As Spectrum Auction Unfolds, Big Questions Loom

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By Lydia Beyoud and Kyle Daly

April 6 — The Federal Communications Commission’s spectrum incentive auction is officially underway, but there's still a lot of uncertainty about how it will play out — especially among the broadcasters who are key to its success.

In the first-of-its-kind auction, broadcasters will voluntarily surrender licenses for highly prized spectrum in the 600 megahertz (MHz) band in return for part of the proceeds from the resale of those licenses to wireless carriers and other broadband providers. The auction is a complex, multi-stage process that will take years for the agency to finish. The FCC's aim is to free up a swath of spectrum for mobile broadband. But given the broadcasters' uncertainty, combined with unpredictability about how the auction will go, it's still not clear how much spectrum will change hands, or when the entire process will be completed.

“While there are a lot things we do know about how the process will play out, no one really knows what the outcome is going to be,” Jonathan Cohen, an auctions expert and partner at Wilkinson Barker Knauer LLP, told Bloomberg BNA.

Spectrum auctions—even one as novel and complex as the incentive auction—are a relatively familiar concept for wireless carriers and many other participants looking to buy spectrum licenses. The list of companies intending to bid on 600 MHz spectrum includes AT&T Inc., Verizon Wireless, and T-Mobile US Inc. — Sprint Corp. was the sole nationwide wireless provider to sit the auction out — as well as a number of companies such as Dish Network Corp. and Comcast Corp. that have hinted at interest in getting into the wireless space .

But the broadcast industry as a whole is grappling with several unanswered questions in what, for it, is a largely unfamiliar process. The biggest single issue for broadcasters: how the FCC plans to move their signals to different parts of the airwaves, a prerequisite to mobile carriers being able to deploy services in the 600 MHz spectrum band.

Some big-name broadcast owners sitting on valuable spectrum and rumored to be interested in participating, such as Sinclair Broadcast Group Inc., Media General Inc., Univision Communications Inc., Gray Television Inc., and the big four broadcast networks, may have the resources and experience to be well versed in spectrum auctions even before embarking on this one. Yet there are many more broadcasters who are less sophisticated in auction proceedings but who still want to participate, Davina Sashkin, a telecommunications attorney at Fletcher, Heald & Hildreth, PLC, told Bloomberg BNA. For them, what lies ahead is still very opaque, she said.

Many broadcasters are still coming to terms with how the two-sided auction will proceed. Some are nervous about what the new band plan of channel assignments will look like. Others are concerned about the possibility that, after they offer up their licenses, the FCC could determine that the particular spectrum isn't needed, but that their broadcast signals will be relocated — or “repacked” — into a different spot on the spectrum anyway. Others might think their licenses are being sold directly to wireless companies, without the intervening repackaging of the acquired spectrum by the FCC, Sashkin said.

Adding to broadcasters' concerns is unfamiliarity with the FCC's brand new auctions software. Both Angela Giancarlo, a partner at Mayer Brown LLP, and Patrick McFadden, associate general counsel for the National Association of Broadcasters, singled out that unfamiliarity as the last notable process concern in the resale portion of the auction to remain a live issue. They told Bloomberg BNA that some broadcasters are nervous the FCC’s systems won’t be able to handle the historically complex auction, resulting in less money for their licenses or other undesirable outcomes.

With the auction underway, broadcaster participation is being kept a closely guarded secret by the FCC for post-auction competitive and business reasons. So for now, no one outside the agency knows just how many spectrum licenses are involved.

“Because of the anonymous nature on the broadcast side of the auction, it would be difficult for us to know this far out as to whether the program will support the auction,” Giancarlo said.

However, other elements of the auction process that once troubled broadcasters, such as a scrapped plan to deploy dynamic reserve pricing — which would have let prices fall below a broadcaster's intended minimum in the event that a lack of interest risked failure to meet clearing targets — have either been settled or have been baked into the auction for long enough that broadcasters have come to terms with them.

Incentive Spectrum Auction Roadmap

Next Mile Post

The first of several significant auction milestones will come in the next few weeks, when the FCC is expected to announce an estimate of how much spectrum it can clear for wireless use. Once that is known, wireless companies and other bidders — including Dish Network Corp., Comcast Corp., private equity groups and other, less-traditional players — will be able to develop auction strategies.

Common projections for the amount of spectrum that will be made available for auction range from 108 MHz to 114 MHz, said Sashkin. The clearance target is unlikely to reach a high end of a possible 126 MHz, she said, while a target at the lowest projection of 84 MHz wouldn't result in a sufficient amount of cleared spectrum to have made the process worthwhile, she said.

Cohen said no one can predict the target. “I think it's dangerous for anyone to estimate,” he said. However, a target at or near the top end of 126 MHz “would indicate a fairly high degree of broadcaster participation, at least at the opening price offers”—a good sign for the forward auction.

