Wireless 20/20 digs into preparations for the upcoming FCC 600 MHz incentive auction proceedings

It is time for bidders to start gearing up for the 600 MHz band incentive auction. This could be the last time a large block of valuable low-band spectrum will be up for sale in the foreseeable future. The Federal Communications Commission recently announced the schedule for the Broadcast Incentive Auction 1001. The deadline for broadcasters to file their initial Form 177 applications expressing their intent to participate in the reverse auction is Jan. 12. Each participating broadcaster that has completed an application must commit to whether it wants to sell all of its spectrum, engage in channel sharing or move to a lower channel or from a UHF to a VHF channel.

Having established the schedule and final procedures for the incentive auction, the FCC is now working to maximize the perceived value of this spectrum during the reverse auction in which broadcasters will offer to voluntarily relinquish some or all of their spectrum usage rights. Although the FCC has stated its central objective is to allow market forces to determine the highest price and best use of the 600 MHz spectrum, a final list of opening bid prices for the incentive auction has been released. The top opening bid price in the reverse auction, where broadcasters will sell spectrum to the FCC, has been set at $900 million for a station in the New York City metropolitan area.

In the run-up to the reverse auction scheduled to begin on March 29, the agency will hold a mock auction and a practice auction, in addition to training webinars and other tutorials. The FCC will also make available an interactive, online tutorial focusing on the pre-auction application process for the forward auction (Auction 1002) no later than Jan. 19. The FCC is expected to reach its projected 84 megahertz spectrum clearing target across more than 400 partial economic areas, but broadcasters are still running their simulation models to decide whether and how they are going to actually participate in the auction. If successful, the FCC could clear as much as 110 to 126 megahertz of 600 MHz spectrum with very low impairment.

• Most major broadcasting companies are likely to participate in the reverse auction to varying degrees, including CBS, Sinclair Broadcast Group, Media General, Nexstar Broadcasting, Entravision Communications, Meredith and Gray Television.

• Comcast recently stated it will consider selling some “spectrum usage rights” for its NBCUniversal broadcast television stations during the 600 MHz incentive auction, and based on whether it can expect a good price for giving up its spectrum.

• Other broadcasting companies have said they will take a wait-and-see approach to the auction.

Wireless 20/20 believes the FCC needs to keep up momentum for the auction by reassuring broadcasters there will be sufficient interest from carriers in buying their spectrum. Once the reverse auction begins there will be a maximum of 52 rounds, with the prices broadcasters get for their spectrum declining with each round. The process will continue until each broadcaster giving up spectrum is placed in a band or is declared a provisional winning bidder. As part of the auction process, the broadcast television bands will be reorganized or “repacked” so the television stations that remain on the air after the incentive auction occupy a smaller portion of the UHF band, thereby clearing contiguous spectrum that will be repurposed as new, flexible-use licenses suitable for providing mobile broadband services.

The forward auction will ultimately set the prices broadcasters relinquishing rights in the reverse auction will be paid. The FCC Form 175 participant filing window for the forward auction (in which wireless carriers will bid on the broadcast spectrum) was extended to between Jan. 26 and Feb. 9. But mobile operators will not actually know what spectrum will be auctioned until the FCC completes the reverse auction process. Once the reverse auction is completed it will take the FCC a few weeks to set the initial clearing target for how much broadcast spectrum it is going to receive and the band plan. After this brief break, the forward auction will begin. Based on extensive experience in spectrum auctions in the U.S. and Canada, Wireless 20/20 believes mobile network operators and other investors must be ready for the forward action to begin in May or June 2016. Although it is not clear how long the forward auction will last, the FCC estimates the whole process could take two to three months with the auction closing in the third quarter of 2016.

The FCC has released its opening bid prices for the forward auction in which wireless carriers will bid on the broadcast spectrum. Wireless 20/20 has been carefully reviewing forecasts of how much spectrum will be cleared for wireless users in the broadcast incentive auction and how much money the forward auction may attract. Projected auction revenues differ widely and depend on how many broadcasters choose to relinquish their spectrum. In a recent report, Wells Fargo predicted the 600 MHz auction will generate total bids of between $30 billion and $35 billion – a range below the astounding $41.3 billion in net revenue generated in the FCC’s AWS-3 auction, but still above all of the other spectrum auctions the FCC has conducted. This record-breaking result came with major carriers taking on significant debt.

The success of this auction may depend on carriers continuing to have almost an insatiable appetite for spectrum. Carriers are currently making a direct trade off between capital being used for network densification and allocating capital for the spectrum auction. Mobile carriers are also considering their spectrum needs and the amount they can spend on acquiring new spectrum in light of their current holdings, available capital and the amount of debt they took on to help pay for spectrum they acquired during the AWS-3 spectrum auction. AT&T and Verizon Communications had to sell off assets to help finance their license payments, and this will undoubtedly affect these carriers’ ability to invest in the incentive auction. Although 600 MHz spectrum has been prized for its long reach and ability to penetrate walls, the incentive auction is scheduled when AT&T and Verizon are increasingly looking to expand their network capacity. T-Mobile US and Sprint still need additional low band spectrum to enhance their LTE network coverage.

