FCC's Spectrum Auction to Fall Short of Lofty Initial Target

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By Kyle Daly and Lydia Beyoud

Aug. 24 — Bidder behavior in the Federal Communications Commission's incentive spectrum auction demonstrates the agency likely has set both its own initial financial conditions and the amount of available airwaves too high, a Bloomberg BNA analysis of auction data shows.

The FCC hopes to free up a large swath of airwaves for exploding wireless Internet uses. Broadcasters will get a portion of the proceeds from auctioned licenses. The auction won't end until the dollar amount of bids matches up with a certain number of spectrum licenses under a complicated FCC formula.

The initial rounds of bidding suggest that the auction will likely take multiple stages of bidding and many months to close.

Companies that include AT&T Inc., Verizon Communications Inc., T-Mobile US Inc., DISH Network Corp. and Comcast Corp. are bidding on spectrum licenses voluntarily relinquished by broadcasters, believed to include Sinclair Broadcast Group Inc. and CBS Corp. in the first-of-its-kind auction.

The FCC isn't disclosing the identities of companies that make particular bids, making individual company strategies difficult to discern. After one week and 13 bidding rounds, the overall amount of bids, at about $15.1 billion, is nowhere near the $88.3 billion target the FCC set to close the auction—which includes $86.4 billion needed to clear broadcasters out of their spectrum and cover other costs— after just one stage, or set of bidding rounds. The FCC reached that figure through an earlier auction phase during which it solicited licenses from broadcasters, continually dropping prices at which a sufficient number of them were willing to exit their spectrum in order to reach the clearing target (2016 TLN 24, 8/1/16).

Multiple stages are likely before the auction is finished, analysts told Bloomberg BNA. Bidders are already jockeying for position in the first stage by shifting their bids between markets across the country, but so far demand is uneven and concentrated in big cities.

“I don't think anyone expects this to go to $86 billion,” said Roger Entner, an analyst at Recon Analytics LLC. “I am actually flabbergasted that people are still bidding, that they’re playing in this absurd theater trying to reach a number that they know they will not reach. Congratulations: If you really bid $70 billion more on this, we’ll see you in bankruptcy court.”

However, one telecom industry attorney, speaking on background, told Bloomberg BNA the FCC was wise to have started the auction at the highest possible clearing target. Had they closed the auction after only a first round at a lower target, the FCC would have been criticized for not seeking to clear more spectrum for wireless users, the attorney said.

To be sure, the FCC likely didn't expect to close the auction after only one stage of bidding. The agency set an ambitious target for freeing up airwaves in the first auction stage, aiming to clear 126 megahertz (MHz) worth of spectrum, of which 100 MHz would be made available for wireless purposes.

An FCC incentive auction task force spokesman declined to comment.

bidding map
Bidding on Par With Expectations

Bidding is robust in top markets in and around major cities, where wireless demand is heaviest and spectrum licenses are most expensive. But the supply of available licenses is still outstripping demand in the vast majority of markets around the country. The auction isn't likely to end until after the FCC lowers its financial target in a process that also will involve reducing the amount of broadcaster-held airwave licenses for sale.

“It's all about the population centers,” Davina Sashkin, an attorney at Fletcher, Heald & Hildreth, PLC, told Bloomberg BNA. Companies trying to compete in a metro area must be able to offer reliable service in a customer’s workplace and their home, which could be in a more suburban or rural area on the periphery of a metropolitan area, she said.

Bidders have already exited top markets such as New York City, the most expensive market, for cheaper pastures. There were 33 bids for 10 available licenses in the New York market in the first round, but only 23 bids by round 13.

Other top markets, such as San Francisco, have seen a similar trend, while others have seen more fluctuation as bidders look for new places to park bidding credits after removing them from costly top markets.

Companies might be seeking to fill out their spectrum license holdings in areas just outside of major cities, which may correlate to the shift over time from the majority of bidding taking place in the top 10 markets to a gradual shift to bids for licenses in secondary and tertiary markets, Sashkin said.

Approximately half of all money committed in the auction during the first 13 rounds is in the top 10 markets and more than 90 percent is in the top 50 markets. In most markets—though not in any of the top 25—spectrum supply meets or exceeds demand from bidders. That dynamic keeps prices locked in from round to round. As the auction continues and more bidders pull out of bigger markets, smaller ones will likely start to see more bids. Demand could overtake supply in smaller markets, causing license prices in those markets to rise.

