellite operators (and consumers) desire the signal – they want the programs!  What we have today is a direct product of the jurisdictional straddle that has haunted this issue forever.

 

It Is Passed Time To Undue This Mess

 

As Majority Whip Scalise correctly perceives, it is passed time to repeal this whole mess and to defer to market forces.  His Bill does so in an even-handed and fair way that is certain to enhance consumer welfare.  Below are some of the questions I have heard raised about his Bill and my responses.

 

Will It Work?

 

Some continue to argue that the compulsory licenses are necessary for Cable and Satellite operators to retransmit broadcast programs.  Honestly, that is just silly.  For decades Cable and Satellite have been clearing the rights to programs on non-broadcast channels without a compulsory license. The channel owner clears all the rights and then sublicenses them to the Cable/Satellite operator.  Clearing the rights for programs on Broadcast channels could work the same way.

 

What About OTT Streaming Services?

 

In recent years some have argued that Congress should extend compulsory licensing to online streaming services.  But those services are multiplying and flourishing without compulsory licensing. Netflix has grown like a colossus over the industry.  And many streaming services like Hulu and Direct Now carry BOTH Broadcast and non-broadcast programs without the need for compulsory licenses.  In fact these streaming services are simply more proof that there is no need for the compulsory licenses.

 

Will The Broadcasters Have To Pay More To License Programs?

 

Some Broadcasters have expressed the fear that they will have to pay higher license fees for programs if they need to secure the right to sublicense those programs to Cable/Satellite retransmitters.  I do not believe that will be the case.  Many of the programs on TV Stations are Network shows secured as part of a Network Affiliation agreement.  The Networks already charge the local Stations as much as the market will bear – some argue they charge too much. And Retransmission Consent fees have been acting as a proxy for copyright and routinely are split between the Network and the Station.  There is no evidence that any of this would change if we get rid of the “legal fiction” that that Cable/Satellite operators are paying for the “signal” rather than the programs.

 

One of my last jobs was with a large producer and distributor of television programs including programs sold to local TV Stations on a market-by-market basis (“syndicated” programs).  I asked the executive in charge of those syndicated sales whether local Stations would be charged more if the boilerplate license agreement was amended to include the right to sub-license the programs to local cable/satellite operators. After polling the sales representatives the executive answered “no” because the sales representatives currently sell the show to the highest bidder in the market and that dynamic would not change.

 

Would Copyright Be A Stronger Foundation For Broadcaster Retransmission Fees?

 

There is one bedrock principle in all of this – Broadcasters, just like non-broadcast channels, deserve to be paid by any retransmitter.  In my opinion Broadcasters should favor repealing the compulsory licenses.  There is a strong argument that copyright actually would give local TV Stations a stronger foundation for their second revenue stream.  Currently some Cable/Satellite operators have mounted a non-stop attack on the Communications Act Retransmission Consent fees charged by Broadcasters for their “signal”.  By contrast, pure copyright is bedrock Constitutional principle that is harder to argue against.  Local TV Stations would have an entire army of fellow copyright owners to help them defeat any effort to undermine basic copyright rights.  Simply stated, pure copyright is simply a stronger foundation to assure a continued second revenue stream for Broadcasters.

 

What About The Rights Of Program Owners?

 

This might be the easiest of all.  When a programmer goes to bed at night its first prayer is for the right to direct and control the exploitation of the programs it has created unfettered by government intervention.  The Scalise Bill is the answer to that prayer.  In any rational world, this Bill will have the vigorous and unqualified support of program owners.

 

A Caveat On Must-Carry

 

I very strongly support all of Majority Whip Scalise’s Bill dealing with repeal of compulsory licenses and associated Statutes and Regulations.  And, I support his continuation of Must-Carry for public Stations.  I express no opinion regarding the future of Must-Carry Regulations for commercial Stations, leaving to others to determine whether there are public policy reasons to continue those Regulations, at least for certain categories of Stations.  Repeal of compulsory licenses does not require repeal of Must-Carry.  Must-Carry Stations would need only certify that they had secured the right to sub-license the performance rights in the programs on their schedule.

