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By Kyle Daly
Oct. 19 — The second stage of the Federal Communications Commission’s airwaves auction opened and closed Oct. 19 after just one round of bidding, as wireless service providers bid just $21.52 billion on spectrum that is being relinquished by broadcasters.
The bidding total missed by a wide margin the round's clearing cost of $54.59 billion—what broadcasters agreed to as the price at which they'd be willing to give up their spectrum licenses.
The anemic outcome suggests that major bidders stopped bidding on licenses for top markets with little fanfare, though there is a chance they could come thundering back at the right price, as spectrum supply narrows in future bidding rounds.
The brief bidding stage was the latest development in the FCC's ongoing auction to repurpose broadcast spectrum to meet the surging demand for wireless data. The stage aimed to clear 114 MHz of spectrum, of which 90 MHz could have been repurposed for wireless industry use. The first stage of wireless industry bidding ended after 27 rounds, as early demand for spectrum vastly outstripped supply in top markets. The stark contrast in stage two, with its lone round of bidding, may point to lighter-than-expected demand for spectrum—though it could also simply represent a touch of bidding strategy as wireless carriers wait for prices to come down in future stages.
FCC rules bind participants on both sides of the auction to silence regarding their auction strategies. Strict anti-collusion rules keep everyone outside the FCC in the dark regarding which broadcasters are giving up spectrum and which wireless companies and other entities are bidding on it. But auction results in the stage suggest one or more of the top bidders—AT&T Inc., Verizon Communications Inc.'s Verizon Wireless unit, T-Mobile US Inc., DISH Network Corp. or Comcast Corp.—might be easing off leading markets, Bloomberg Intelligence analyst Matthew Kanterman said in an interview.
“By digging into the data, it looks like, at least in the top markets, someone backed out, and that’s why they closed it so fast,” he said.
At the stage-two clearing target, every market in the U.S. had a maximum of nine spectrum licenses available to be transferred from broadcasters to wireless carriers. Bidding would have continued as long as there was demand for more than nine licenses in at least one of the top 40 markets in the country, but that level of demand didn't materialize. Demand did outstrip supply in some less-in-demand markets, but the close of a given auction stage relies only on activity in the top 40 markets.
It's unlikely that a major bidder dropped out altogether, however. Eligibility to continue vying for spectrum is measured by the number of credits toward bidding that auction participants hold in a given round. If any bidder pulls out of a given market without applying those bidding credits to another market, they relinquish them for good. Overall eligibility in the auction fell by roughly 7 percent in stage two, an FCC official told Bloomberg BNA, a smaller dent than would be expected if a major player had exited the auction completely.
What remains unclear is whether the bidder or bidders that did pull back from the top 40 markets will return to bid for them at a later stage, when there will be fewer licenses available but also a lower overall clearing cost to reach.
The founder of a recently-disbanded group formed to organize broadcasters interested in the auction remains optimistic that bidding will surge as the auction goes to a third or even later stage.
“This is a complicated auction design and no significance should be attached to interim steps,” former executive director of the Equal Opportunities for Broadcasters Coalition Preston Padden told Bloomberg BNA via e-mail Oct. 19. “As supply contracts in future stages I am confident that the auction will become more competitive, leading to a successful conclusion.”
Industry trade group the National Association of Broadcasters was “surprised” by the results of stage two but still anticipates a successful conclusion to the auction, NAB Executive Vice President of Communications Dennis Wharton said in a statement.
Analysts told Bloomberg BNA that it's entirely possible bidders will return to key markets as the auction continues. BI's Kanterman said he hopes to see a “more normalized trajectory” in bidding in the stage three, when broadcasters are expected to give up licenses covering 106 MHz of spectrum, of which 80 MHz would be available for wireless development. But, he said, he still believes that there is demand for a total of 60 MHz of spectrum among wireless bidders. If that's the case, the auction would likely close after stage five.
Another major drop in the clearing cost is also possible, as spectrum clearing targets falling “disproportionately” drive down the prices broadcasters are willing to accept, J. Armand Musey, a telecom analyst with Summit Ridge Group LLC, said. That could bring bidders back to top markets as the clearing cost falls closer to the $25 billion to $35 billion range he believes wireless carriers are prepared to pay.
It may be stage four of the auction, in which carriers will vie for 70 MHz of usable spectrum, before “pain points” in terms of insufficient capacity force bidders to get competitive again for the most desirable markets, said SNL Kagan analyst Sharon Armbrust.
Roger Entner, an analyst at Recon Analytics LLC, told Bloomberg BNA the quick round indicates pragmatism at the FCC. “Everyone knew that they would not make it to even to $56 billion so they just ended the misery that this round represented so that they can get to a round that has a chance of succeeding.”
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