FCC Proposes Top Station Opening Bids Totaling $39 Billion

WASHINGTON—The Federal Communications Commission is shooting to open the TV spectrum incentive auction with bids for just the top station in each market totaling more than $39 billion. The figure is derived a report by New York-based Greenhill & Co., released by the FCC on Friday and designed to motivate broadcaster participation. It came a day after executives from Fox, Tribune and ION met with FCC Chairman Tom Wheeler to talk about participating in the auction, according to a scoop by John Eggerton at B&C.

The report is the second from Greenhill. The first, released last October, provided “estimated high-end compensation per broadcaster,” from gross auction receipts totaling $45 billion—the amount raised in the recently closed auction of 65 MHz of Advanced Wireless Spectrum. (See “FCC Interference Pricing Projects $45 Billion in Proceeds”)

Both Greenhill figures reflect the high-end estimates. The report released on Friday starts with a figure of $900 million to calculate opening bid prices in the reverse auction, where broadcasters agree to a sale price for their 6 MHz license. This number is then used in a calculation that considers population and interference.

In New York, for example, the maximum opening bid in the reverse auction was placed at $870 million. That figure represents the most valuable station in the No. 1 market according to the FCC’s formula, and also happens to be the most valuable station in all 210 designated market areas. The October Greenhill report set high-end compensation “per broadcaster” in New York at $490 million.

The relationship between the maximum opening bid and high-end compensation differs in each market. While the New York station may be looking at taking 56 percent of auction proceeds, the top-valued station in Atlanta, DMA No. 9, may be looking at 19 percent, while the top station in No. 4 Philadelphia could get 59 percent, and the top station in No. 67 Wichita-Hutchison, Kan., may get 7 percent.

TV Technology asked a commission official how the agency came up with its figures.

TV Technology: Opening bid prices are based on a figure derived from $900 million for what was considered the highest-valued station. Where did this figure come from, and why then, isn’t the maximum open bid price for the top station in New York $900 million?
FCC:  We set an opening price of $900 million to get appropriate opening bid prices for participation. The station with the highest volume is a VHF station, so that’s why it’s $870 million. [VHF stations are discounted because that spectrum is less effective for both wireless and DTV transmissions.]

TV Technology: New Greenhill numbers are calculated on a completely different formula than the original ones. The original one used $1.50 MHz/Pop while this one uses the $900 figure. Please clarify.

FCC:  The $1.50 was set to model auction on revenues of $45 billion gross receipts, or $38 billion minus funding the public safety network, etc. We took $38 billion and sliced that up per the interference formula, [thenumber of people covered by signal, and the number of signals with which it overlaps.] The major differences is the first Greenhill figures were estimated high-end payouts. It was a top-down approach. This is maximum opening bids designed to reflect robust auction participation.

TV Technology:TVStudy, or the updated software version of OET-69, is being used to determine pairwise interference, is that correct? What population data does it use?
FCC:  We’re using the Longley-Rice methodology described in OET-69, and using it in TVStudy for the inputs. We’re using population data from the 2010 Census. Population input was previously 2000 Census data. Our baseline is always the methodology of OET-69. We developed the TVStudy software because we will have to continually update interference calculations during the auction.

TV Technology: The reverse auction bid pricing formula says, “The base clock price is a constant amount per unit of volume.” I see that volume equals interference times population, but what comprises a “unit” of volume?
FCC:  We say, ‘this station has the highest volume, at $900 million.’ We had to come up with a scale for stations to price with lower volumes. We applied a metric of 1 million and calculated volume on scale of 1 million. We’re translating the $900 million figure to apply to every other station. It’s a two-step process.
We calculate the volume for every station. (Interference x population)
We rescale it so the maximum volume is 1 million. It’s base clock price is then $900 per unit of volume.

TV Technology: The maximum opening bid prices reflect full relinquishment—including stations that will relinquish spectrum to share a channel—correct?
FCC:  Yes. It’s the opening bid for every station with full relinquishment.

