Q&A: Strategy&'s Dan Hays on Auction Price Point Divide
62 bidders must pledge around $88 billion
July 15, 2016
sold 126 MHz for $86.4 billion in the reverse portion of the TV spectrum
incentive auction. On Friday, the Federal Communications Commission revealed
that 62 bidders would vie for 100 MHz of that spectrum; (the 126 MHz clearing
target minus 26 MHz set aside for buffer zones). Of those 62 bidders, 19 will
be able to bid at discounted prices.
The auction will not be able to close if bidders
do not cover the $86.4 billion sale price, plus another $1.75 billion to move
broadcasters and $207 million to cover the FCC’s cost. If it fails to
close, the whole process will have to begin again in a reverse auction with a
lower clearing target. Here are some thoughts from Dan Hays, principal with
PwC’s Strategy&, on the process.
Technology: What if the reverse and forward
auction price points do not initially come together?
gap between the reverse auction commitment… and the forward auction
commitment to be seen in the coming months would likely see the auction
extended by as much as four to six months. For broadcasters, this would mean a
delay in seeing auction proceeds until at least the middle of 2017, with both a
reduction in proceeds to some and others being eliminated from the auction
Technology: What is the potential impact of
broadcasters who were not prepared to relinquish their spectrum immediately
upon the auction close anyway, this will have little impact. For others who are
anxious to cash in and go off the air or begin sharing channels with fellow
licensees, the addition of a second stage presents a modest delay to their
expectations. The net impacts to tax liabilities could be minimal.
The same delay in the availability of this new
spectrum for mobile operators may have somewhat less consequence, but could
force them to find alternative ways to fulfill growing demand for mobile data,
as well as their planned deployment of 5G networks. The delay could accelerate
the use of less attractive and efficient spectrum bands, and it may accelerate
the use of alternative network technologies such as small cells.
Technology: Why have these not been more
widely deployed already? Do small cell networks cost more in terms of
infrastructure or otherwise than building out low-band spectrum?
network operators have already begun deploying small cells, but have been
hindered by slow-to-change environments for zoning, permitting, and leasing.
The operators themselves are also still experimenting with new operating models
for these less-costly, lower-capacity cell sites, in the hope of finding a
formula that balances cost with performance. Access to low-band spectrum
promised to stave off some of the need for small cells, but this could accelerate
if significant delays are encountered.
Technology: At the $88 billion price point
where this first reverse auction ended and that the forward auction would have
to cover—$2.75 per MHz/pop, according to Wells Fargo’s
Marci Ryvicker—would alternatives such as small cell networks and
accelerating the use of less attractive and efficient spectrum bands be a less
The calculus of mobile network capacity and coverage is extremely complicated
and difficult to paint with a broad brush, but given the high total clearing
cost from the first stage of the reverse auction, it’s likely that
the spectrum costs in some markets would be much greater than the other options
available to mobile network operators, including small cells.
Technology: Is 100 MHz of low-band spectrum
that will be available for auction worth $86 billion to the wireless industry,
and specifically, the forward auction bidders?
With mobile phones now above 100 percent penetration in the United States,
mobile operators are increasingly under pressure to watch every penny of
capital expense. Given this, an outlay of $86 billion seems highly unlikely at
this time. To put it in perspective, this is two to three times the typical
annual capital spending of the industry. That’s an awful lot to bite
off in one big chunk.
“FCC: 62 Applicants Qualified to Bid for TV Spectrum.”
Many of the smaller entities will receive bidding credits, which amount to a discount on spectrum. Of the total 62 applicants, 19, or 30 percent, received a bidding credit related to rural service or a small-business revenue threshold.
For comprehensive coverage, see our Spectrum Auction silo.