FCC Open-Minded, Working Through Key Incentive Auction Questions

The FCC is focusing on two main alternatives for the reverse auction of TV broadcast spectrum -- a single-round bidding system and a descending clock auction, Hanson said. The former would be simple, but risky, she said. “A bidder will submit a one-time best offer for whichever option they choose -- going off the air, channel sharing, etc.,” she said. “In this model they have one chance to get the price right,” she said. “In some ways that’s very simple, they just have to understand their bottom-line price. But at the same time, broadcasters may be concerned about what their competitors are doing and enter into a lot of strategic thinking that could complicate and overburden how they approach a single-round sealed bid and could actually create higher risks that their bid might not necessarily be accepted because they have one chance to get it right.”

Hanson said a descending clock auction, on the other hand, “allows bidders to see multiple prices” and offers a number of advantages. “The FCC and not the bidder will offer prices to the broadcast stations,” she said. “So, for purposes of example, let’s say in a particular market the FCC asks `What stations in this market are willing to give up their spectrum for, say, $70 million?’ A number of broadcasters will say yes.” If too many stations agree, “we'll drop the price to, say, $60 million,” she said. “We'll see how many want to offer their spectrum for $60 million. Some will presumably drop out, and as that clock declines further and further, then we'll determine at a certain point if we have received enough stations and then we'll freeze the price there."

"The reason that we think this approach could be attractive to broadcasters is that under this option, all they need to understand is what their bottom-line price is to go off the air,” Hanson said. “They don’t need to worry about what their competitors are doing. They just need to know what it’s worth to them.” Hanson said the approach provides “a very simple way of participating in the auction.” One big consideration of the FCC must be making the eventual channel repacking process “as easy as possible,” Hanson added. The agency wants to “maximize the amount of spectrum we get, but at the same time to minimize the disruption to viewers of over-the-air television.”

The FCC is also examining various approaches for selling the spectrum to carriers, Hanson said. “If we're running a declining clock auction on the reverse side, then at the same time we are likely to be running an ascending clock auction on the demand side,” she said. “So wireless companies would be bidding in increasing amounts for their spectrum, while on the reverse auction side we would be offering decreasing amounts.” At some point, the FCC would decide the auction should close and “both clocks would stop,” she said. The commission would have the option of “going back to the beginning of that process, reduce our spectrum target and run the process again."

Hanson encouraged all interested parties to file comments. Comments are due on the auction rules Jan. 25, replies March 12. “We very much want the industry’s input,” she said. “We think it’s essential to this process that we get all the best and brightest ideas out there."

Brattle Group economist Coleman Bazelon said broadcasters will likely bid in the reverse auction to give up the full 120 MHz of spectrum targeted by the FCC, which could be “on the order” of $3 billion to $4 billion. “The payments to them, given the structure of the auction, would probably be more like $15 billion, so that on average broadcasters are receiving three or four times some notion of the value of their spectrum to clear,” he said. “There would still be significant revenue left over for the government beyond paying the broadcasters.”

Given the amounts broadcasters stand to gain from the auction, Bazelon said he’s “very optimistic … there will be robust” participation by stations. But the results of the auction are likely to vary by market, he said. “There are broadcasters in small markets where repacking alone will clear more than enough spectrum,” he said. “In those markets, no broadcaster will be bought out.” The “valuable broadcasters in the big markets” are also unlikely to sell, he said. “A network-owned and operated station in New York City is likely worth more in broadcasting than the auction is likely to pay them."

The FCC wants to maximize the amount of spectrum made available through the auction, and broadcasters stand to see high prices for their spectrum, said Mark Fratrik, chief economist at BIA/Kelsey. Fratrik expects many broadcasters to jump in. “But there are certainly many broadcasters who are not going to participate for many reasons,” he said. Some broadcasters aren’t even “driven by the profit motive,” he noted. “There’s lots of religious and noncommercial stations that are broadcasting. … And then there are some that are not going to be ready” for leaving the business, he said. Fratrik said that in the last few years, some “speculators” have been in the market, paying prices 40 to 50 percent more than the previous few years, likely with the intention of selling the spectrum in the auction.

Broadcasters are having a tough time figuring out “what their spectrum, as spectrum, is worth to another user,” said Brian Madden of Lerman Senter, who represents broadcasters. Broadcasters have many unanswered questions, he said. “Plainly, there are opportunities for broadcasters here and there are chances to find an exit strategy that hasn’t been available for the last couple of years,” he said. “There’s also a lot to be afraid of here, because it’s not been fleshed out as much as it should [be].” Broadcasters spent a decade preparing for the DTV transition, he added. “Now they're being asked to surrender some [of their spectrum] at a price that’s hard to figure out."

"I do think the biggest mistake the FCC made here is that in asking the question ‘how do we get more spectrum into a service where the use is higher and better,’ they never really looked at broadcasting and said, ‘Hey, we're going to be doing a lot of work here, how do we make broadcasting better?'” said John Hane of Pillsbury, which has broadcast clients. The FCC never asked, “'Is broadcasting a service that matters? Is it something the people care about? Is it something that’s useful in the national interest,'” he said. Some broadcasters feel the FCC is more focused on maximizing the amount of spectrum reclaimed, “rather than sort of reclaiming the right amount, whatever the market wants,” Hane said. Broadcasters also want transparency, he said. They want to “understand what’s going on … what may or may not happen to the them” as a result of the auction, he said.