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.

[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 20^th 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.

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.

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.

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.

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).

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.