 

The One Truly Unthinkable Course Of Action

 

As noted I strongly favor repeal of the compulsory licenses and all of the Statutes and Regulations that exist to ameliorate the market disrupting effect of the compulsory licenses – Retransmission Consent, Syndicated Exclusivity, Network Non-duplication, etc.  The one truly unthinkable action would be to leave the Compulsory Licenses in place but repeal any of those ameliorating Statutes and Regulations.

 

I have testified before Congress on these issues multiple times.  Links to two recent examples are below:

 

Testimony before the House Judiciary Committee, September 2013 – https://judiciary.house.gov/wp-content/uploads/2016/02/Padden-testimony-091013.pdf

 

 

Testimony before the Senate Commerce Committee, July 2012 – https://www.gpo.gov/fdsys/pkg/CHRG-112shrg86916/html/CHRG-112shrg86916.htm

 

Preston Padden

 

 

 

 

 

 

Spectrum Welfare For Microsoft?

On July 10, 2017 Microsoft scored a public relations coup in The New York Times.  The headline read, “To Close Digital Divide, Microsoft to Harness Unused Television Channels”.  How perfect!  Microsoft would be the selfless servant of the noble goal of providing residents and businesses in rural communities with the same high-speed Internet access enjoyed by those in big cities.  

There was only one problem.  The Microsoft plan was, in the words of highly respected Harvard Law Professor Susan Crawford, a cynical “hustle”.  Wired, 7/26/17.  Microsoft’s real goal is to get for free the scarce electromagnetic spectrum it wants to be a major player in the coming Internet Of Things – a world where all the devices in our lives and in industry will be connected to each other.  Providing and managing those connections will be a huge business and Microsoft wants in.  Its rural “White Spaces” Proposal is a pretext to get free spectrum in the TV Band nationwide. Microsoft already has access to “White Spaces” channels in rural America. If Microsoft’s real objective was to serve these rural areas, why is it asking the FCC to create “White Space” channels in downtown New York, Los Angeles, Chicago and other urban areas?

Microsoft is a great American company whose current management is highly respected.  That management is trying to recover from the disastrous missteps of its predecessors in famously missing the mobile revolution.  While Apple, the wireless carriers and others were investing heavily in the future, former CEO Steve Ballmer kept Microsoft on the sidelines.  He stated, “There’s no chance that the iPhone is going to get any significant market share. No chance.”  TGAAP 7/11/14.  Current Microsoft CEO Satya Nadella has acknowledged, “We clearly missed the mobile phone, there’s no question.  Our goal now is to make sure we grow new categories.” V3.co.uk, 10/25/16. 

Among those new categories is the Internet Of Things.  But having missed the mobile revolution, Microsoft seems to not understand one of the central building blocks of a mobile business – investing in spectrum.  The recovery Microsoft seeks will not be found by trying to get for free the mobile spectrum resources for which other competitors pay dearly.  One can be sympathetic about Microsoft’s past missteps, and root for them to do better in the future, without believing that they deserve Spectrum Welfare.

There are at least four ways that Microsoft can acquire the spectrum it wants to be a player in the Internet Of Things without seeking a public hand out.  First, it can contract for capacity with one or more of the nation’s wireless carriers who paid for their spectrum in FCC auctions. Second, Microsoft could participate in upcoming FCC spectrum auctions.  Reminiscent of its mistakes in mobile, Microsoft sat on its hands and failed to participate in the most recent FCC auction where it could have bought the exact same 600 MHz spectrum it now wants for free.  Third, Microsoft could buy spectrum in a secondary market transaction – the kind of transaction routinely used by other companies seeking spectrum.  In fact, there are several investors who, with an eye toward future resale, did buy 600 MHz Spectrum in the auction (again, the exact same spectrum Microsoft wants) who would be only too happy to sell to Microsoft.  Finally, Microsoft could simply buy a business that already owns spectrum.

In the 600 MHz auction, I led a Coalition of TV Station owners who were interested in selling their channels.  The auction was a success. But because Microsoft sat on the sidelines, demand was below expectations.  As a result, many Stations that wanted to sell were not purchased and all of the 600 MHz Spectrum that was available was not reallocated.   Now those Stations, and the Stations that never wanted to sell, are being subjected to an involuntary “repacking” process in which they must move to new channels and erect new antennas and other transmitting equipment.  

