Returns from a Broadcast Spectrum Auction Hard to Predict, Experts Say
Congressional Budget Office estimates of how much the government will raise through a proposed voluntary incentive auction of broadcast spectrum are no better than an educated guess, industry officials said last week. The CBO’s $24.5 billion estimate for revenue from proposed FCC auctions, after the cost of reimbursing broadcasters for their spectrum, has emerged as a key figure in the debate over spectrum legislation and even deficit reduction. But industry officials who closely track auctions say auction results are difficult to predict, especially at a time when the industry is changing.
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AWS-1 was a $21 billion auction and the 700 MHz auction saw $18.9 billion in net bids. But any broadcast spectrum auction would come amid huge change for the U.S. wireless industry. T-Mobile, for example, was the big player in the AWS-1 auction but that company may not even be around if it’s absorbed by AT&T. Other variables include whether LightSquared spectrum, when it comes online, will depress future auction prices. It remains uncertain how many broadcasters would opt to sell spectrum in the major markets like New York and Los Angeles where carriers have the greatest needs.
CBO’s estimates acknowledge there’s uncertainty. It predicts that auctions over the next 10 years will likely bring in less than auctions since 2001 -- 70 cents per MHz/POP compared to 80 cents for recent auctions. “That decline reflects expected differences in the quality and quantity of spectrum expected to be auctioned,” CBO said. Past auctions have offered plenty of surprises. For example, the original PCS C-block auction in 1996-1997 brought in much more than expected, a net $10 billion, at a time when the economy was booming. The Wireless Communications Service auction a year later surprised in the opposite direction, with licenses for some major cities bringing in $1 each.
"There’s so many variables that would have to be factored in,” said a former FCC official and wireless attorney. “Where the economy at is at that point, the ability to raise capital at any given time, makes a huge difference.” If there are lots of bidders that drives up prices, but fewer bidders have the opposite effect, the source said. How spectrum is subdivided, the geographic size of the licenses offers, rules for bidding credits, all make a difference.
"There are a lot more unknowns than knowns at this point,” said Sanford Bernstein analyst Craig Moffett. “First, there’s no way to project how many broadcasters would participate. Second, LightSquared’s spectrum is a huge question mark, Clearwire is on the ropes, T-Mobile is in merger purgatory, cable is already sitting on spectrum it doesn’t know what to do with, AT&T is likely to find itself in divestiture mode, nobody knows what Dish Network is going to do with the spectrum they've already got, and Sprint doesn’t have any money. With all that, nobody has any idea what would come out of a spectrum auction right now."
"The auction score is based on variables that are really hard to predict and could end up being off by a fair amount,” said MF Global analyst Paul Gallant. “But CBO’s estimate is the only one that counts.” Medley Global Advisors analyst Jeff Silva said CBO did a good job taking many variables into consideration. “My sense is there is a lot of potential play in the $24.5 billion revenue figure, and CBO acknowledges as much in the text of the score,” he said. “On the one hand, with so many variables at work (thus giving rise to uncertainty), the $24.5 billion figure could be subject to downward pressure. On the other hand, the fact that the supply of prime spectrum is limited and demand will be relentlessly strong going forward, the airwaves being considered for auction over the next decade could be expected to fetch top dollar."
Public Knowledge Legal Director Harold Feld said uncertainty over auction results shows why revenue shouldn’t drive policy. “The text of the CBO estimate makes it very clear that this is a best guess after running thousands of models,” Feld said. “Unlike the AWS or 700 MHz auction, we simply have no idea how much spectrum will be available and, more critically, how much it will cost to clear. People do not seem to appreciate the enormity of the repacking in the most crowded markets. The more people need to be moved, the more people need to be bribed not merely to give up their licenses, but to move to lower bands or accept doubling up with surviving broadcasters.” The CBO’s estimates, at best, are little more than a conservative “best guess” of auction proceeds, he said. “Auction enthusiasts will keep insisting there must be more revenue because they assume away all the uncertainties and focus on the most favorable probabilities,” Feld said. “As an auction skeptic, I'm inclined to think it is going to be a much harder project and generate much less money than even CBO predicts. The days of easy money from spectrum auctions are over. We have hit ‘peak spectrum.’ People need to accept this and not continue to generate studies that assume high auction revenues and low clearance costs."
Predicting auction results is always hard, agreed Media Access Project Senior Vice President Andrew Schwartzman said. “This one is particularly hard to predict. Based on a very quick read of the CBO’s paper, there are several variables that are quite uncertain,” he said. “In particular, CBO appears skeptical about how much broadcast spectrum can be reclaimed, and it is taking a wild stab at estimating how much of the proceeds will have to be surrendered to the broadcasters and cable operators as cost reimbursements. The fact that this will be the first two-sided spectrum auction adds to the uncertainty.”