FCC Sets Stage for Robust Incentive Auction Bidding

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By Lydia Beyoud

April 29 — The Federal Communications Commission's high-stakes incentive spectrum auction appears to have the necessary ingredients for success following the agency's release of an ambitious target amount of airwaves they are hoping to offer for wireless use.

The agency April 29 issued a target of 126 megahertz (MHz) of spectrum it hopes to recoup from broadcasters in order to license 100 MHz in most markets to wireless carriers such as AT&T Inc. and T-Mobile US Inc. to use for mobile broadband services. That's a sign that broadcasters have offered up a large swath of spectrum for the agency to auction to the carriers. For their part, major carriers have enough cash to engage in the robust bidding that FCC Chairman Tom Wheeler has called on them to do. But actual wireless carrier participation will determine whether the commission can reach its goal.

Wheeler is expected to keep up the pressure on carriers to step up to the plate, Sharon Armbrust, a senior analyst for SNL Kagan, told Bloomberg BNA.

T-Mobile is expected to be come to the forward auction with $11 billion to bid with, Bloomberg Intelligence Senior Credit Analyst Stephen Flynn wrote April 28. AT&T is expected to have $23.5 billion and Verizon $10 billion to finance their bidding, Flynn said. Sprint is not participating.

CTIA and the Competitive Carriers Association, trade groups representing wireless carriers, sounded an optimistic note April 29. “Competitive carriers desperately need access to additional spectrum, and we knew there was significant wireless carrier interest in participating in this auction,” CCA President and CEO Steven K. Berry said in an e-mailed statement. “We are pleased broadcasters feel the same, and the high spectrum clearing target number is certainly good for promoting competition throughout the industry,” he said.

The National Association of Broadcasters also applauded the FCC's clearing target. “Now the onus is on the wireless industry to demonstrate there is significant demand for 600 MHz spectrum,” NAB President and CEO Gordon Smith said in an e-mailed statement.

With 100 MHz cleared for most markets nationwide, auction revenues could reach $40 billion, Armbrust said. Higher average prices could swell that figure to $50 billion, she said. The FCC's last auction, for licenses in the 700 MHz spectrum band, brought in a record-breaking gross of $44.9 billion with 70 qualified bidders.

Over 100 applicants filed to participate in the forward auction as of March 18 .

While the clearing target is much larger than expected, it still provides no indication of the amount of spectrum the auction will ultimately deliver to wireless operators, Walt Piecyk, telecom analyst at BTIG LLC, told Bloomberg BNA. The next meaningful data to help answer that question will come once the reverse auction closes, he said. The FCC plans to issue the aggregate total of the price broadcasters are willing to sell for at the conclusion of that reverse auction round, according to the agency.

Initial Clearing Target Band Plan

Senior FCC officials told reporters April 29 the availability of so many unencumbered spectrum licenses should put to rest carrier concerns about the quality and number of available licenses, due to the potential for interference from broadcasters who could be placed in the wireless bands post-auction.

That is welcome news for forward auction participants including not only wireless carriers but also Comcast Corp. and venture capital group Social Capital are expected to bid—is the amount of completely unimpaired spectrum blocks available . Impairment refers to wireless interference from other sources. Of the 4,160 spectrum blocks available nationwide, the FCC will offer up 4,048 licenses for bidding. Of those, 3,999 have zero impairment. Only 18 licenses will have impairment levels between 15 percent to 50 percent.

Mobile carriers want broadcast spectrum in the 600 MHz band for a simple reason: low-band signals can travel over long distances with fewer cell sites and penetrate walls and windows — highly desirable attributes for wireless services.

The duration and number of possible auction stages will be set by market demand, senior FCC officials said. They reiterated prior estimates that, if the final stage rule is met for the 126 MHz target, the auction could close in the third quarter of this year. A second stage of the auction, which would involve a lower clearance target, should be able to close by the fourth quarter, the officials said.

The target signals that the Incentive Auction Task Force has carefully constructed the parameters for a successful auction, given the level of commitments received from broadcasters, Davina Sashkin, an attorney at Fletcher, Heald & Hildreth, PLC, told Bloomberg BNA.

“I don't think they'd shoot for the moon, because then they'd have to start over. But if you do another stage, you lose a lot of confidence on both sides,” she said, adding: “My sense is they have enough data that it's telling them that this will succeed.”