The repack is a Herculean task for which there is not enough time or money. Worse yet, there are not enough channels for all the TV stations including translator stations that bring network programs and local news to rural areas and low power stations that provide important local programming.  The Microsoft “White Spaces” plan – its land grab for free nationwide 600 MHz Spectrum – would seriously exacerbate these difficulties. Granting Microsoft’s request would mean that more consumers would lose more of the TV programming that they rely on today.

Microsoft’s bet seems to be that it’s cheaper to hire slick PR muscle and to try to hoodwink regulators into handing out free spectrum than to buy spectrum like everyone else.  As someone whose 600 MHz auction battle scars are still healing, I sure hope they are wrong.

 

Preston Padden is the former President of the ABC Television Network and a senior executive at Fox and Disney.  Presently he is a consultant to broadcasters, to broadcast associations and to spectrum investors.

 

FCC TV Ownership Rules & Unintended Consequences

[Note: Regrettably, no one paid me to write this. The views and experiences are my own.]

 

I have longtime friends who believe that the public interest requires the FCC to strictly limit the ownership of multiple TV stations. I genuinely understand and respect their opinions. But, my personal experience over 40 years in the industry suggests that TV ownership limits intended to enhance diversity may, in fact, prevent the creation of meaningfully diverse competitors.

 

My first job out of law school in 1973 was at Metromedia, Inc. Metromedia had emerged out of the ashes of the Dumont Television Network. In the late 1940’s television pioneer Dr. Allen Dumont warned the FCC that it must assign at least four VHF stations to all the major markets to assure the survival of the then extant four television networks. But in it’s Sixth Report And Order On Television Allocations in 1952, the FCC did not listen and Dr. Dumont was proven “dead right” – his network folded. The FCC’s allocations decision condemned the nation to decades of service from only three commercial television networks. Reading this history was my first lesson in how well meaning FCC Rules can have unintended consequences for competition and diversity.

 

As the Dumont Network was going out of business, it spun off to shareholders its owned TV stations in New York, WABD (named for Dr. Dumont) and in Washington, D.C., WTTG (named for Dumont Chief Engineer Thomas T Goldsmith). Businessman John Kluge acquired de-facto control of the new company and adopted the name Metromedia. A passionate competitor and risk taker, Mr. Kluge struggled to fulfill the FCC’s continuing priority public interest objective to create a fourth free-over-the-air commercial television network.

 

Kluge aggressively sought to expand Metromedia’s portfolio of owned television stations – the indispensible foundation of any network. But his efforts were thwarted by the FCC’s own Rules limiting the ownership of multiple stations. One particularly prominent obstacle was the FCC’s “Top 50 Policy” that required a “compelling public interest showing” to own more than 3 TV stations, or more than 2 VHF stations, in the top 50 markets. Of course, the TV stations owned by the three entrenched networks were “grandfathered” and exempt from compliance with the FCC’s ownership Rules and policies. The first decade of my life in the industry was consumed drafting, and advocating for, waivers of the FCC’s TV station ownership limits and its Top 50 Policy in order to advance Metromedia’s quest to launch a fourth network.

 

Meanwhile, Kluge and his executives, including television legends Al Krivin and Robert Bennett, were hard at work investing in compelling programming. They developed a late night show entitled “Thicke Of The Night” launching the career of comedian Alan Thicke. They spent a fortune on a five night-a-week primetime variety show hosted by Jerry Lewis. And they developed first-run sitcoms like “Dusty’s Trail” (essentially “Gilligan’s Island” on a Western wagon train). At the same time, Metromedia set industry records for daily local public affairs programming including the programs “Midday” in New York, “Chronicles” in Boston and “Panorama” in Washington.

 

But, the greatest programming in the world could not overcome the handicap imposed on Metromedia by the FCC’s TV station ownership Rules and policies. Mr. Kluge was not able to fulfill his dream, and the FCC’s policy objective, of creating a fourth network.

