Incentive Auction 'Success': A Skeptic's View

OAKLAND, CALIF.—On Jan. 18, two days before he left office, former FCC Chairman Tom Wheeler released a statement lauding the completion of the incentive auction. “[T]he benefits of the auction are indisputable,” he said. “We will repurpose 70 MHz of high-value, completely clear low-band spectrum for mobile broadband on a nationwide basis. On top of that, 14 MHz of unlicensed spectrum—the test bed for wireless innovation—will be available for consumer devices and new services. The auction will provide $10.05 billion to broadcast television licensees who participated and billions toward deficit reduction.”

The commission and the overall business environment may look quite different with the passage of enough time to see whether the promises of new public service delivery are achieved in practice. But even now, some caveats are in order after the applause dies down and before we ever embark on an incentive auction like this again.

Successful wireless bidders in the forward auction will be given a 12-year license term. They will be given six years to provide reliable signal coverage and offer wireless service to at least 40 percent of the population in the license area. In 12 years they will be required to offer reliable wireless service to 75 percent of the license area. They will never be required to offer service to all or substantially all the areas being served.

Television broadcasting, which will be degraded through the loss of many bought-out stations and through removal from Channels 38-50, will see a march backward from what is now almost universal coverage. Nielsen universe estimates for the 2016-2017 season put at 96 percent the number of homes with televisions receiving traditional TV signals via broadcast, cable, DBS or telco. The role of over-the-air TV is growing, not declining. As of the second quarter of 2016, Nielsen reported that 94 percent of households had an HDTV, up from 91 percent in 2015. This compared with smartphones (83 percent), subscription video-on-demand (45 percent), and any tablet (52 percent).

The auction formally began a year ago, when broadcasters were required to submit a form stating their interest by 6 p.m. Eastern Time, Jan. 12, 2016. On that date, strict confidentiality regarding bids and bidding strategies went into effect. Actual bidding started on May 31, and continued until the merciful conclusion on Jan. 17. Because the amount of the spectrum kept changing, TV owners could not know whether their own station would have to move or be displaced. They did not know what monies might be forthcoming, because each stage involved new bids. Because of strict nondisclosure beginning on Jan. 12, 2016, the auction immobilized station sales and equipment upgrades.

Incentive auction winners will be required to surrender their licenses promptly. Their studios, offices and transmitters will become scrap and their staffs will be largely pink-slipped. Up next: Staff publication of a Channel Reassignment Public Notice will start a 90-day period for stations assigned new channels to apply for changes consistent with their new frequencies. Then they will have 36 months and a set-aside of $1.75 billion in reimbursements to get this done. The time and the money were decided long ago, and no one knows whether either one will be adequate.

Claims that reverse auction payouts to broadcasters will be re-invested in TV broadcasting are hard to fathom. By definition, a payee who gives up its channel no longer has it to refurbish. The use of proceeds is unconditional, so that the real “beach front property” may be the one where the former TV broadcaster constructs a retirement villa.

FCC planners foresaw a revenue bonanza, by projecting from the result of the Advanced Wireless Services Auction (AWS-3), which closed on Jan. 29, 2015, with bids of $41.33 billion for blocks at 1695 MHz and up. But the final stage rule was met with only $18.2 billion offered for 70 MHz.

The wireless companies are still digesting their AWS-3 wins. But they also are beginning to realize that the “beachfront” at UHF may be harder to exploit than cleaner, higher bands. Doug Lung observed (in TV Technology, June, 2015): “As cell sites become more overloaded, wireless carriers increase capacity by adding more sites, so each one serves a smaller number of customers. As the service area of each site is reduced, the long-range coverage of UHF frequencies becomes less important and limiting interference more complicated.” We will have to wait and see how zealous the carriers actually are in building out and marketing for these bands.

The incentive auction was sold to Congress as a painless way to reduce the deficit without raising taxes. As Wheeler testified at a House Appropriations Subcommittee, March 27, 2014, “The commission welcomed the statutory authority to initiate and operate incentive auctions because of its benefits to consumers and stakeholders, as well as the Treasury.” It’s now clear that the overage from payments and administrative costs will only be billions in the single digits. With a new Congress hankering for large tax cuts, that windfall is hardly going to live up to its initial PR.

