Feds to Take Auction Pitch on the Road

WASHINGTON— Regulators are taking their spectrum incentive auction pitch on the road after the holidays, with bid figures based on interference rather than enterprise value.

“We’ll start in January. We’ll have about a dozen town-hall style meetings. All broadcasters can attend. We’ll hold one-on-one confidential meetings with broadcasters who are interested,” said Howard Symons, vice chair of the Federal Communications Commission’s Incentive Auction Task Force at a Wells Fargo event in New York Thursday morning. “We are currently planning to cover 50 markets in these road shows.”

The road show was primed by an FCC estimate that stations might be splitting $45 billion after auction expenses. The figure officially was released Oct. 1 in a pricing model compiled by staff in conjunction with New York investment banker Greenhill & Co. LLC. This “Greenhill Report” projected total auction proceeds at $45 billion, as much as $20 billion more than previous estimates based on historical spectrum pricing.

Where the Greenhill Report diverges from past estimates is that it assigns values based on interference versus the market or enterprise value of a station. Thus, a station in Palm Springs—the 148th largest TV market in the country—is pegged at $180 million because of its proximity to Los Angeles. By comparison a station in Sioux City, Iowa, market No. 147, comes in at just $12 million.

When the Greenhill figures were first presented, there was some confusion that they represented bid reserve prices. They do not, Symons said. They are high-end estimates based on a subjective model. ( See “$45 Billion Auction Projection Rests on AT&T’s DirecTV Acquisition Pledge.”)

“These are not based on station value or enterprise value. We tried to measure according to our ability to repack the spectrum,” Symons said. “A station that interferes a lot has a high value. Those that don’t preclude us from repacking as many stations getting a lower value in the model…. A different methodology will be used for the actual auction.

“We estimated high-end compensation. This begins to lay out the way we would develop methodology for opening bid prices. Like any business opportunity, it’s based on a model, not actual dollars.”

Marci Ryvicker, senior analyst at Wells Fargo, directed the discussion with Symons and Gary Epstein, Task Force chairman. Ryvicker said some broadcasters want to know why they can’t just collectively sell their spectrum and split the $45 billion their own way.

Epstein said stations “cannot collude to sell any other way” than how the FCC prescribes.

“Wireless carriers are not that interested in buying 6 MHz in a particular market,” he said. “Whatever they get will be one [channel] in one market; and a different channel in another market.

“They’re paying for LTE-compatible spectrum in nationwide or near-nationwide spectrum blocks, in a contiguous block. That’s crucial. Nationwide or near-nationwide spectrum blocks…. The repacking authority allows us to supply the spectrum in a near-nationwide amount. Individual stations don’t have the ability to do that.”

The primary motive for the Greenhill Report was to get the attention of broadcasters, who’ve been skeptical about the auction for a number of reasons. It was more or less foisted upon them by the FCC not a year after the conclusion of the last TV channel repack, beginning with the March 2010 release of the National Broadband Plan. The NBP called for taking 120 MHz of broadcast spectrum to auction off to wireless providers. The previous channel repack, in which 108 MHz of TV spectrum was reassigned to wireless, concluded in June of 2009.

The incentive spectrum auction is also the first of its type. Congress had to give the commission express authority to share proceeds with broadcasters, but they’ve had no idea how much their 6 MHz licenses will be worth to wireless providers now flush with undeveloped spectrum.

The Greenhill Report, and its unprecedented $45 billion figure, had the desired effect.

“It has had the intended effect,” Symons said. “The presentation of auction opportunity and the dollars in the book has caused a lot of interest. We’ve had several calls, sometimes several a day, several days a week. The next step is the field visits.”

The road show will run January through April. One-on-one meetings will be kept confidential as statutorily required. Symons said participation of people who ultimately drop out of the auction will be kept confidential for two years.

“It’s critical. We need supply, and broadcasters need to be comfortable coming forth,” Symons said. “We’re not just going to large markets. Markets deep into the DMA list are going to be important to the auction.”

Each station will have its own calculation for the opening reserve bid price, for each of the three relinquishment options—going dark, moving to VHF or channel-sharing.

“The mechanism we’re proposing is to show broadcasters an opening bid price before they decide if they want to participate in the auction,” Symons said. “We want to give them adequate time to decide. If they like the opening price, they register and indicate their preference. Their only commitment is to sell that spectrum at that opening bid price. If it falls below that, they do not have to participate…. It doesn’t affect them in the repack. All decisions will be made by algorithms and optimization models.

“If you stay in auction in multiple rounds, what we do then, in every given round, we look to see if we have channels remaining for the stations in that round. If your station is one we can’t find a space for, you will be frozen at that price. You’re provisionally accepted. If we have channels for everyone, the price keeps going down.

“The thing about descending clock format is that 1) it doesn’t require broadcasters to formulate a price; and 2) broadcasters may pick a price above their walk-away price,” he said.

“We’ll have an actual mock auction where people will be able to sit in front of a screen and understand what it will be like to participate,” he said.

Ryvicker noted that the Greenhill numbers were pre-tax.

“How shall we think about taxation?” she asked Epstein.

“All broadcast stations... have a balance sheet. Your spectrum is carried at a specific level. That basis, may or may not be amortized over a period of time. When you receive spectrum [auction] proceeds, you will all likely have gains—more than the adjusted basis accounting for amortization and depreciation. The difference will be treated as capital income, and everything above that will be treated as gains,” he said. “The amount that you would take for depreciation would be recaptured; the amount above would be capital gains. As I understand it, that is the basic construct.”

Ryvicker said there were concerns in the market that discussions about channel-sharing could be considered collusion.

Symons said the FCC was very supportive of the arrangement.

“For a lot of stations, it could be a viable way to stay in business,” he said. “Under our rules, a licensee that wants to share has to enter into a channel-sharing agreement before the auction and take it to the FCC. There are collusion rules, but channel-sharing discussions can take place before the auction. There is an exception for stations that self-identify as channel-sharing partners.”

Epstein said the FCC would start accepting applications for auction participation in the fall of 2015.

The auction was originally supposed to take place next June, but it was delayed on several counts. Broadcasters are suing over the rules; the FCC itself is not ready; and wireless providers may not be ready to bid after today’s auction of 65 MHz of Advanced Wireless Spectrum between 1,695 and 2,180 MHz.

“We delayed because of pending litigation, and also the complexity of designing the auction,” Epstein said. “And for investors, we needed to have certainty in advance of the auction. We will need bidder education and mock auctions. So the pending litigation, complexity, and the need to space the proceedings out, led to the delay.”

In terms of official proceedings to come, Epstein said to expect a Public Notice on auction comments. He said comments typically are handled at the staff level, but in this case, the full commission wanted to respond to comments on the auction rules it released in May.

He said the Public Notice would outline “opening bid prices, auction prices, the benchmarks for closing the auction, how the market-based reserve actually functions, and how we implement market variation.”

He said it would be out “rather shortly,” and that it was the first of four notices.

The second will cover how wireless and broadcast services co-exist, and what happens with low-power TV stations, translators, wireless mics and unlicensed use. The third will focus on the auction architecture; and the fourth will be continued outreach to get broadcasters on board.