Low Prices in Incentive Auction Said to Offer Many Lessons for Next FCC
The Stage 4 clearing cost for the TV incentive auction, $10.05 billion to clear 70 MHz of usable 600 MHz of spectrum, came as a surprise, but not a shock, to analysts and other auction watchers. Assuming the auction raises the $12.01 billion needed to pay broadcasters and close the auction, carriers bidding for 600 MHz licenses could get spectrum at a relative bargain price, auction watchers said. Overall, the FCC will need to clear 84 MHz to get 70 MHz into the hands of providers (see 1701130077).
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“We believe Stage 4 of the forward will look much more like a typical auction, with multiple rounds, as the clearing price suggests this will be the last Stage and the carriers will behave accordingly given their spectrum needs,” UBS said Tuesday in note to investors. “We continue to expect T-Mobile, AT&T and Comcast to be the largest bidders but now believe the carriers could pay less, given the dramatic decline in the broadcaster ask.”
When the auction opened last year, some estimates were as high as $100 billion, MoffettNathanson said. “What a difference eight months makes,” the firm said. “Tomorrow, the fourth and likely final stage of the forward auction will begin with an ask price of, wait for it… just $10 billion for 84 MHz (70 MHz of licensed spectrum ex guard bands). Broadcaster confidence has crumbled, replaced with a desperate rush to at least get something out of an auction that once promised riches. Their ask has fallen to $0.38 per MHz-POP.”
“One swallow does not make a summer,” said Roger Entner, analyst at Recon Analytics. “This is the first auction that might come in below realistic expectations. We have to ignore the ludicrous $80 billion figures that some spectrum owners threw out there. ... The real lesson is that low-band spectrum does not carry a premium over medium or high-band spectrum. ... Lower frequencies are better for coverage and higher frequencies are better for capacity due to how far the signal carries and how much it interferes with others.” Three of the four nationwide carriers already cover more than 300 million Americans, he said. “We have coverage where it is economically feasible.”
FCC re-establishment of bidding credit policies “helped to push AWS-3 auction prices to record highs, which would tend to reduce the amount of capital the largest providers have to commit to the incentive auction,” said Fred Campbell, director of Tech Knowledge. Campbell ran the 800 MHz auction as chief of the Wireless Bureau. Campbell said FCC adoption of a set-aside for competitors, under which the largest carriers “are likely to receive the least valuable blocks,” also didn’t help. “Ironically, these decisions were driven by the FCC’s unsubstantiated assumption that lower frequency spectrum is substantially more valuable than higher frequency spectrum, an assumption that appears quaint given the wireless industry’s interest in using higher frequency spectrum for the deployment of 5G technologies,” Campbell said. Reclassification of broadband as a common-carrier service was also a factor, he said: “The resulting cloud over the future prospects of investment in wireless networks appears to have prompted the largest providers to focus their capital on less regulated sectors of the industry.”
Michael Marcus, former FCC engineer now a spectrum consultant, said the prices may reflect that spectrum is only one of the factors in how well carriers can expand their coverage, along with technology and infrastructure. “Most [increased] cellular capacity over the last 30 years has not come from spectrum, it has come mainly from infrastructure with some increase in efficiency,” he said.
“Predicting spectrum valuation is always difficult because [auctions] happen rarely and so many things go into the valuation,” said Harold Feld, senior vice president of Public Knowledge. “Here, everyone treated the AWS-3 auction valuations as a ‘new normal.’ It turns out instead to have been a one-time bubble. If you took the AWS-3 valuation out of the equation, the prices we are seeing are more rational.”
Other questions also came into play including uncertainty about the length of time repacking will take and when the reclaimed spectrum can be put into productive use by the winning carriers, Feld said. Carriers are reevaluating their business models to emphasize densification in high-band spectrum, he said. “Consolidation and expected further consolidation reduced the number of active bidders." Interest rates also have been on the rise, making the cost of capital higher, he said. “All of these things play a substantial role for carriers evaluating their bid prices,” but that’s how markets work, Feld said. "My refusal to take market value for my house when I don't want to move is neither a failure of demand or a failure of supply.”
The incentive auction suffered from “unfortunate timing,” said Richard Bennett, free-market blogger and network architect. “The AWS-3 auction drained the coffers of two largest carriers and also left them well-stocked with spectrum. T-Mobile has the strongest need for low-band spectrum, but very low willingness to invest when it has increasingly viable technological alternatives,” he said. “Sprint appears determined to address its spectrum needs through mergers, and has never been a serious a player for low-band. I suspect the demand for low band will be higher in two to five years, but by then we’ll be well into 5G, ultra-high-band and very small cells.”
The low returns from the auction are a “game-changer for those counting on auctions to raise revenue,” said a former FCC spectrum official. “There are likely a number of reasons for the depressed prices. Some include rushing to hold the auction so quickly after the AWS-3 auction, the major slow-down in demand for low-band spectrum, and consolidation in the wireless industry. There just isn’t robust competition for that much spectrum and the small carriers simply cannot compete.”
“The auction will almost certainly close at this stage, which is what was always considered most likely,” said Michael Calabrese, director of the Wireless Future Program at New America. “The good news is that forward auction bids for 60 MHz should be substantially greater than $10 billion, generating revenue for the Treasury. At $10 billion the cost per megahertz would be roughly the same as it was for the record-setting AWS-3 auction. And with more than $20 billion in eligibility at play from the three largest carriers alone, for considerably better spectrum, the end result should be a successful auction.”
Experts questioned reports the Trump administration might suspend the auction as part of its revamp of the FCC (see 1701170025). “That would be a disaster if they tried,” Feld said.
“I see no good reason to suspend the auction unless it fails to close at the current 84 MHz threshold,” Calabrese said. “The big drop in the cost to pay off broadcasters suggests that the next forward auction is likely to close and likely to send significant revenue to the Treasury, even if much less than originally anticipated. More importantly, auctioning 70 MHz potentially gives each of the three national carriers in the auction the 20 MHz they say is necessary to make it economical to add the band to their network.”