Wheeler noted: “14 MHz of unlicensed spectrum—the test bed for wireless innovation—will be available for consumer devices and new services.” But without the removal of Channels 38 to 50 from TV broadcasting, white space was open and available already, throughout the TV band, and the technology existed to exploit it on the local level without destructive interference.

The reservation of 14 MHz for a white space, being set aside nationwide, makes it more likely that this technology will be developed and controlled by a few very large national entities. Ironically, the extinguishing of TV spectrum is being monetized, the wireless spectrum is being repurposed monetized, yet the approach to white spaces makes them available “for free.”

TV stations typically operate on channels reserved for them, under a fundamental FCC policy since 1952. Public TV stations by law may not accept advertising, and their revenue potential is circumscribed by a number of FCC and IRS rules and policies, and in many cases by institutional licensing to government and education. In the incentive auction, no distinction was made between commercial and non-commercial. The public TV stations may be easy or willing targets, but by deliberately killing them off, the incentive auction is an inversion of the long-term policy goal stated in the Public Broadcasting Act of 1967 that “it is necessary and appropriate for the Federal Government to complement, assist and support a national policy that will most effectively make public telecommunications services available to all citizens of the United States.” 47 U.S.C. Section 396(a)(7).

When stations are moved out of the sold spectrum and repacked in Channels 36 and below, the 2012 enabling law instructed the FCC to replicate, as far as possible, the area and population currently covered. In many cases, full service TV stations depend on extended terrestrial coverage, over mountain ranges and into valleys, by means of rebroadcasting TV translators. This coverage is factored into their TV ratings, their maps, their sales brochures, and their rate cards. Yet the planners of the incentive auction decided to treat these translators and their coverage as though they did not exist. Consequently, in the repacking, rural residents in Utah, Colorado, New Mexico, and several other states will face loss of their only practical means of reception.

In the set aside of $1.75 billion to compensate full service TV stations for their moving costs, no funds are provided for TV translator relocation costs. This is in contrast to the DTV transition, where the Department of Commerce had a reimbursement program for rural translators that upgraded to digital. Many of these translator stations are operated by local government and non-profit entities who will be hard pressed to find the money to cover this unfunded Federal mandate.

Class A low-power TV stations have co-equal protected spectrum rights, along with full service TV's. In February, 2013, the Media Bureau began issuing citations based on minor deficiencies such as late or missing children's TV quota reports. The stations were threatened with large fines, up into the five figures. Thirty-seven such letters were issued in one day, on February 12. But the FCC licensees were told that, if they would simply downgrade to LPTV and surrender their Class A spectrum rights, all would be forgiven and the fines would be waived. The cynicism in these actions was clear because, if the stations downgraded, they would no longer even need to do any children's programming at all. This was a brute-force band clearing measure.

Low-power TV stations (non-Class A) have no spectrum rights or compensation rights in the repacking. If anything, the threat to their business from the drawn-out auction and its uncertainties was worse than for full service TV stations. A study by the General Accountability Office looked at possible LPTV losses, based on a survey conducted in the summer of 2016, that obtained 115 responses, representing approximately one-fourth of the licensed 2,063 LPTV stations, and more than 40 percent of the 3,660 licensed translators. The report, published in December, predicted substantial repacking losses of niche programming by LPTV, including specialized cultural programs, foreign language, and Tribal program services. One estimate had the population of licensed TV translators and LPTV's in Channel 38 to 50 at 2,332.

The FCC has pursued consistent policies since 1952 that favored a fair, efficient and equitable distribution of radio services among the several states and communities, 47 U.S.C. Sec. 307(b), with first TV service being a foremost goal. Now universal coverage is largely achieved. Homes that never subscribed to cable, satellite or telco TV, or who dropped their subscription were estimated by the end of 2016 as 26.7 million homes, or 21.9 percent of households, up by more than four million homes since 2014, according to a report by Convergence Research Group Ltd. (Canada). The growth of “cord cutters” and of those who never had a TV cord to cut are bringing healthy competitive balance to the overall TV marketplace. Only time will tell whether the sacrifice of these values serves a higher goal, or proves to be a mistake.

Michael Couzens is a communications attorney in Oakland, Calif. A long-time supporter of low power TV and rural TV translators, he is currently vice president-legal affairs for the National Translator Association.