Round Timing

The multi-stage auction will begin with a reverse auction, with broadcasters accepting reduced bids in each round by 5 percent increments until a station either drops out of the auction because the FCC's proposed bid for its license was too low, or until the station's price is frozen because a new spot in its pre-auction band can no longer be found—resulting in the station becoming a provisionally winning bidder. The reverse auction phase ends when there are no more stations participating that haven't been frozen or dropped out.

The forward auction for wireless carriers and others also brings new procedures for bidders. Bidders in the forward auction are bidding for generic blocks in specific geographic areas. Demand will be expressed by bidders by the number of blocks they would be willing to purchase at a price specified by the FCC during the first phase. The second phase of the forward auction will be an opportunity for provisional winning bidders to bid on specific blocks or frequencies.

Bidding rounds in the reverse auction are expected to begin slowly, likely with a single round on the first day, allowing broadcasters to get their bearings in processing their bids. The FCC will have the option to accelerate to two or three rounds a day if participants seem comfortable with the process, Cohen said. “It's a bit of a question mark on how long that's going to take,” he said.

The forward auction is expected to run at a faster pace, several sources said. The forward auction will likely have a longer first round time so wireless carriers and other bidders can input their initial demands, an Incentive Auction Task Force spokesman said. After the first round, the FCC expects to have a more typical round schedule due to the upload file formats recently made available, the spokesman said.

“It all depends on bidder behavior,” the spokesman said.

The forward auction design should help avoid some of the long, drawn-out rounds seen in prior auctions that dragged on due to bidding in smaller markets, Cohen said.

The success of the auction itself will be tied to triggering the “final stage rule” in the forward auction, which consists of two components related to average prices in top markets and bids sufficient to cover expenses related to the auction, practitioners said.

“That's a really significant moment,” said Cohen, because at that point broadcasters will be assured their provisionally winning bids will in fact be paid, while forward auction participants will know that the spectrum on which they are bidding will be the final band plan.

There are no assurances that the auction will reach the final stage rule after a first round, FCC Chairman Tom Wheeler told lawmakers at an April 5 Senate Appropriations subcommittee hearing.

“This is not just a one-shot auction,” Wheeler said.

The FCC will keep running new rounds of reverse and forward auctions until the money is sufficient to buy out broadcasters at a price set by market demand for their spectrum, Wheeler said.

Repacking Uncertainty

The auction isn't over once the gavel falls, Wheeler said. “The post-bidding activity is actually as challenging as what we saw with the DTV transition,” Wheeler said, referring to the broadcast industry's transition to digital broadcasting.

One of the main pillars of the incentive auction is the repacking of broadcast signals — those of broadcasters who give up their licenses as well as many who don't — to clear spectrum for wireless uses. The repacking process that will launch after the auction brings even more uncertainty as it's not clear how smoothly the process will go, and broadcasters are worried they'll end up on far less desirable spots on the airwaves.

One broadcast lawyer who concentrates on spectrum matters told Bloomberg BNA on background that he is certain, given the allowed timeframe and the lingering uncertainties, that repacking will be a huge disaster — the only question being just how big that disaster will prove to be.

Others haven’t been so overtly pessimistic, but say they don’t see how the FCC will be able to pull off a repack that could affect as many as 1,300 broadcasters — not counting low-power TV (LPTV) and translator stations — in just over three years.

“There is concern that there’s not enough time provided for it, particularly because there isn’t any set plan right now on how the repack is going to be implemented,” said Nathaniel Hardy, of counsel with Marashlian & Donahue LLC.

Auction Timeline

While there are no specific dates nailed down for each step of the incentive auction, FCC officials have provided the following projections for its progress:

March 29 Official start date; broadcasters make initial bid commitments in reverse auction

Late April/Early May Confidential FCC notices go to participating broadcasters stating whether their spectrum is needed; Initial clearing target and band plan announced; FCC conducts mock auctions

May Reverse auction bidding begins

Summer Reverse auction closes; forward auction begins at least two days later

Late Summer/Early Fall Forward auction closes. If final stage rule not met, reverse auction resumes bidding at a lower clearing target

Late Summer/Early Fall FCC releases public notices announcing winning bidders in both sides and broadcaster channel assignments

Early 2017 FCC begins distributing payouts to broadcasters. Those going off the air have three months from receiving payment to vacate their channel with a possible three-month extension; those entering channel-sharing agreements have six months with a possible six-month extension

Fall 2019/Winter 2019-2020 All repacked broadcasters must be operating on new channels and have ceased operations on former channels

The 39-month repacking timeline outlined by the FCC is more than double the 18 months originally proposed as the auction began to take shape under former FCC Chairman Julius Genachowski.

Broadcast insiders say that is still a distressingly short time to execute what McFadden called a massive and massively complex jigsaw puzzle in which every shifting signal has the potential to create a ripple effect on neighboring broadcasters.

