Second Stage of Spectrum Auction Unlikely to Be Last

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By Lydia Beyoud

Sept. 2 — The second stage of the Federal Communications Commission's first-ever spectrum incentive auction promises to be just another chapter in a lengthy process aimed at repurposing airwaves for wireless use.

The agency is running a complex process to move television broadcasters off technologically desirable spectrum to make those airwaves available to support exploding consumer demand for streaming video and the internet of things. Broadcasters who volunteer to surrender spectrum licenses will be rewarded with auction proceeds at the end of the process.

Telecom analysts expect the auction will continue through three or four stages, during which the FCC will offer fewer and fewer licenses at auction, before wireless demand matches up with broadcaster supply and bidding really heats up.

“I think we will have to come down quite a few rounds before supply becomes rational and demand will have to step up to the plate,” Roger Entner, an analyst at Recon Analytics LLC, said. As the available supply of spectrum and associated clearing costs drop, auction bidding may become more dynamic as competitive pressure builds to capture licenses in valuable markets, Entner said.

AT&T Inc., T-Mobile US Inc., Verizon Wireless, regional carriers, and companies such as Dish Network Corp. and Comcast Corp. are among the approved bidders for spectrum licenses. The FCC is not disclosing the identities of actual auction bidders.

The second stage will begin, like the first, with the FCC having to offer some broadcasters progressively lower offers in order to clear enough of them off their spectrum to achieve the next clearing target. The remaining broadcasters whose signals aren't necessary to achieve that goal will be repacked into lower spectrum bands.

If the figure, known as the clearing cost, is substantially below the $88.4 billion the FCC set for the first stage of the auction, it might signal that the entire auction could conclude sooner than expected, possibly well before the end of 2016. But a clearing cost only a few billion below that figure would almost inevitably mean the auction will continue to progress through several more stages.

The first stage of the auction concluded Aug. 30 after $23.1 billion in proceeds over the course of 27 bidding rounds fell well short of the $88.4 billion necessary to close the auction at the initial clearing target of 126 megahertz (MHz), a measurement of radio spectrum frequency.

(An interactive Bloomberg BNA graphic showing aggregate round-by-round statistics from incentive auction Stage 1 is at: http://src.bna.com/ihL.)

The FCC's Aug. 31 announcement that it would start the second round on Sept. 13 came as no surprise to auction observers .

The agency designed the auction to proceed, if necessary, through multiple stages of reverse and forward bidding, first by the broadcasters who are relinquishing their airwaves licenses to the FCC at incrementally lower prices, followed by companies looking to buy licenses through a more traditional auction with incrementally increasing bids.

Auction Statistics - Stage 1

The Stage 2 broadcaster clearing target is 114 MHz, which would result in 90 MHz of spectrum made available for wireless use in most markets nationwide.

Stage 1 Bidding

The FCC isn't disclosing any information from the broadcaster portion of the auction, but has published aggregated data from the auction bidding by wireless carriers and others.

The first stage of the auction demonstrated the variety of dynamics at play, including different levels of supply, generic spectrum blocks, bidding price increments set by the FCC, and other factors that resulted in a faster than expected series of auction rounds. Analysts told Bloomberg BNA they expect subsequent stages to proceed even more quickly.

In the final round of the first stage, bidding stalled in 406 out of 416 markets, called “partial economic areas” or PEAs. The average price/MHz/“pop” (a measure of the population covered by an airwaves license within a defined geographic area) rose to $0.90 on a nationwide basis, up from the $0.42/MHz/pop in round 1.

(An interactive Bloomberg BNA graphic showing the latest round statistics from incentive auction Stage 1 is at: http://src.bna.com/ihJ.)

Demand in the top 25 markets reached supply in all but four of the top 25 markets after the 23rd round. “Competition is concentrated in a relatively small number of markets,” J. Armand Musey, a telecom analyst with Summit Ridge Group LLC, told Bloomberg BNA.

PEA Statistics - Round 1

Measured by price/MHz/pop, the standard method for measuring spectrum value, the Los Angeles market proved to be the most expensive, at $2/MHz/pop, followed closely by New York at $1.89/MHz/pop. However, that price tag was primarily dictated by supply in the Los Angeles market, where only five licenses were available compared to 10 in New York. In Stage 2, nine licenses will be available in New York, while six will be available in Los Angeles.

(An interactive Bloomberg BNA graphic showing statistics for each market (PEA) in incentive auction Stage 1 is at: http://src.bna.com/ihK.)

Another factor may also be at play in the high price for spectrum in Southern California: the greater Los Angeles region stretches over thousands of square miles, making 600 MHz licenses there ideal for wireless carriers, particularly T-Mobile, which has less spectrum in that spectrum band than AT&T or Verizon. A license to such airwaves, on which signals travel farther and penetrate objects more easily than other airwaves, is less necessary in cities with high population densities, such New York and Chicago.

In prior auctions, licenses in the Los Angeles market cost less per /MHz/pop than New York or Chicago, but the constrained supply might keep the cost for that market the most expensive, a spectrum engineer not participating in the auction told Bloomberg BNA on background.

This auction is all about spectrum coverage, rather than capacity. The 600 MHz spectrum band is less ideal for the sort of high-capacity wireless data connections that feed consumer demand for streaming video and other mobile applications.

More Licenses in Round 2

Nine wireless licenses will be available on a nationwide average basis, compared to 10 in the first stage of the auction. However, there is more variation in the number of licenses on a per-market basis.

More — and more desirable — licenses will be on the auction block for the forward portion of the second stage. Overall, 29 markets will increase the number of category 1 licenses available, including in three of the top 10 market: Los Angeles, Baltimore-Washington D.C., and San Diego.

Category one licenses are for airwaves with relatively little signal interference — zero percent to 15 percent interference impairment, generally making them more valuable to wireless bidders. Many other markets with additional category one licenses are markets along the U.S.-Mexico border.

According to the FCC, the vast majority of licenses offered in the second stage will have zero impairment: 99.9 percent of spectrum blocks in the second stage are category one licenses; of those, 99.8 percent will have no signal interference.

The supply of licenses in 15 other markets will remain the same in the second stage. There will also be fewer licenses in Category 2, which may have between 15 percent to 50 percent impairment. Those numbers are reduced thanks to the FCC's ability to repack more broadcast TV stations into the TV band below Channel 37, resulting in less signal impairment for the spectrum real estate for which the wireless industry is bidding.

[With assistance from Tommy Shen.]

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

Link to Bloomberg BNA's interactive statistics for each market (PEA) in incentive auction Stage 1: http://src.bna.com/ihK.

Link to Bloomberg BNA's aggregate round-by-round statistics from incentive auction Stage 1 is at: http://src.bna.com/ihL.

Link to Bloomberg BNA's latest round statistics from incentive auction Stage 1: http://src.bna.com/ihJ.

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