Reverse Auction Clearing Cost Over $86 Billion; Second Stage Expected

“We estimated the capacity of the major bidders at $40 Billion,” Citi analyst Michael Rollins emailed investors. “We don't believe another $48 Billion of demand is feasible.” If the auction goes to a second or subsequent stage, the process essentially will be reset and run over again with a lower clearing target, meaning the broadcaster bids just received in the reverse auction won't be final. “Broadcasters have done our part; now it’s up to the wireless industry to demonstrate the demand is there for low-band TV spectrum,” said an NAB spokesman.

“Strong participation from broadcast stations made this initial clearing target possible,” said FCC Incentive Auction Task Force Chairman Gary Epstein in an emailed statement. “Now the action shifts to the forward auction, which will give wireless bidders the opportunity to compete for this beachfront spectrum to meet America’s growing mobile data needs.”

The high clearing costs likely indicate a large number of stations were frozen at very high prices, broadcasters and broadcast attorneys told us. That would fall in line with anecdotal evidence we gathered from broadcasters during the reverse auction (see 1606170056). The number indicates many broadcasters showed “discipline” in sticking to their price goals, Wells Fargo analyst Marci Ryvicker emailed investors.

The high clearing cost is beyond what most broadcasters expected, several attorneys and analysts told us. “It is very surprising,” said BIA|Kelsey Chief Economist Mark Fratrik. But the possibility of a second stage was not surprising, broadcast attorneys and broadcasters told us. Chairman Tom Wheeler suggested at the 2016 NAB Show that multiple stages were likely, and broadcasters have been anticipating multiple stages since the high 124 MHz clearing target was announced.

The higher-than-expected clearing cost doesn’t necessarily mean the FCC offered broadcasters overly high prices, several broadcasters and broadcast attorneys told us. The auction is a mechanism for determining the supply and demand of the 600 MHz spectrum, and since the forward auction hasn't been held yet, it's impossible to know if the commission overestimated that demand. If the FCC had started with a lower clearing target, it might have left spectrum that could have gone in the auction on the table, an agency official told us. Though one broadcast attorney suggested starting with a lower target would have saved the time that will be wasted by multiple stages, many others told us it's unlikely participation in the reverse auction would have been so robust.

With the reverse auction complete, the forward auction is expected to start in roughly a month, with tutorials and mock auctions first for forward auction bidders, FCC officials said. Upfront payments for forward auction bidders are due at the FCC Friday. If the forward auction doesn't clear the $88 billion cost, the FCC will drop the clearing target to 114 MHz, and only broadcasters frozen during the first go-round still will be in the auction, at lower prices. With each stage, fewer broadcasters will be participating for lower prices, FCC officials have said.

Broadcasters and analysts differed on how many more stages are likely. SNL Kagan Analyst Justin Neilson said he expects at least one more stage, while some broadcasters told us they expect more. Saying “114 is not very far from 126” MHz, a broadcaster suggested one extra stage might not be enough to lower the cost to within the realm of forward auction demand.

'King's Ransom'

The unexpectedly high price left some puzzled.

“These numbers suggest there are relatively few TV stations in prime markets that are truly motivated to sell, so they are demanding a king’s ransom,” said Michael Calabrese, director of the Wireless Future Program at New America. Calabrese predicted the FCC eventually will drop to the 84 megahertz clearing target, with seven rather than 10 licenses sold in most markets. “An 84 MHz auction that sells 70 megahertz is the outcome FCC staff and others predicted early on to be most likely,” Calabrese told us. “It still is. The big downside is that unless the FCC bypasses the 114 megahertz clearing target, which they should, the auction could drag on until the middle of 2017.”

“No incentive for anyone to even turn up for Round 1 of forward auction, would just reveal bidding strategies,” tweeted satellite consultant Tim Farrar. He told us he expects round one to go “absolutely nowhere,” with bids as low as $10 billion and most licenses left unsold. Farrar also said the auction is a signal to Dish Network that bidders won’t pay what the company is looking for for the spectrum it holds.

“My expectation is that the wireless carriers wait until the bogey comes down to $30 billion or so before bidding actively,” Farrar said. “How many rounds that takes is unclear, but I'd guess the FCC will not want to prolong it excessively by stepping down only 10 MHz at a time. Perhaps we drop from 100 to 80 or even 70 MHz. … The FCC should have a good idea what it will take to get to that level so it can decide with more knowledge than outsiders have.”

“Wireless operators just don't have the money to pay broadcasters to clear that [much] spectrum, but let's not forget that the broadcaster participation was much higher than thought,” BTIG analyst Walter Piecyk told us. “The $86 billion could still drop quickly in future rounds but it now looks like this auction will drag on for a few stages.”

Record-Setting

The cost so far would top any FCC auction, observers noted.

The $86 billion is more than twice what was bid in the record-setting AWS-3 auction, Wells Fargo analyst Jennifer Fritzsche said in a note to investors. “We continue to remain very skeptical that the wireless companies have the balance sheets to spend this amount,” she said. “We believe it is highly likely that the FCC will likely have to step to a lower clearing target.” Wells Fargo's Ryvicker said by her calculations, the figure translates to a payout of $2.18/MHz-POP for broadcasters at a cost of $2.75/MHz-POP for the carriers and other buyers. “We DO NOT think these prices will hold as we go through subsequent rounds,” she wrote.

UBS analyst John Hodulik asked investors whether anyone really thinks carriers will pay $86 billion for spectrum. "Today's news suggest multiple stages, less spectrum re-deployed, a protracted timeline and greater likelihood of a failed auction,” he wrote.

The high number reported by the FCC isn’t a bad thing, said Doug Brake, telecom policy analyst at the Information Technology and Innovation Foundation. “Worst case scenario, it just takes a bit longer to find the equilibrium,” Brake said. “Better to start with an expectation of, as the [FCC] chairman puts it, fulsome bidding on both sides and work toward the middle than give this historic swap short shrift.”

“Now the finessing begins,” said Adonis Hoffman, chairman of Business in the Public Interest. “I suspect investors in the forward auction will have to dig a little deeper in their pockets than they wanted, but dig they will.” The kind of opportunity comes around about as often as Halley’s Comet, or every 75 years or so, he said.

“We are pleased to see the 600 MHz incentive auction move closer to delivering spectrum for wireless providers so they can meet Americans’ mobile-first lifestyles,” CTIA President Meredith Baker said in a statement. “With mobile data usage expected to rise six-fold by 2020, we will need to use all tools, including an effective incentive auction process and high band spectrum, to meet consumer demand and continue our wireless leadership.”