 

So, in 1985, Kluge sold his TV stations to Rupert Murdoch who also acquired the then bankrupt 20th Century Fox film studio. Together with Barry Diller and Jamie Kellner, Murdoch set out to create the long sought fourth network. Again, FCC Rules got in the way. On behalf of Fox it fell to me to seek waivers of TV station ownership limits and other Rules intended to promote diversity like the TV/Newspaper cross-ownership Rule and the Financial Interest And Syndication Rule. In other words, the effort to create meaningful diversity required waivers of FCC Rules intended to create diversity!

 

The good news is that because the benefits of granting the Fox waiver requests were so strong – creation of a fourth free network and saving more than a hundred jobs at the New York Post – even strong supporters of TV ownership regulation like Senator Ted Kennedy, Governor Mario Cuomo and Senator Dan Inouye supported our waiver requests. But the point is that there is something fundamentally wrong when creating new competition and diversity requires waivers of Rules intended to promote competition and diversity.

 

I offer this history because I lived it. On many occasions I thought, “Why can’t the FCC see that these TV station ownership restrictions are preventing the creation of meaningful entities of scale that could bring to viewers the benefits of greater competition and diversity”? In today’s world of hundreds of cable/satellite networks, the Internet and OTT providers, that question is more compelling than ever.

 

Recent initiatives by the current FCC have given me some hope that the Commission’s well intentioned but counter productive and outdated TV ownership Rules finally may be repealed. If so, consumers almost surely will benefit from the emergence of additional free over-the-air networks. And at a time of escalating TV costs and cord cutting, enabling the creation of additional competitive and diverse free networks would be a great public service.

 

Some of my longtime friends seem to oppose repeal of the TV station ownership Rules because one beneficiary of repeal might be Sinclair Broadcasting Company, a company widely believed to have conservative views. But these same friends would be the first to insist that Federal licensing decisions cannot – must not – be based on political views.

 

I have not always been on the same page with Sinclair, particularly during a business dispute over the first round of Fox affiliation renewals. But, Sinclair has emerged as a genuine television industry leader, especially on technology issues. And, for all we know, the next beneficiary of deregulation could be Tegna, Scripps, George Soros or Tom Steyer. And that is what free markets, competition and diversity are all about. My real world experience with the television ownership Rules leaves no doubt that consumers will be well served by their repeal.

 

 

FCC Incentive Auction Post Mortem

Today, the FCC’s Incentive Auction reached its “Final Stage”.  This means that, for the first time, the prices at which participating broadcast stations were frozen are real.  I am happy for the winning broadcasters.  I am disappointed for the participating broadcasters who did not win.  And I am deeply grateful to the dedicated FCC staff who worked tirelessly for four years to turn a bare statute into an auction.

When this process began the carriers proclaimed their urgent need for 600 MHz spectrum.  But, there was great concern whether broadcasters could be brought to the auction.  In part through the work of the EOBC, the broadcasters showed up.  But, interest among the carriers declined.  In the end, the carriers left 42 MHz of 600 MHz spectrum on the table – spectrum broadcasters were willing to sell.

A full post mortem will take time.  But it appears that delay, complexity and shifting carrier priorities led to a result that was less than it could have been.

 

 

 

