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.