Considerably less ambitious historical examples illustrate the sheer scale of the challenge facing the FCC and broadcasters. Following passage of the Telecommunications Act of 1996, broadcasters had a full 10 years to prepare for the switch to a digital signal. Despite that—and the fact that broadcasters were able to simultaneously broadcast in analog and digital right up until the switch—the deadline was still pushed back several times.

The agency hasn't announced all of the details about how it will execute the repacking, such as whether it will move region by region, or reallocate stations across the country all at once.

Concern Over Delays

The industry is now testing the ATSC 3.0 broadcast standard, a new, more efficient method of digital broadcasting, in preparation for repacking. In late March, participating broadcasters in the Baltimore and Washington, D.C., held a test broadcast of a proposed single-frequency network operating on ATSC 3.0.

That test run took place after more than a month of delays stemming from inclement weather, according to Louis Libin, senior director of new technology at Sinclair Broadcasting Group, who helped run the trial.

“That was just in the normal course of doing things,” Libin told Bloomberg BNA. “None of these factors are being accounted for [in the repack as proposed]. That is extremely scary to the participants, but also the ones who are not participating but will be impacted.”

Furthermore, some of the smaller, less experienced forward auction bidders may not be aware that they won't be able to deploy on their newly-acquired spectrum as soon as the licenses are granted, even without the overhang of a potential delay, Giancarlo said.

Reimbursable Expenses

One measure to provide some additional comfort for broadcasters is in the works. The FCC has circulated a declaratory ruling authorizing broadcasters to be reimbursed for certain expenses to prepare for the repacking period, an agency spokesman confirmed on background.

“Some people had suggested that there might be some productive things that broadcasters or tower owners could be doing now to prepare for repacking, even before knowing what channel they might be going to,” said McFadden.

“From my perspective, it’s every entity’s decision about whether the risk is worth it,” he said. While such a measure could benefit broadcasters, it also creates some risk, several practitioners said. Broadcasters or tower owners could end up incurring non-reimbursable expenses if they aren’t required to change channel assignments, McFadden said.

Despite the risks, the measure could help alleviate concerns raised by NAB and others that the proposed 39-month repacking deadline will create a time crunch, Sashkin said.

“But the FCC really has to take on a really strong role, versus what they did with the digital TV transition,” she said. “If the FCC manages this in a much more top-down approach,” where they coordinate and set channel change by region, the repacking period could be completed within the allotted time with perhaps a few outliers, Sashkin said.

The FCC is still accepting comment on the repacking process in the auction docket. “This is the time for the stakeholders to come to us and make sure we’ve got all the best data that they have and all their best thoughts on this so that as we put the schedule together it reflects” all the real world implications of moving broadcast signals and switching to a new technology, a spokesman for the Incentive Auction Task Force told Bloomberg BNA.

LPTV Vulnerability

Low-power television stations and translator stations, which operate at lower power levels, respectively providing original programming — often targeted at a specific demographic — and rebroadcasting another station's signal to extend its geographic reach — are not eligible to participate in the auction, may prove especially vulnerable during the repacking process. Full-power and Class A stations that give up their licenses but want to stay on the air will get a different spot during the repack, but LPTV and translator stations have no such guarantee.

“If they're in any of the major markets, they're going to be out of luck,” Sashkin said. More rural, less densely-populated areas—where most of an estimated 4,000 LPTV stations are located— may have enough spectrum available to accommodate most LPTV and translator stations after the auction, said Sashkin, though she predicted there could a “scrum” to find new channels. “The problem is they'll have to bear all the costs of this move. That's a heavy burden with a lot of uncertainty,” she said.

Hardy said it’s “extremely likely” that at least some stations will be left without a channel once the repack is done. That the FCC will be foreclosing one possible slot in which to repack an LPTV broadcaster by leaving white spaces for possible wireless broadband use, McFadden said, may only pressure the LPTV industry further.

Even if the FCC manages to find a space for every broadcaster, low-power or otherwise, in the country, there may still be logistical challenges to the repack felt most acutely in the world of LPTV.

“Some of the low-power television stations are…afraid that all the capable engineers and construction crews will be booked up,” Hardy said.

Congressional Action

Congress is also keeping a watchful eye on the repacking process.

Rep. Frank Pallone (D-N.J.), ranking member of the House Energy and Commerce Committee, earlier this year introduced a bill that would add $1 billion to the repack reimbursement fund.

The NAB will keep pressure on the FCC in filings and meetings to reconsider repacking issues that remain troubling for broadcasters.

The auction task force's spokesman said it is unlikely the agency will launch a formal proceeding to extend or alter the repack process.

NAB is on an “all-fronts campaign,” including congressional action, to ensure its members aren't harmed during the transition period, McFadden said.

“We just have to make sure the FCC gets this right,” McFadden said. “If they don’t, it’ll make putting Humpty-Dumpty back together look like a cakewalk.”

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

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