

FCC's incentive auction band plan.

There were no obvious surprises among the 104 applicants that the FCC said last week could participate in the upcoming incentive auction of valuable 600 MHz spectrum, although a major dark horse may yet emerge. And plenty of other questions loom as we head into what FCC Chairman Tom Wheeler hopes will result in a "spectrum extravaganza."

Verizon (NYSE: VZ), AT&T (NYSE: T) and T-Mobile US (NYSE:TMUS) will participate in the auction, as expected. Sprint has repeatedly said it won't participate, but because the FCC has yet to make the database of bidders fully available, there's still a slight chance parent company SoftBank has applied under a "doing business as" name.

Participants hope to walk away with low-band airwaves that offer both distinct propagation characteristics for deployments over long distances and strong in-building penetration. This is likely to be the last major auction of low-band spectrum for the foreseeable future, so stakes are high. First, though, the FCC must hold a reverse auction during which it will buy back spectrum from TV broadcasters that will later be auctioned to bidders looking to use it to deploy wireless services.

Setting the clearing target

The FCC hopes to provide as much as 126 MHz of spectrum nationwide from broadcasters who must let the government know which specific TV channels they are interested in selling by March 29. (Broadcasters could submit applications beginning in December.) The FCC will then reconfigure those airwaves via optimization software, making them more easily usable for wireless service providers. The process is expected to take weeks, and the commission hopes to have the reassembled spectrum blocks ready by the end of April.

The government will then announce its "clearing target," revealing how much spectrum it thinks it can free up based on the amount broadcasters have agreed to give up. The initial clearing target is significant because it will signal how much spectrum will be available in the initial stage of the auction, which could be indicative of how long the entire auction process will take. It won't necessarily be indicative of how much spectrum is eventually sold, though, because the FCC will reduce the amount of available spectrum if the bids of mobile carriers aren't high enough.

It's highly unlikely that the FCC will announce the availability of the maximum 126 MHz; however, the initial amount is more likely to be north of 100 MHz. Carriers are hoping the initial clearing target is at least 80 MHz, because less than that would indicate there may not be enough spectrum for each major bidder to walk away with as much as it wants.

While analysts don't expect to see a massively disruptive player spend vast sums, there are reasons to believe bidding will be aggressive. "While the list does not tell us much about what tension will be in the auction, the robust bidders list suggests we should see solid demand. The same participants that drove almost all the action in the AWS-3 are there," observed New Street Research Analysts this week. "While we don't expect Dish to be nearly as aggressive this time, demand from Comcast and others may well replace them."

Shifting into reverse…

The announcement of the clearing target will set the rest of the auction in motion. In May, after the clearing target is announced, payments for bidding credits will come due for bidders in the forward auction. The size of those payments will signal how much each player plans or hopes to spend at auction, but the FCC won't make that information public. So analysts and other interested parties will be paying close attention to any statements bidders might make about their potential auction budgets, and second-quarter earnings reports from those companies will be heavily scrutinized. The FCC will issue a final bidder list later that month after all the payments have been collected.

No exact date has been set for the reverse auction yet, largely because no one knows for sure how long the FCC will take to set the clearing target. But the reverse auction is likely to begin in earnest in June, and the Commission won't release information during that process. Indeed, broadcasters who drop out aren't permitted to say so publicly during the auction.

The FCC will start the auction with its highest possible price and methodically lower prices per round of the reverse auction until it has sufficient spectrum blocks to meet its target. Once it has obtained enough spectrum at the lowest possible price (that may occur by the end of June) the reverse auction is over. The FCC will then release the amount of money bidders in the forward auction will have to meet to end the auction. If that figure isn't met during the forward auction, the FCC will have to start over by going back to the broadcasters, reducing the amount of spectrum it hopes to clear, and holding another reverse auction.

…then moving forward…

Two days after the reverse auction ends – probably sometime in July, although it could happen earlier – the forward auction starts. As in prior FCC auctions, bidders will remain anonymous but the FCC will provide information to the public regarding bidding per market, providing some transparency on how much progress is being made toward meeting the minimum figure for a successful auction.