Thoughts On ATSC-3/SFN’s And On Ansin/NBC

ATSC-3 And Single Frequency Networks
ATSC-3 and SFN’s may be the just what broadcasting needs to prosper in the future.  Certainly there are smart and dedicated women and men working hard to make these technologies a reality.  I would offer a few cautions – (1) acquiring sites, building multiple towers in each market and enabling consumer reception of a not-backwards-compatible new standard won’t be cheap, (2) enabling better and “hassle-free” over-the air reception inadvertantly could could undermine Retrans revenues from cable, satellite and telcos and (3) it is by no means certain that smartphones and tablets ever will be engineered to receive frequencies in the broadcast band.
The first point needs no explanation.  The ATSC-3/SFN vision comes with major costs.  Of course, those costs may be worth it – if they enable significant new revenues.
The second point (the danger of undermining Retrans revenues) hit me when I read this quote from Sinclair’s Mark Aitken (for whom I have enormous respect) describing the ATSC-3/SFN consumer experience in Communication Daily on March 23 :
“Imagine how simple it becomes for a consumer to go on Amazon, order a TV, the drone drops it off on your porch two hours later, and you grab it and take it out of the box and plug it into the wall and you’ve got television. There’s no climbing up on the peak of the roof or into the attic, but you’ve elevated the power in a market in simple embedded antennas, and suddenly you allow broadcast television hassle-free.”
My own view is that broadcasters would be better off if their second revenue stream from cable, satellite and telcos was based on pure copyright.  But there is no question that broadcasters need and deserve a second revenue stream to support their programming services.  If ATSC-3/SFN “hassle-free” over-the-air reception causes the consumer in Mark’s example (and other consumers) to “cut the cord”, the station would lose Retrans fees.  Maybe that loss could be offset by other new revenues, but the potential loss should be a part of every station’s due diligence about ATSC-3/SFN.
Finally, the vision of offering programming and data services to mobile devices needs to be tempered by the realities of smartphone and tablet technology.  In the upcoming Incentive Auction, there is a reason why the FCC needs to create a compact contiguous band for the new wireless frequencies – a reason why the FCC needs to “repack” broadcasters.
Mobile devices are built to receive specific frequency bands pursuant to standards developed by the 3rd Generation Partnership Project – a worldwide consortium of carriers, chip makers and device manufacturers.  The physical limit of antenna size in smartphones constrains the size of the receivable frequency bands.  It is expected that mobile devices will be built to receive the frequencies in the new wireless band.  Absent a prolonged and uncertain effort to lobby carriers, chip makers, device manufacturers and 3GPP, those mobile devices will not receive transmissions from broadcasters operating in the new broadcast band.
I look forward to watching the progress of the ATSC-3/SFN initiative and I hope that it results in great new opportunities for broadcasters.  At the same time, broadcasters need to be fully informed about the challenges that lie down this road.  Since the deadline for broadcasters to register for the Incentive Auction has long passed, and the window to register preferred options has closed, I thought it safe to offer my thoughts without anyone thinking that they are related to the auction.
The Ansin/NBC Dispute
The dispute between NBC and Ed Ansin is unfortunate on many levels.  In the early, struggling, days of the Fox Network, there was no more supportive and constructive Affiliate than Ed Ansin.  As head of Fox Network Distribution I worked closely with Ed and his colleague Bob Leider at WSVN, Miami.  In those early Fox days, the older Networks ridiculed us, we burned through money like confetti and many doubted that we would succeed.  But Ed and Bob never wavered.  They carried our shows in pattern (not all Affiliates did), they generously promoted our shows, they offered valuable and constructive advice and they delivered big numbers to our fledgling Network when we needed them.
Because of differing self-interest, Networks/Affiliate conflict is a fact of life and always has been.  But those same self-interests are what keep Networks and Affiliates together.  The Networks provide Affiliates with the best programs and a strong identity.  The Affiliates provide the Networks with the best distribution in television – no other distribution platform is even close.  When I was at ABC there was no broadcast station available to us in the Salinas/Monterey market.  So, we “affiliated” with a local cable channel created by Time Warner Cable complete with a local newscast.  The ABC ratings in that market were about 1/3 of the national average.  Later ABC affiliated with the D2 signal of the local Hearst broadcast station and the ratings came back up.
Today, Ed Ansin’s WHDH in Boston is a ratings powerhouse for NBC and those ratings cannot be taken for granted.  It is not my place to second guess NBC’s business decisions.  The people running the NBC Network and the NBC Owned Stations are as talented, experienced and decent as anyone in the industry.  This is just a note to say from my own personal experience (1) broadcast Affiliates are the best distribution, (2) Ed Ansin in particular knows how to generate big ratings and (3) if I was running a Network today, I would want him as a part of my distribution platform.