TV Technology: Opening bids for stations moving from UHF to low VHF would be calculated at 67 to 80 percent of this relinquishment figure, correct?
FCC:  Correct. We’ve asked for comment on where within that range to put [the discount]. Comments due Feb. 20.

TV Technology: Opening bids for stations moving to a high VHF would be calculated at 33 to 50 percent of this figure, also correct?
FCC:  Yes, and we’ve also asked for comment on this.

TV Technology: How were these discounts derived?
FCC:  We picked a range because we wanted some input. They reflect the usability of VHF versus UHF for digital TV. We recognize that for digital TV, VHF is less valuable. We’d still pay them—they’re getting a less effective channel—but they’re still giving up spectrum.

TV Technology: Please tell me again about the hierarchy of options. If I go into the auction intending to:
1. Relinquish, I can, during the reverse auction, opt instead to move to a VHF.
2. Move to a VHF, then I cannot relinquish.
3. Share a channel… then what?
FCC:  Correct on the first two. Sharing is the same as full relinquishment.

TV Technology: How it is that the opening maximum reverse bid price is $870 million in the reverse auction, while Appendix F from the Dec. 17 Public Notice gives the minimum opening bid price in the forward auction at $135 million.
FCC:  The numbers in the Greenhill books are for the reverse auction. In forward auction, those numbers will be bid up. We started forward auction in AWS-3 at relatively small numbers. Forward auction minimums use same methodology as the AWS-3 auction, but we raised them a little for the TV spectrum incentive auction. It’s the same idea using weighted bidding. The $2.53 MHz/Pop price we got in the AWS-3 auction will impact the forward minimum prices. Those may be adjusted from Appendix F.

TV Technology: The reverse and forward auctions occur simultaneously in all markets, correct?
FCC:  The auctions will be sequential. We will run the reverse until that’s done, and then do the forward auction, then determine if we’ve come up with enough money to pay broadcasters to cover the initial clearing target. Based on who comes into the initial round, we will determine our clearing target. Both auctions will be run nationwide.

TV Technology: How does auction work?
FCC:  The way it works is that bidders will get a secure token, and log onto a website and bid from remote locations. There are “rounds” and there are “stages.”
We’ll have multiple rounds in the reverse auction until we get to the price we have to pay. At some point, we’ll get to point where a station is frozen, where they’ve provisionally got their bid, or they’ve dropped out.
Then we’ll determine how much we have to pay in the reverse auction. We’ll determine which stations we need to buy at what price.
If we get to that in the first forward auction, great. If not, we’ll run another stage of the auction.

TV Technology: Will all stations be able to participate?
FCC:  There are some stations that we know from the get-go we won’t need, and we will inform those stations at the outset, but those will be few and far between. There may be some markets on the fringes of the East and West Coast where others are participating, that we don’t need.

TV Technology: What happens if there’s no room left in the remaining spectrum for a station?
FCC:  If we reach a point where we can’t repack a station, we’ll freeze them and pay them the last bid price where they opted to stay in the auction.

TV Technology: Applications are due in the fall. Will the number of applications be revealed to the public?
FCC:  No. We will provide information on the clearing target, and some information to the forward auction bidders how many blocks will be put up for auction.

TV Technology: Will you run a rehearsal?
FCC:  Yes, we do that for every auction. The more so here. We’ll have bidder seminars once the rules are complete later this year. After people have applied and their applications have been accepted, they’ll receive tokens.

TV Technology: How long is the auction expected to go on?
FCC:  We expect the auction to continue for months. The AWS-3 started Nov. 14, closed end of January, and it was just a forward auction. We’re running two sequential auctions here, so several months for this one.

TV Technology: Will the FCC release the estimated total amount of cleared spectrum nationwide before and during the auction at anytime, or only at the end?
FCC:  If the auction goes to a second stage, the clearing target has been reduced. How much information goes out is something that has to be determined.