The forward auction will almost surely be the most heavily analyzed period during the overall process due in part to the amount of information shared by the FCC. Interested parties will watch not just the aggregate bidding to determine how much money the auction will generate, but there will be plenty of speculation about which carrier made which bids. The FCC will raise prices in each round, and the forward auction is expected to take roughly one month. Additionally, the FCC has set aside certain chunks of spectrum for companies that don't already own a lot of the low-band airwaves. The strategy aims to spur competition among service providers and will almost surely limit the spending of AT&T and Verizon, which have relatively deep low-band portfolios.

Once bidding is completed in the forward auction, the FCC takes the winning bids and assigns them to specific frequency bands and will likely try to award carriers with contiguous bands across all its markets when possible. It's far from clear when the auction will end, however: If the FCC needs only the single reverse auction and no other major hiccups occur, the process could end as early as August. But if it needs to hold a second reverse auction – or maybe even a third – the process could extend into 2017.

The repacking challenge

Regardless of how smoothly the process takes, though, wireless service providers likely won't be able to use their newly acquired spectrum for years. That's primarily because the spectrum will have to be "repacked," or reassembled to make it available for mobile network operators while TV broadcasters are moved to other channels. The FCC has proposed a 39-month timeline for repacking, but that schedule has come under fire by TV broadcasters who say it simply doesn't provide enough time. And AT&T has repeatedly said it wants a "realistic" schedule for repacking, indicating the operator might be willing to extend the deadline beyond 39 months.

Interestingly, AT&T last week also said in an FCC filing that "strong, centralized FCC leadership on the transition will be essential," noting that the 800 MHz rebanding effort that began in June 2005 was expected to take 36 months but continues today. So regardless of whether the FCC holds the line on its 39-month timeframe, there is ample evidence that the repacking of 600 MHz spectrum may not go as efficiently as the commission hopes.

Who's "taking a paddle" and who isn't

The three largest U.S. mobile operators have all submitted their applications to participate in the forward auction, as expected. Analysts at Wells Fargo have predicted that AT&T will spend as much as $10 billion on a 2x10 MHz chunk of spectrum with nationwide capability, while T-Mobile will bid as much as $8 billion and Verizon will limit its bids to $5 billion. Comcast, too, will participate, making good on comments that it is "taking a paddle" to the event, although the company has signaled it may not bid aggressively.

The list of applications is also peppered with smaller network operators such as U.S. Cellular, C Spire Wireless and Bluegrass Wireless, as expected. And while Dish Network's name is missing, one listed company – ParkerB.com Wireless – is registered under Dish's Denver-area address, indicating the satellite TV provider plans to add to its already substantial spectrum assets. It still isn't clear whether the FCC's list includes any surprise heavyweights bidding under other names, but those questions are likely to be resolved in coming days.

How much will the auction raise?

Perhaps the biggest unanswered question is just how much money all those companies will spend at auction. Moody's said last fall the event could generate as much as $60 billion, echoing an earlier forecast from Kagan Media Appraisals pegging its revenue between $60 billion and $80 billion.

Recent forecasts have been much more modest, though, due to tightening carrier budgets and an apparent lack of interest from deep-pocketed companies such as Facebook (NASDAQ: FB) and Google (NASDAQ: GOOG), which could conceivably leverage new spectrum to provide disruptive new services. A Bloomberg survey of eight analysts in January provided an average of $33 billion. J.P. Morgan recently said the auction will probably fetch only $25 billion to $35 billion, or roughly $1 to $2 per MHz/POP. That's far below the $2.68 MHz/POP generated by the landmark AWS-3 auction that ended a year ago with almost $45 billion in total bids.

Regardless of how much money is spent at auction – and regardless whether a potentially disruptive bidder emerges – the events that will play out in the coming months will lay the foundation for the transition from 4G to 5G and beyond. The newly available airwaves may not be deployed until 2020 or later, but they will play a major role as carriers develop their strategies for the next decade.