600 MHz $$$ Will Exceed AWS 3

Some commentators have predicted that the revenues generated in the FCC’s 600 MHz auction will be lower than the $44.9 Billion in the AWS 3 auction.  I believe that those projections are very wrong and here’s why.
The AWS auction involved 65 MHz of spectrum, only 50 MHz of which was paired spectrum.  There were 70 qualified bidders.  The pricing was driven primarily by four bidders – AT&T, Verizon, T-Mobile and Dish.
Based on detailed auction simulations in the FCC record, the 600 MHz auction is likely to include a net of 90 or 100 MHz of paired spectrum – twice as much as in AWS 3.  That fact alone strongly suggests higher – not lower auction revenues.  And, demand is greater in this auction.  104 bidders have filed in the 600 MHz auction – more than the 70 in AWS 3.
All the key bidders who drove the pricing in AWS 3 (AT&T, VZ, T-Mo and Dish) are back bidding in the 600 MHz auction.  And, they have the same capacity and the same incentives to bid as they did in AWS 3.  Spectrum is still the life-blood of the carriers.  There is no more spectrum in the pipeline after this auction.
600 MHz is uniquely valuable spectrum – it travels long distances and goes through walls.  Even advanced 5G systems will need low band spectrum for signaling channels.  As would be expected in their “posturing” before the auction, the carrier/bidders have tried to downplay the value of this spectrum.  But just a few weeks ago, Bill Smith, President of AT&T Network Operations, gave a speech in which he candidly admitted the continuing need for more spectrum.  And with AT&T and VZ launching spectrum hogging new video services and T-Mo inviting their customers to “Binge-On”, the suggestion that they might not bid aggressively is just silly.
In terms of financial capacity, the major carriers are among the most credit worthy enterprises on the planet.  And, at the moment, money is free!  With no other auctions looming, the carriers will have plenty of time to de-lever after the 600 MHz auction.
As for Dish, they continue to have the same interest in protecting the value of their spectrum portfolio as they had in AWS 3.  And, Dish knows that mid-band spectrum alone cannot get the job done as evidenced by T-Mo’s voluminous filings at the FCC begging for a low-band reserve.
So, the four bidders who drove the pricing in AWS 3 will drive the value of twice as much spectrum being offered in the 600 MHz auction.  But wait, there’s more – much more!
In addition to those four bidders, data just released by the FCC reveals additional deep pocketed potential disrupters who have filed to participate in the 600 MHz auction.  Any one of these disrupters – any one of them –  could seriously raise the auction stakes for every bidder.  They include:
– Billionaire Technology Executive Raj Singh bidding with Columbia Capital (Senator Mark Warner).  Columbia just hired former FCC Wireless Bureau Deputy Chief Jon Liebovitz who helped to design the auction.
– Comcast.
– Billionaire Tech and Media Investor Mario Gabelli.
– Billionaire Silicon Valley Executive Chamath Palihapitiya who already has built a wireless business in Sri Lanka that he runs from San Francisco.  Palihapitiya has publicly stated his intention to bid up to $10 Billion in this auction and reportedly has recruited an extremely wealthy Asian investor.
 – Sinclair Broadcasting which has publicly stated their intention to sell $2 Billion in broadcast spectrum in the first part of the auction.  In the second half of the auction, they can bid that $2 Billion, in a tax advantaged manner, before they even begin to impact their balance sheet.
 – Liberty Global.  After filing to participate in the auction, a spokesperson for Dr. Malone’s organization stated that they have changed their minds.  Whether that is true, or a typical bidder’s pre-auction misdirection, remains to be seen.
 – Former Verizon Executive John Dirkson and as yet undisclosed investors.
None of these potential disrupters was a factor in driving the pricing in the AWS 3 auction.  But one or more almost certainly will play a role in driving up the 600 MHz prices.
So, for anyone to believe that the 600 MHz auction will yield less revenue than the AWS auction, they MUST believe:
(1) that AT&T, VZ, T-Mo and Dish will bid less than half of what they bid in the AWS auction (recall that the 600 MHz auction will involve twice as much spectrum); and
(2) that none – not a single one – of the new disrupters actually will bid in the auction.
For example, the analysts would have to believe that Columbia Capital recruited Raj Singh and lured Jon Liebovitz from the FCC without any intention of bidding in the auction.  And, they would have to believe that Chamath Palihapitiya recruited his Asian investor and boasted about bidding $10 Billion without any intention of actually bidding.  Reductio ad absurdum!
 
