Forward Auction Ends in 1 Round, Surprising Some, as Panel Discusses Repacking

The auction process is designed to find "equilibrium" between broadcast spectrum prices and wireless demand, said Kiddo. Others also expressed surprise, with some analysts saying it could mean prices will be lower than the high end of expectations in whatever proves to be the final stage. A few weeks ago, the IATF released the repacking plan (see 1610040076), which some broadcasters said may still prove too complex for a smooth post-auction transition to new channels for affected stations.

Under the rules for the auction, a round ends when supply and demand hit an equilibrium in the top 40 partial economic areas (see 1608300064). At the initial prices in Stage 2, that happened in round one. Stage 1 took 27 rounds. “Bidding in the forward auction has concluded for Stage 2 without meeting the final stage rule and without meeting the conditions to trigger an extended round,” the FCC said in an announcement. “The incentive auction will continue with Stage 3 at a lower clearing target.”

Auction watchers echoed Kiddoo's statement that the auction was proceeding as planned. "We always expected the incentive auction to be a multi-staged process," said CTIA Vice President-Regulatory Affairs Scott Bergmann. "This is a complicated auction design and no significance should be attached to interim steps," said Preston Padden, who advises some reverse auction participants. The auction will become more competitive "as supply contracts," he said.

AFCCE President Bob Weller said he was surprised by the stage's swift end, and it was too soon for him to speculate on what the single round forward auction meant. Several other broadcast attorneys told us they also were surprised and unsure how to interpret the wireless bidding. This result was "completely unexpected," Wells Fargo analyst Marci Ryvicker emailed investors.

The lack of wireless interest in Stage 2 makes it more likely the auction will stretch into a fourth stage, during which the clearing target will be 84 MHz, analysts emailed investors. Citigroup's Michael Rollins said the bidding showed demand for 80 MHz of spectrum, and the auction would likely stretch until March. Ryvicker said the quick stage means the auction will proceed to the 84 MHz point more quickly and end sooner. The FCC said it will release information about Stage 3, expected to have a clearing target of 108 MHz, next week. The IATF has said it won't skip any clearing targets. One broadcast attorney told us the swift end of Stage 2 likely makes skipping even more unlikely, since the commission hasn't had any lead time to ready itself to do so.

The FCC repacking plan doesn't do enough to account for delays caused by local zoning and permitting processes and possibly required structural changes to towers, said Gates Air Engineer Jay Adrick in a presentation at Destination Repack. The phasing schedule could also be tripped up by supplier delays, Adrick said. He criticized the plan to have all the phases of the repacking start at the same time. Though FCC officials have said the schedule is intended to provide broadcasters a lot of lead time, Adrick said it could cause resource contention in the early part of the repacking. Adrick said he's "doubtful" the repacking can be accomplished in 39 months.

Broadcast engineers expressed similar concerns about a deadline after the auction for the filing of construction permits and reimbursement forms. The 39-month deadline forced it to also shorten the time frame for construction permits, said NAB Vice President-Spectrum Policy Patrick McFadden. The auction's prohibition on communications prevented engineers and broadcasters from being able to discuss preliminary assessments of what might be required for the repacking, said Smith & Fisher Broadcast Engineer Kevin Fisher. IATF Legal Adviser Dorann Bunkin said the anticollusion rules shouldn't prevent those kinds of discussions, as long as bidding strategies and auction participation aren't discussed.

Broadcasters can make “an educated guess” that the $1.75 billion reimbursement fund won't be enough to cover relocation costs, McFadden said. Pamela Gallant, associate chief of the Media Bureau Video Division, said it's too early to be sure how far the funds will stretch. Broadcasters should hold FCC Chairman Tom Wheeler to his past statements that he would support a request for additional funds from Congress if needed, McFadden said.

The commission initially won't have access to the $1.75 billion after the auction, since wireless companies won't have paid their forward auction bids yet, Gallant said. Instead, the FCC will make initial allocations to broadcasters using $1 billion borrowed from the Treasury Department. The bureau will determine the appropriateness of a station's reimbursement claims on a case-by-case basis, Gallant said. A contractor will be hired for the reimbursement process and the agency will be on the lookout for outliers in terms of expenses, she said. What's appropriate for some may not be appropriate for others, she said.

The abrupt end of the stage was not a surprise, said Scott Flick, communications lawyer at Pillsbury, in a blog post. One takeaway is that wireless bidders had refined their strategies before Stage 1 started and saw no reason to change their strategies, he said. Spectrum "auction groupies" fall into two categories, he said: “Those who think that wireless bidders were holding back in Stage 1 to conceal their resources and bidding strategies, and those who thought Stage 1 represented the high water mark, with the total amount bid going down as the amount of spectrum being cleared dropped with each stage. Based on this morning’s results, the latter group is growing.”