Bidding stops once there are no markets left in which demand exceeds supply. At that point, the auction would have to raise a total of roughly $88.3 billion, as well as hit another target related to average prices for spectrum in top markets, to close at the current clearing target. If bidding gets to within 20 percent of that total, it will trigger a “clock round” in which bidders could commit to higher prices to hit the target, but if it either falls short of 20 percent or bidders decline to close the gap, the whole process will start anew. In succeeding stages, the FCC will lower both the number of spectrum licenses available and its overall asking price, until the overall figure is met.

Bidding: More Stages Expected

Despite the early shifting among bidders, no one expects wireless carriers and others to pony up the $86.4 billion the FCC wants to close the auction after just one stage.

Several analysts and telecom attorneys predicted at least four stages of bidding before the spectrum supply might match market demand. The fourth stage, based on potential spectrum band plans the FCC laid out based on different clearing targets, likely would see the FCC reclaim 84 MHz of spectrum from subscribers, of which 70 MHz would be available for wireless bidders to buy.

Based on factors including commitments from top wireless companies such as AT&T and Verizon, the market may only have the appetite for 60 MHz of spectrum, Bloomberg Intelligence analyst Matthew Kanterman estimated in a March report. If that's the case, the auction wouldn't end until after five stages. Kanterman has seen nothing about the bidding so far to change his mind about the estimate.

Walt Piecyk, telecom analyst at BTIG LLC, told Bloomberg BNA that the current stage of bidding is unlikely to pack in any big surprises that would cause it to drag on for months, as the agency's single-stage auction of different airwaves did in late 2014 and early 2015. With bidders fully aware that they're unlikely to drive prices up anywhere near $86.4 billion, they're likely going through this stage of bidding simply to stay eligible, Piecyk said.

Tim Farrar, president and CEO of TMF Associates, a Menlo Park, Calif.-based analysis firm, predicted the first stage of the auction might only last two more weeks. Other analysts predicted a six- to eight-week long first stage.

Several analysts said it may be 2017 before the auction actually closes.

Bidding Strategies

The unique nature of the auction makes it particularly hard to track just what bidders are thinking. Unlike a traditional auction in which participants drive up prices by bidding against each other, the incentive auction has prices increase each round of bidding as long there is more demand than supply in a given market. Prices go up by 5 percent each round when that's the case; when the number of bids in any one market is at or below the number of spectrum blocks available, prices stay locked in from round to round.

Because of this auction's novel two-sided structure involving both broadcasters and license bidders, there's no way to gauge how much interest any one bidder has in a given market. They may be more active in particularly popular markets in order to keep prices down in secondary markets they might actually be more interested in, or they may stay out of those smaller markets because some carriers already have low band spectrum there, the attorney said.

Dish could be a wild card because it's rumored to be looking to sell some of its spectrum licenses at a later point, Farrar told Bloomberg BNA. “Dish has obviously come in with an incentive to push the price up” in major markets, particularly New York, Los Angeles and Chicago, he said.

“If this auction price comes low, then a lot of people are going to say Dish's other spectrum is not worth as much,” he said.

Dish representatives did not immediately respond to an e-mailed request for comment from Bloomberg BNA.

As prices climb in the top markets, smaller market licenses could sell quite cheaply, Farrar said. That means that the participating major national wireless carriers might just seek to fill out some of their spectrum needs in markets like Austin and Des Moines, Iowa.

If that prediction is borne out over the course of the first stage of bidding, the real issue becomes whether the three national carriers, AT&T, T-Mobile and Verizon, leave the top markets to Dish. That scenario might leave the satellite provider stuck paying a high price for premium licenses, possibly as much as $5 billion, or if they keep bidding until Dish gives up, Farrar said.

“It could go either way in terms of whether Dish wins it or not,” Farrar said. He sees New York, Los Angeles and Chicago as the markets with “by a significant margin, the most expensive licenses.”

With participating companies bound to silence, however, it will be some time before observers know who will end up with what spectrum once the auction closes.

“I'd characterize the auction as ‘steady as she goes',” Kanterman said. “We just have to sit back and watch.”

— With assistance from Tommy Shen

To contact the reporters on this story: Kyle Daly in Washington at kdaly@bna.com; Lydia Beyoud in Washington at lbeyoud@bna.com

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

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