The Auction Debacle

January 17, 2017

As 2017 gets underway and the spectrum auctions continue into the fourth round (which will quite possibly conclude by the time you read this), the assessment so far from most corners of the industry is that the results are underwhelming at least and disastrous at worst. The federal government will not reap the benefits of an anticipated revenue windfall (it may not even be enough to cover the costs); and many broadcasters feel duped that the so-called “spectrum crisis” alarm calls from the wireless industry over the past decade were way overblown. Since we’re still in the “quiet period,” we don’t exactly know how these results will affect the upcoming channel repack, but it’s safe to say that there are far fewer broadcasters that will benefit from this auction than anticipated even 12 months ago.

Scott Flick, a partner with the Washington law firm Pillsbury Winthrop Shaw Pittman, has been involved with the spectrum auction extensively; I recently spoke with him about his thoughts regarding the process so far.

“As an exercise in reallocating spectrum, it hasn’t been particularly impressive by anyone’s measure,” Flick said. “While I do think it has revealed important lessons that could make a future auction more productive, the experience has been sufficiently disappointing that I suspect it will be a long time before anyone wants to repeat this experiment.”

Flick acknowledged the complexity of the process and praised the FCC for attempting it in the first place. “The auction has been handled as a very serious endeavor on the part of the FCC, and the amount of brainpower the FCC has focused on it has been extraordinary,” he said. “For a first time at something that has never been done before, it is immensely impressive.” He added, “If there was one mistake that could have been avoided, it may have been electing to proceed with such a complex undertaking in the first place, knowing that there was only one chance to make it successful. In the end, it was the one factor that the FCC couldn’t control—the lack of demand for spectrum—that has been damaging to the prospects for a successful auction.”

Planning for the auctions began at the beginning of this decade; and the time lapse between their origins and their commencement last March offers a classic example of how technology timelines can trump Washington timelines nearly every time. Seven years is a lifetime in the technology industry, and some industry pundits believe that the increasing availability of unlicensed spectrum and advances in wireless technologies such as the emerging 5G standard over that time period dampened demand for broadcasters’ “beachfront property.”

Flick thinks the problem may be simpler.

“The real answer may be that it is always easy for someone to say they desperately need a particular asset, but then lose interest when they actually have to pay to get it,” he said. “The auction is making it clear that actual demand [what bidders are willing to pay for] was overstated.”

With a change in administration, some broadcasters are hopeful that a Republican FCC will provide more support for the industry’s transition in the repack. Commissioners Michael O’Rielly and Ajit Pai have certainly been more receptive to protecting and advancing free over-the-air broadcasting than their Democratic colleagues as the industry prepares to move to the new ATSC 3.0 standard. But before that happens, the auctions have to proceed to their formal conclusion.

“At this point, the auction rules are largely set in stone, and trying to change them midstream would only make matters more confusing for all involved,” Flick said. “The FCC is going to have to ride this horse until it either reaches a livable (albeit not ideal) destination, or the horse collapses underneath it. The change in control at the FCC is more likely to have an impact on the repacking process, where concerns have been raised about preserving broadcast service to the public while overcoming many obstacles, both known and unknown, that such a complex endeavor inevitably involves. That includes not just the technical and construction issues but addressing the mechanics and substance of how the costs of the repacking are handled as well.”

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