Any objective review of the facts – the doubling of the amount of spectrum likely for sale, the unique and essential quality of the spectrum, the increased number of bidders, the financial capacity and the business incentives of the returning major bidders, AND the existence of many deep pocketed potential disrupters – compels only one conclusion.  The revenues in the 600 MHz auction will be greater than the revenues in AWS 3.

How Will The FCC’s Incentive Auction Play Out?

Television Broadcasters, existing wireless carriers, potential new wireless entrants, speculators and the FCC itself all are curious about how the long awaited U.S. Incentive Auction of 600 MHz spectrum will play out.  Prominent questions include:

 

–       How much spectrum will the FCC clear?

–       How much will the cleared spectrum cost the FCC?

–       How much impairment will there be in the spectrum blocks offered to carriers and other bidders?

–       How many television stations will be assigned a repacked channel in the duplex gap or elsewhere in the new flexible use band?

 

In a new analysis conducted on behalf of a former Member of the Expanding Opportunities For Broadcasters Coalition, Cramton and Associates attempted to answer these questions.  Peter Cramton is a highly expert auction economist having advised 12 governments and 36 bidders in spectrum auctions around the world.  He has assembled a team of remarkably talented associates.  For their just completed Incentive Auction analysis they developed a full suite of auction tools including sat solvers, reservation (exit) price models, pre-solvers and performance analysis modules, an auction simulator (including what may be the only private sector replication of the FCC’s ISIX interference standards) and a clearing target optimizer.  All of these tools faithfully replicate the tools the FCC will use to run the auction and fully implement U.S. government agreements with Mexico and Canada.

 

The Cramton team did not “back into” their findings.  Most importantly, they did not start with assumed clearing targets.  Instead they made reasonable (even conservative) assumptions regarding broadcaster participation and then let the optimizer program work its magic.  For example, in the base case they assumed that affiliates of the top 5 commercial networks and PBS in the top 50 markets – the markets most critical to establishing the clearing target – would not tender their channels.  And they performed thousands of simulations that tested varying levels of TV Station reservation prices to assure robust results.

 

Of course, no pre-auction simulation can predict actual auction results with 100% accuracy.  But, the Cramton results represent a highly reliable estimate of the likely outcome of the Incentive Auction.  Those results include the following:

 

–       The FCC is likely to clear at least 114 MHz.  Tendering one additional TV Station beyond the base case in each market – perhaps through channel sharing – clears 126 MHz.

–       At 114 MHz, national impairment is likely to be only 4.9% and will be concentrated along the Mexican border, with minor impairment in the Northeast (4.5% national impairment comes from Mexico – so only 0.4% of the impairment comes from U.S. Stations).

–       At 114 MHz, 96.8 % of the spectrum blocks offered to bidders in the top 40 markets will be “Category 1” blocks.

–       Clearing 114 MHz is expected to cost the FCC approximately $42 Billion (including broadcaster repacking reimbursement and the cost of running the auction) or $1.49 MHz/Pop.  Because this is an actual simulation, not a “prediction”, there is no estimate of how much more carriers and others may bid.

–       At 114 MHz, only between 1 and 3 TV Stations will be assigned a channel in the duplex gap or elsewhere in the flexible use band – fewer even than FCC Chairman Wheeler’s July 16 press conference estimate.

 

The results of the new Cramton analysis should give comfort to television broadcasters, to wireless carriers and to the FCC Officials who have worked tirelessly to implement Congress’ auction mandate.

Response To FCC New Data And Changed Auction Filing Dates

This is commendable super due diligence by the FCC Staff and it is great news that there is no change in the March 29 date. The extra filing time for stations and the emergence of well funded new entrant bidders, like Facebook exec led Rama, assure that more broadcasters will be able to benefit from the historic bidding frenzy for the last available low band spectrum.

Response To NAB Repacking Study

The duration and cost of Repacking is a serious issue deserving of careful consideration.  Hopefully, market response to high demand for tower crews and antennas will stimulate more supply than a static analysis would suggest.  As far back as a blog post in April of 2014, one of the authors of the NAB study referenced the possibility of slowing the repack to sync up with the transition to ATSC 3.0 (“The Weekly Riff”, Myra Moore, April 28, 2014).

