Incentive Auction Price Target Lowered But Still Seen as Beyond What Carriers Will Bid

The amount needed to close the auction in Stage 2 is still more than twice the $22.45 billion in net bids buyers offered in Stage 1. The record spectrum auction to date was the AWS-3 auction, which closed in February 2015 with more than $41.3 billion in provisionally winning bids (see 1501300051).

If forward auction bidders don’t bid enough to close the auction during stage two, the clearing target will drop to 108 MHz for stage three, according to the FCC's band plan. Many broadcasters, analysts and attorneys have told us they don't expect the auction to close until stage four, which would have a clearing target of 84 MHz. The forward auction will begin next week, four business days from the reverse auction’s close, an FCC Incentive Auction Task Force spokesman told us.

Many wireless industry observers predict an auction take of less than $30 billion (see 1609120054). Craig Moffett, analyst at MoffettNathanson, said earlier that carriers just don’t have the “kind of balance sheet capacity to drive the auction to the … stratospheric levels” seen in the AWS-3 auction. The lower-than-expected clearing cost means the auction could end in 2016, Wells Fargo analyst Marci Ryvicker emailed investors. The rapid fall in clearing cost “debunks” predictions the auction will fail, she said. Stage one of the forward auction took 27 rounds over 14 days, Ryvicker said. “Extrapolating the same timeline to Stage 2 would give us an 11/2 end, though we note this stage could go even faster given we are beginning where Stage 1 left off.”

“The drop in the clearing target was within the range of our expected outcomes and brings a Stage 3 conclusion within reach,” BTIG analyst Walter Piecyk told us. “The focus will now turn to how much the forward auction will rise, if at all.”

Several broadcast industry officials and analysts said they expected a clearing cost in the $60 billion range, and a cost lower than that could suggest an end to the auction is closer than expected. Nexstar CEO Perry Sook wouldn’t go that far, but said the number shows progress. “I think we’re getting closer,” he said in an interview Thursday. “Things are moving in the right direction, I think it will be another round or so before the bid and the ask are aligned.” He told us the prospect of the auction continuing makes it important that the FCC grant Nexstar’s request for a waiver that would keep it from having to wait for the auction’s end to complete its purchase of Media General (see 1609220035)

The clearing cost number is still in the expected range, BIA/Kelsey Chief Economist Mark Fratrik told us. It's low enough that it’s possible the stage two forward auction could be more vibrant than stage one, he said: Wireless companies may believe the price is low enough that they must bid aggressively or risk missing out on spectrum if stage two proves to be the final stage. “It’s still a lot of money to raise,” Fratrik said. The high number suggests many broadcasters are still freezing early in the auction, he said.

'Not Close Enough'

“We are closer, but not close enough” to end the auction in this coming stage, said Roger Entner, analyst at Recon Analytics. “My expectation continues to be that we will have a successful auction at the 84 MHz or 78 MHz levels. The bidders simply do not have the wherewithal to come up with $54.6 billion.”

The broadcaster demand is down 31 percent on a dollars per MHz/POP basis, from $3.02 to $2.08, said Michael Rollins, analyst at Citi. The total dollars demanded is lower than expectations due to “greater price elasticity than expected,” Rollins wrote investors. Rollins predicted the auction will end in February or March.

“It seems very unlikely that wireless industry bids will total anywhere close to $54 billion,” said Michael Calabrese, director of the Wireless Future Program at New America. “If not, then the auction will be spinning its wheels until the FCC moves along to Stage 4 and a 84 MHz target. The reason is that Stage 3, at 106 MHz, requires only one less TV station, but it also auctions 10 MHz less spectrum to wireless carriers. Only at Stage 4, when you jump below TV Channel 37, which will not be auctioned, is there considerably more space to repack the most expensive TV stations that remain on the air.”

The new price target is a “sizable dip” from the previous level, but the auction is unlikely to close in Stage 2, agreed Doug Brake, telecom policy analyst at the Information Technology and Innovation Foundation. “That’s OK,” he said. “Better to take the time and get to an accurate equilibrium. It’s important the FCC proves out the two-sided model as an example for other bands and other countries, so no reason to rush.”

“Wireless companies are winning this game,” said a lawyer who represents broadcasters and carriers. Bidding shows carriers don’t need the 600 MHz as badly as the FCC thinks they do, the lawyer said. Carriers “know that the price will keep dropping, so why would they bid more in this round than the last?” the lawyer asked.

"The auction is going exactly as planned,” emailed Preston Padden, who advises broadcasters. “It was not designed for speed but rather to find the equilibrium point between spectrum sellers and buyers and that is what it is doing."