FCC set to kick off the forward auction part of its phase two 600 MHz auction proceedings with the offer of 90 megahertz of cleared spectrum for telecom operators

The Federal Communications Commission’s second attempt to match television broadcaster wants with wireless telecommunication operator needs is about to begin as phase two of the 600 MHz incentive forward auction process is set to get underway.

As you may remember from part one of this saga, telecom operators stopped throwing money at 100 megahertz of total cleared spectrum well short of what broadcasters were looking to pocket for those resources to the tune of just $23 billion offered up against the $86 billion sought.

This time around, the FCC managed to lower its clearing target to 90 megahertz of spectrum, for which television broadcasters are asking to receive around $54 billion in compensation. Telecom operators also will have to put up a couple billion more dollars to handle the auction proceeding’s overhead.

The trimming of total spectrum up for bid in phase two has resulted in a reduction in the number of 10-megahertz spectrum blocks available in most markets. For instance, the availability of spectrum consolidated into partial economic areas centered on markets like New York City, Chicago and San Francisco has been trimmed from 10 to nine. However, the number of licenses centered on Los Angeles has increased from five to six this time around.

Bid prices for the licenses up for grabs in phase two are set to begin at the closing price level of phase one activity, thus the New York City licenses are set to begin at $477.2 million per 10-megahertz license, the Los Angeles licenses at $388.5 million and the Chicago licenses at $125.1 million.

One possible incentive for bidders is that the phase two spectrum is “cleaner” in that it will contain 3,688 “category one” license blocks with up to 15% impairment, and five “category two” license blocks with between 15% and 50% impairment. The FCC did note 99.8% of the category one licenses will have no impairment. The first phase spectrum included 4,030 licenses with less than 15% impairment and 18 licenses with between 15% and 50% impairment.

The FCC is set to hold a pair of two-hour bidding rounds per day through at least the end of this week. Despite eventually falling short, the first round of bidding in phase one got off to a roaring start with $8 billion put forth in potential winning bids, or what was eventually one-third of its total.

Among the 62 qualified bidders, established mobile carriers Verizon Communications, AT&T and T-Mobile US were expected to be the most aggressive auction participants. Verizon was predicted to bid up to $10 billion for spectrum, while AT&T was forecast to bid up to $15 billion having committed to at least $9 billion in bids as part of gaining approval of its DirecTV acquisition.

The FCC previously said it would set aside 30 megahertz of the repackaged spectrum for carriers that do not already control a significant amount of sub-1 GHz spectrum holdings, which is predominately made up of AT&T and Verizon Communications. T-Mobile US is expected to be the most aggressive bidder for the set-aside spectrum, with some predicting the carrier could spend up to $10 billion on licenses.

Sprint, which has sat out all of the FCC’s recent spectrum auctions, announced last year it would again sit out the competitive bidding process. The carrier noted a need to focus on improving its network and that it already had sufficient spectrum due to its vast portfolio in the 2.5 GHz spectrum band.

Similar to recent spectrum auctions, the FCC is only releasing bidding information on markets and not on which bidders have placed those bids.

Analysts have been predicting that it’s likely the FCC will need to move to a third auction stage, which would further reduce total spectrum available for commercial services down to 80 megahertz, or even to a fourth stage with just 70 megahertz of spectrum made available before there is alignment on what broadcasters want in terms of compensation for the spectrum and what telecom operators are willing to offer.

“The significant reduction in the targeted net proceeds of the reverse auction shows just how effective the auction mechanisms can be in bringing together supply and demand,” explained Dan Hays, principal at PwC’s Strategy& division, following the close of the latest reverse auction round. “However, at over $54.5 billion to broadcasters, or roughly $56.5 billion in total, we believe that the clearing cost is still well beyond striking distance for the budgets of mobile network operators. A third stage of the auction, and perhaps even a fourth, is now all but a certainty. For broadcasters, this is a clear indication of a rapid decline in interest at lower prices, effectively calling the bluff of the wireless industry and demanding that they come to the table ready to pay up.”

The current high-water mark for a commercial spectrum auction was the $41.3 billon in net proceeds generated in last year’s AWS-3 auction, which included 65 megahertz of total spectrum in the 1.7/2.1 GHz band, including 15 megahertz set aside for unlicensed use.

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