Some “Boulder Thinking” About The 600 MHz Auction

Having spent the last three years working on the FCC’s 600 MHz “Incentive Auction” as Executive Director of the Expanding Opportunities For Broadcasters Coalition (“EOBC”), I’d like to offer a little “Boulder Thinking” about the opportunities for broadcasters in the Reverse portion of the auction and the likely level of demand in the Forward portion.

These thoughts are informed by: (1) sophisticated auction simulations conducted by Peter Cramton and Associates and (2) conversations with prospective bidders. The simulations were based on replication of FCC sat solver and optimizer programs, station domains and interference constraints, a detailed station reservation price model, ISIX inter-service interference calculations, border constraints (including a Canadian multiplier), projected clearing targets and weighted impairment estimates. Without implying a corner on wisdom, these simulations and conversations provide a factual baseline not available to others who have offered views about the auction.

My conclusions are: (1) that the FCC will succeed in clearing 114 to 126 MHz with very low impairment enriching hundreds of broadcasters who will continue to serve their communities (and preserve their future technical options) through channel sharing and (2) that demand in the Forward auction will be so strong that bidders will have to pay dearly to walk away with a piece of coveted 600 MHz spectrum.

The “hockey stick” growth of consumer and business demand for wireless capacity is well documented. The Internet Of Things, increased-user-to-the-cloud uploads, machine-to-machine communications and spectrum intensive advances like augmented reality will fuel even greater, and more symmetric, demand in the future. The unique capabilities of low band spectrum are well documented and led the FCC to impose the first-ever spectrum reserve. Low band capacity will be critical for future uses like 5G control channels and increased user uploads from low power hand held devices. Add the fact that there is no more low band spectrum in the pipeline and it is clear that demand in the 600 MHz Forward auction will be extremely robust.

Existing carriers, new entrants to the wireless business and investor/speculators (gold and oil are not what they used to be) are likely to drive the MHz/Pop costs to new record levels. EOBC representatives have spoken with many potential bidders and confirmed their plans to participate. The bidders will include some of the most credit worthy entities on the planet eliminating any concerns about financial capacity. Simply stated, they need it and they can afford it.  And, some broadcasters who sell their spectrum in the Reverse auction may decide to reinvest some or all of their proceeds, perhaps on a tax deferred basis, in the Forward auction.

For broadcasters, the auction presents a timely financial hedge against an uncertain future while maintaining current service, and future technical options, through channel sharing. Registering for the auction is a no-brainer. By registering, a broadcaster’s only commitment is to accept its sky-high opening price – prices some auction critics have labeled “illusory”. If the FCC lowers that price by one penny, the broadcaster can exit.

Using a realistic station reservation price model, our simulations show that the FCC is likely to recover 114 or 126 MHz of spectrum with very little impairment. Some lucky broadcasters will freeze at, and be paid, the high opening prices – a very high-class “problem”. And, simply being registered assures a repacked channel in the broadcast band for stations that are not bought in the auction.

I have great respect for broadcasters who are excited about the prospect of a new digital television standard. Because of channel sharing, enthusiasm for a new standard need not be mutually exclusive with auction participation. Instead the auction provides a hedge against the very real hurdles that lie between today and meaningful implementation of a new standard. Those hurdles include: (1) getting the entire TV industry (broadcasters, networks, TV set manufacturers, etc) to coalesce around a complete new technical standard; (2) persuading the FCC to adopt that standard (the last time the FCC approved a new standard it took 10 years); (3) finding the money to fund potentially Billions of Dollars worth of converter boxes or dongles for the existing universe of non-compatible TV sets (Congress is unlikely to foot the bill); (4) persuading device manufacturers to build and to sell such devices; (5) financing and building a large number of new single frequency distributed transmission sites in each market; (6) developing new business plans for broadcasters’ own transmissions and/or negotiating spectrum leases with carriers and (7) winning regulatory battles over the scope of permissible “flexible use” of broadcast spectrum.

While I hope that the industry is successful in running this gauntlet, most broadcasters are likely to conclude that registering for a big auction payday today, while continuing current business and preserving future options, is the way to go.

Based on all of the facts available to me, I believe that the Incentive Auction will be a huge success.