Wireless 20/20’s analysis has been influenced by a series of recent statements and financial reports from wireless carriers, signaling that there may be a land rush for these new broadcast spectrum licenses.

• Although AT&T is highly leveraged after its investments in DirecTV and Mexico, the carrier is likely to bid aggressively and dominate the forward auction by spending as much as $10 billion on a nationwide 2×10 megahertz block of spectrum.

• Verizon will likely limit its bid to a total of $5 billion. Verizon is less interested in 600 MHz spectrum, which is very good for coverage but not so good for capacity in densely populated areas. Verizon is concerned about the interference between 600 MHz and 700 MHz spectrum, and is more focused on densifying its network with small cells and acquiring fill-ins for existing low-band spectrum.

The FCC has set aside 30 megahertz in most markets for smaller wireless carriers and investor groups that hold a smaller share of sub-1 GHz spectrum to bid on during the forward auction. That would allow Sprint and T-Mobile US to not have to bid against Verizon and AT&T.

• Sprint has already stated that it will not participate in the auction. Sprint’s rationale for bowing out is understandable since it lacks capital to bid aggressively against T-Mobile US and the company holds a sizable chunk of high-band spectrum that still need to be deployed to improve capacity.

• Sprint’s decision not to participate could make T-Mobile US the only nationwide carrier eligible to bid on the reserve spectrum, and the “un-carrier” will reportedly bid as much as $8 billion in the 600 MHz auction. T-Mobile US has been selling off towers and more to raise cash, and CEO John Legere has predicted T-Mobile US will walkaway a winner in the incentive spectrum auction.

• Several tier-two regional and tier-three rural mobile service providers appear to be enthusiastic about the opportunity to participate, bid on and win valuable 600 MHz spectrum for mobile broadband, including US Cellular, C Spire, Cellular One, Bluegrass Cellular, Cellcom, Carolina West Wireless, Chariton Valley Wireless, Chat Mobility and Union Wireless.

• Other possible “dark horse” players, or those companies that do not currently play in the wireless industry include Google, and cable companies like Comcast and Charter Communications have stated that they are exploring participating as a bidder in the forward auction to build a low-frequency canopy for areas without Wi-Fi coverage.

• Investor groups are also likely to emerge as bidders once we get closer to the forward auction. Chamath Palihapitiya is backing a company called Rama that has ambitions to compete with Verizon and AT&T by bidding in the range of $4 billion to $10 billion in the 600 MHz incentive auction, with the hope of winning enough airwaves to start a new carrier to shake up the U.S. wireless industry.

Smaller carriers and investors face a unique challenge in positioning themselves to secure the most spectrum at the lowest cost and may not be prepared to execute a success strategy for the 600 MHz auction.

Wireless 20/20 has prepared the following check-list for mobile operators and investors as they prepare for the Upcoming 600 MHz Broadcast Spectrum Incentive Auction:

1. Keep a close watch on the reverse auction as it unfolds during the next few months. This will determine how much 600 MHz broadcast spectrum is released and the degree of impairment across more than 400 PEAs. The prices broadcasters receive for their spectrum will decline over a maximum of 52 bidding rounds until a provisional winning bidder is declared for each band.

2. Be patient as the FCC repacks the 600 MHz band so the remaining broadcast TV stations occupy a smaller portion of the UHF band and as much contiguous spectrum can be cleared and repurposed as new flexible-use licenses for mobile broadband services.

3. Organize your forward auction team, including experts in bid tracking, game theory, simulation and competitive analysis, and begin preparing for the forward auction as the reverse auction unfolds.

4. Develop your auction strategy and run a large number of simulations to prepare for the actual bidding process several weeks before the forward auction begins.

5. It is critical that smaller bidders determine the funding needed to effectively participate, and begin project planning, team building and auction preparation early in 2016.

6. Once the FCC has released the cleared spectrum and opening bid prices for the forward auction, these bidders should focus on valuing the spectrum in those PEAs targeted for their company and by likely competitors.

7. The key to winning targeted licenses at the most favorable prices is setting up an auction war room well in advance to conduct auction simulations, track auction bidding and competitive auction bidder prediction.

Wireless 20/20 helps mobile operators and their vendors develop their 4G LTE launch strategies, service offerings, marketing plans, technology roadmaps and business cases. More information about the WiROI™ Neutral Host Network Venue Tool can be found at www.wireless2020.com/WiROINeutralHost/.

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