Success of Canadian 700 MHz Auction Could Be Positive Sign for Incentive Auction, Experts Say

The prices “bode well for the incentive auction,” said Cramton, who also does work for competitive carriers among his clients. “Prices in any particular auction are very much dependent upon a number of factors, the most important of which is the amount of competition. But it’s clear that low-band spectrum is extremely valuable. Canada isn’t more competitive than the United States in terms of the number of providers and so on. I would expect auction revenues to be quite robust in the incentive auction.”

The Canadian auction (http://bit.ly/1l5GONq) raised C$5.2 billion ($4.66 billion). If the U.S. succeeds in clearing 84 MHz in the incentive auction, that would translate to proceeds of about $50 billion for the incentive auction, Cramton said. “It’s a good indicator of value and I would expect some more higher values in the United States.” Canada’s big three carriers bought most of the 97 licenses awarded: Rogers paid C$3.3 billion for 22 licenses, Telus C$1.1 billion for 30 and Bell C$565 million for 31. A fourth bidder, Montreal’s Vidéotron, originally a cable company, bid C$233 million for 7 licenses. Four smaller companies also won at least one license in the auction.

"It’s definitely helpful to have a real-world comparable for projecting demand for broadcast spectrum,” said Paul Gallant, analyst at Guggenheim Partners. “It certainly suggests that U.S. carriers will go all-out for 600 MHz spectrum. And if that’s right, it should also be encouraging for broadcasters who are thinking of selling.”

"The Canadian auction bodes well for the U.S. auction in terms of revenues that could be raised, but the overall amount will depend on how much there is to sell,” said a wireless industry lawyer who represents a diverse client base. Carrier executives also said Friday they view the Canadian results as having positive implications for the U.S. auction.

NAB Executive Vice President Rick Kaplan said the big question is whether the U.S. auction may have fewer major participants than the Canadian auction, especially if Sprint makes a bid for T-Mobile. “A key driver of the Canadian auction, in addition to not yet having 700 MHz spectrum available, is that it had four major players bidding aggressively for the spectrum,” said Kaplan, an ex-Wireless Bureau chief. “In light of the potential Sprint/T-Mobile merger and other factors, it’s unclear if we'll have two, three or four significant bidders."

Auction expert Armand Musey of Summit Ridge Group also had a more mixed view of the Canadian auction than Cramton. “The Canadian auction is certainly a positive signal for the U.S. incentive auction, but there are many other signals that aren’t so positive,” Musey said. “In general U.S. spectrum prices have been flat for a few years now. The Verizon/T-Mobile 700 MHz A-block sale represented an annual increase of mid-single digits [percentage] from when Verizon bought in the 2008 FCC auction despite vastly improved long-term outlook for channel 51 interference since then."

Musey said that with the AWS 3 and other auctions, the FCC plans to auction about 150 MHz of spectrum nationally over the next 18 months. “That’s approximately 40 to 50 billion MHz/POPs,” he said. “Unless the vast majority of this spectrum is allocated to AT&T and Verizon, who have approximately 80 percent plus of the industry’s cash flow, the prices will need to be, on average, well below $1 per MHz/POP. There’s just not enough money in the industry to afford it. Even AT&T and Verizon would need to do some aggressive financing to buy this much spectrum. Moreover, AT&T and Verizon already control the majority of the spectrum below 1 GHz, leading to legitimate industry concentration concerns about allowing them to have a disproportionate amount of this spectrum. When you add-up these factors, it’s hard to see Canadian style pricing in the U.S. incentive auction."

Some small carrier officials pointed to the Canadian auction as a sign that the FCC can impose some spectrum aggregation limits in the incentive auction without harming the proceeds. Canadian regulators placed a cap of sorts on bidding, restricting any carrier with more than 10 percent of spectrum in any region from buying more one of the four prime paired blocks in the region. The Competitive Carriers Association said in a Feb. 5 FCC filing that in Canada and elsewhere “regulatory authorities have concluded that limits on the aggregation of low-band spectrum are sound spectrum management policy” (http://bit.ly/1c98CIs).

"The Canadian 700 MHz auction provides additional concrete evidence that an auction with well-designed spectrum limits can enhance competition without negatively impacting revenue,” said T-Mobile Vice President Kathleen Ham. “The Canadian auction was expected to raise less than $2 billion, yet brought in nearly $5.3 billion, while also adding a new competitor in every region.” Other industry officials disagree that the auction shows the wisdom of imposing caps in the U.S. auction.

"This significant value sets an incredibly high bar for the commission to get it right,” said a former FCC spectrum official. “What does that mean? One, a straightforward incentive auction to attract a large number of broadcasters in the big cities, and, two, a forward auction where every comer has an unrestricted opportunity to participate fully. Fancy schemes written into prescriptive, counterintuitive rules will not raise big money.”

"The Canadian results prove that the American incentive auction will produce healthy proceeds for selling broadcasters, for FirstNet and for deficit reduction if the FCC refrains from scoring stations and restricting wireless bidders,” said Expanding Opportunities for Broadcasters Coalition Executive Director Preston Padden.