FCC Pitches $38B Reasons For Incentive Auction

According to FCC officials speaking on background, a high-end estimate of revenues from the incentive auction could mean as much as $38 billion to compensate broadcasters for giving up spectrum for that auction.

That will be among the takeaways in an information packet the FCC is publishing Wednesday, Oct. 1 and sending to broadcasters as it prepares for the incentive auction, scheduled for mid-2015.

FCC chairman Tom Wheeler announced the effort at a press conference Tuesday.  Wheeler has been arguing the auction is a unique, virtually risk-free, opportunity for broadcasters to capitalize on their spectrum, but said with the packets, broadcasters don't have to take his word for it.

The $38 billion figure is using an estimate of 100 MHz up for bid in the forward auction on an estimated 126 MHz reclaimed from broadcasters in the reverse auction, The difference is the spectrum used for guard bands and the duplex gap (buffers between TV and wireless services sharing the band), and so not available for auctioning.

Some estimates have put the eventual spectrum take at more like 84 MHZ, or less, but the officials said even then, there would be a lot of money available -- essentially two thirds of that $38 billion or about $26 billion in the case of 84 MHz.

They conceded that was a high estimate, but they also said they thought clearing 126 MHz—even more than the 120 target the FCC initially set—is still in the realm of possibility, though clearly the high end of the spectrum, as it were.

The FCC is express mailing information packets to eligible broadcasters—full-powers and Class A stations-- on Oct. 1 making the economic case for why the auction is the once-in-a-lifetime, no-risk opportunity Wheeler has been pitching. Wheeler directed the FCC to undertake the educational outreach. It will also be posted to the FCC’s LEARN (Learn Everything About Reverse-Auctions Now) Web site.

The idea is to take the auction and recast it as a business opportunity, which is why the packets were produced for the FCC by investment banker Greenhill & Co. It is the work product of FCC economists and the FCC’s auction design team, and was produced in the interests of better educating broadcasters and at the direction of the chairman. It is also responsive to calls from other commissioners for more info, said the officials, though it was not something voted on or vetted by them.

The packet is organized by themes. One is that the auction is a unique opportunity. Greenhill says that broadcasters can make more in a one-time payout than trying to hold onto spectrum and lease it to a wireless carrier or create their own wireless channel because repacking will unlock the value of the spectrum by freeing up a near-nationwide swath of contiguous spectrum.

A second theme is the attractive prices broadcasters can get, meaning there is a lot of money to be made.

A third theme is that the auction is voluntary --  with a significant potential for upside with no real risk. It makes the point that broadcasters can decide to offer up a bid, then if the price gets too low, drop out at no penalty for testing the waters, with no effect on how the station will be repacked.

The info includes the highest valuation, as well as the median estimated value (FCC economists did the estimating), in all 210 DMAs, based on their value as spectrum, not enterprise value as stations, and weighted according to their value in the repacking process.

The methodology is similar to that the FCC is working on for the coming up with opening bids for the auction. It values the stations according to how important getting that particular station is in the Rubik’s cube of repacking.

The methodology gives each station a weighted interference value that reflects its footprint and its impact on adjacent stations it overlaps with. A station with a big footprint and a lot of overlap with other stations will have a higher interference value—and command a value—than one in a more rural area that may not overlap with many stations or cover as large a number of people. That is because if the FCC doesn’t get that one station with the bigger footprint, it might have to buy three or four stations to achieve the same repacking result.

The FCC was assuming the 100 MHZ to sell at about $1.50 per megahertz POP (an MHz pop is arrived at by multiplying the number of megahertz associated with a license by the population of the license's coverage area), times 300 million Americans. The result was a forward auction revenue of $45 billion.

Subtract the estimated $7 billion to pay for the FirstNet interoperable broadband emergency communications network, cover $1.75 billion for reimbursing broadcasters for repacking and moving expenses, and the cost of running the auction, and there would be $38 billion available to pay broadcasters -- although some legislators are hoping for some excess for the treasury.

The packet provides individual market estimates based on the assumption all that money would go to broadcasters, so those estimates are the highs for eventual payouts, not necessarily the opening bid prices, which could be lower, or higher.

The individual prices are based on that total apportioned over each station based on the interference value it calculated for each.

That means in major markets, where there is congestion and a greater need for spectrum, the prices are higher.

As for values, In New York, for example, the median price for a station is $410 million. In Los Angeles, the median is $340 million. The officials said they thought those were reasonable estimates, rather than conservative ones. The packet also includes a page on the methodology, so if folks don’t agree they can make their own calculations. The officials are assuming they will get feedback, and said the next step will be to go on the road to discuss the info with broadcasters.

Among the points the packet makes is that payouts are not just reserved for the top 30 or so largest markets, since adjacent ones may also be needed to help clear those congested top DMAs

That means even in markets below the top 30 there can be some pretty hefty median high values because many of those are adjacent to big markets or have stations that overlap. It turns out there could be a station in Wilkes-Barre, Penn. worth $140 million, or Harrisburg and have a median value of $110 million.  Providence, R.I. is a median $110 million because it is adjacent to Boston, and Flint, Mich., $45 million because it's near Detroit.  

People who say the auction is just for the big stations will want to look at the numbers, according to officials, and see that they can go pretty far down the market list and find significant value. Palm Springs, Calif. is one of those --market 148, but the median high value is $100 million.

Even at 84 MHz reclaimed, AT&T has calculated the FCC would have to reach down into the top 70 markets to clear enough spectrum.

And with all these billions being handed out, the FCC wants broadcasters to have a handy guide to the tax consequences. The IRS has provided a detailed letter, included in the packet, that walks broadcasters through the tax implications of various auction options.

John Eggerton

Contributing editor John Eggerton has been an editor and/or writer on media regulation, legislation and policy for over four decades, including covering the FCC, FTC, Congress, the major media trade associations, and the federal courts. In addition to Multichannel News and Broadcasting + Cable, his work has appeared in Radio World, TV Technology, TV Fax, This Week in Consumer Electronics, Variety and the Encyclopedia Britannica.