Another telecom attorney, speaking on background, told Bloomberg BNA the auction design allows for multiple stages, and the possible need for additional stages shouldn't necessarily be viewed as a failure, a point emphasized by Wheeler in recent remarks to broadcasters .

“Achieving this target would be a big step towards ensuring that communications networks can support exploding mobile broadband demand. While the auction is anticipated to generate significant revenues, the economic activity that will enabled by so much new spectrum will be even greater,” Telecommunications Industry Association (TIA) CEO Scott Belcher said in an e-mailed statement.

Hot Markets

Los Angeles could shape up to be one of the hottest markets for bidding, multiple sources said. Unlike the vast majority of available markets that have 10 blocks of spectrum up for bidding, for a total of 100 MHz, Los Angeles is allocated only five blocks, although all are unencumbered by interference.

Another border market, San Diego, Calif. has only four blocks available. The restricted supply is likely attributable to those markets' proximity to the border and the need to protect broadcasters. Many other, far smaller, markets along the U.S.-Mexico border have similarly low number of blocks available.

Wireless Spectrum Holdings

“There are many different ways to play this auction, and more so because there is so much spectrum” available, Armbrust said. Most of the major wireless carriers have indicated they would be satisfied with 20 MHz of spectrum nationwide, she said. The availability of up to 100 MHz of spectrum in most markets should be enough to allow all the known major auction players to be satisfied without stepping on one another's toes, Armbrust said.

Top 40 markets where fewer licenses are available could result in a bidding war, she said. Several markets in the northeastern corridor have fewer than 10 spectrum blocks of unencumbered or less-encumbered (below 15 percent) available. “There are regional buyers and a variety of speculators that will fit in there but I think in the main, the biggest operators will be able to bid on and claim large” amounts of spectrum, Armbrust said.

“The auction stands and falls on the big markets, not the small markets,” Recon Analytics LLC analyst Roger Entner told Bloomberg BNA. T-Mobile could be a likely bidder for licenses in the Los Angeles market due to their ability to bid in the spectrum reserve set aside in that market, Entner said. The spectrum reserve excludes AT&T and Verizon from bidding in most markets.

Satellite provider Dish Network Corp. may not be as dominant a player in the incentive auction as it was in the 2015 AWS-3 auction due to a high net leverage ratio, Bloomberg Intelligence's Flynn wrote in a March 14 note.

Non-traditional auction bidders like Social Capital Partnership, backed by billionaire investor Chamath Palihapitiya, could play the role of the wild card in this auction, Entner said. Such bidders are likely to make tactical buys where they can get spectrum on the cheap, while also creating “blocking moves” in markets desirable to wireless carriers in order to prevent them from doing carrier aggregation of multiple spectrum blocks, said Entner. The likely expectation of such a strategy would be for those licenses to be purchased by larger carriers after a five-year hold period, possibly resulting in generous secondary-market profits.

Fast Timeline

Broadcast attorneys told Bloomberg BNA the timeline leading up to the March 31 bidding rounds was aggressive, but achievable. The FCC plans to hold a series of events to help broadcasters prepare for the reverse auction, beginning with an online bidding tutorial on May 18.

The auction system will be available for a preview period on May 23 and 24, while a public clock phase workshop will be held May 24 at the FCC. Mock auctions will take place May 25 and 26 with up to three mock bidding rounds taking place. The FCC isn't expected to hold more than three bidding rounds per day during the actual auction.

“I think that the schedule that the commission has for May is a deliberate, systematic effort to make sure that all the broadcasters who are participating have all the information that they need,” Jonathan Cohen, a partner at Wilkinson Barker Knauer LLP, told Bloomberg BNA.

Broadcasters have known for months to block off their schedules in May for the auction's kick-off, Sashkin said. The timeline is “a little aggressive, in that it presses everything up together,” but more people were expecting the bidding to have already started, she said.

Regardless, the lead-up to May 31 shouldn't pose a problem, she said. “If you have this much money on the line, you should make yourself available,” she added.

To contact the reporter on this story: Lydia Beyoud in Washington at lbeyoud@bna.com

To contact the editor responsible for this story: Keith Perine at kperine@bna.com

For More Information

Text of the public notice https://apps.fcc.gov/edocs_public/attachmatch/DA-16-453A1.pdf.

Text of the appendix of forward auction spectrum blocks is at https://apps.fcc.gov/edocs_public/attachmatch/DA-16-453A2.pdf.