FCC Completes Reverse Auction as Forward Auction Looms Large

Executive Summary:

The FCC concluded the first round of its two-part spectrum incentive Auction 1000 on Wednesday, June 29, 2016. Broadcasters sold some or all of their spectrum usage rights in exchange for millions of dollars.  It’s been called a “reverse auction” and formally as “Auction 1001” since spectrum was being relinquished rather than acquired. 

The “forward auction,” formally known as “Auction 1002,” is expected to begin sometime in mid-to late July.  In that forward auction, wireless carriers and others (?) will bid to take over the spectrum made available during the reverse auction concluded last Wednesday.

According to the FCC, the reverse auction closed with a clearing cost of $86.4 billion and a clearing target of 126 MHz which specified an “Initial Clearing Target Band Plan.”

The clearing target means that 100 MHz, or 10 paired blocks of spectrum, will be offered in most markets nationwide in the forward auction for wireless bidders.

Earlier this year, FCC Chairman Tom Wheeler said in a statement:

“The 126 MHz initial clearing target ensures that wireless carriers and other forward auction bidders have their chance to compete for the maximum amount of low-band ‘beachfront’ spectrum. The wireless industry has said it needs additional spectrum to meet growing customer demand and usher in the age of 5G. The broadcasters have stepped up and done their part to fulfill that demand.”

Industry Opinions on Reverse Auction:

Wireless industry association CTIA expressed pleasure the auction was moving forward, but declined to comment specifically on the clearing cost target.

“Broadcasters have done our part; now it’s up to the wireless industry to demonstrate the demand is there for low-band TV spectrum,” NAB Executive Vice President of Communications Dennis Wharton said in a statement following the FCC’s announcement.

Other analysts were not so sanguine, especially about the spectrum clearing target.

“They’re completely nuts,” Roger Entner of Recon Analytics said. “It’s inevitable that we will go back and lower the clearing target and lower the amount that will be raised. Because the wireless industry, even with private equity and cable, I don’t see has a chance of raising that much.”

Dan Hays, principal of PwC’s Strategy & Operations agreed. The end of the first auction stage “reveals for the first time just how expensive it could be for mobile service providers to get their hands on the most lucrative tranche of spectrum to hit the block in nearly a decade.”

“At a clearing cost of more than $86 billion, the bar has been set high for the wireless industry,” Hays said. “Given the current financial profile of the industry, this number may have to move significantly lower. A second stage of the reverse auction later this year is likely. Indeed, we could well see the proceedings drag on into early 2017 before coming to a final conclusion.”

Similarly, BTIG analyst Walter Piecyk said on Twitter Wednesday the FCC’s auction “could take a while” with an $86 billion target, and noted the figure would also make it difficult to clear 100 MHz of licensed spectrum.

In a research note released earlier this week, Piecyk said a clearing cost target above $70 billion could “stoke fears (among investors) that the auction could drag into 2017 or that the FCC will not be able to source much spectrum in the big markets at an attractive price.”

On the other hand, Piecyk said such a clearing target would likely boost broadcaster stocks as investors “incorrectly conclude that they will be able to hold out for very high prices.”

Which Wireless Carriers Will Participate in the Forward Auction?

The top three US wireless carriers (Verizon, AT&T, and T-Mobile) will participate in the forward auction.  Sprint had previously announced it would not participate.

According to the FCC’s list of 99 eligible forward auction bidders, the fifth-largest carrier in the country, U.S. Cellular, is also planning to participate. Other potential bidders in the forward auction include Comcast and former Facebook executive Chamath Palihapitiy provided they submitted their upfront payments by July 1st.

Here’s an FCC primer on the Forward Auction  for “New 600 MHz Band Flexible-Use Licenses.”

Investors Business Daily on Importance of Incentive Auction:

Spectrum bought during the current auction might not be deployed until 2020. But it will play a major role as carriers develop their strategies for the next decade, helping them meet growing customer demand and ushering in the age of “5G” wireless networks (whatever that means?).

The FCC’s current auction is the latest attempt to meet President Barack Obama’s memorandum from six years ago to free up 500 megahertz of new spectrum for wireless communications by 2020. Not counting the current auction, the government has so far failed to reach half of that amount.

New spectrum is critical, because Americans have developed an insatiable appetite for data. They consumed more than twice the amount of wireless data in 2015 than they did in 2014. And the 9.65 trillion megabytes of data used last year was three times what they used in 2013, according to mobile industry trade group CTIA.

The wireless carriers, led by Verizon, AT&T,  T-Mobile and Sprint (S), currently have enough spectrum for near-term expansion needs. Down the road, consumers heartily embracing smartphones and tablets will overrun that capacity. The Internet of Things (IoT) — the process of connecting cars, appliances, home energy systems, etc. via the internet — is also expected to drive added demand for capacity.

The new spectrum will help carriers chart out their long-term strategies. But among the current challenges they face is finding a balance between cutting prices to attract new customers and investing in faster, more reliable network infrastructure to keep them.

“All the carriers are looking at various ways to increase revenue, as net customer growth is likely to be flat or lower in next few years,” said Bill Menezes, analyst at research firm Gartner.

It’s become a very promotion-driven environment, with a lot of customers shuffling between carriers, Menezes said. T-Mobile, which raked in more than $32 billion in 2015 revenue but is still only a fraction the size of Verizon or AT&T, has been the biggest beneficiary in the last few years with its innovative offerings and the aggressive expansion of its cellular network.

“T-Mobile continues to expand the reach of its network, with a footprint that is now almost comparable to AT&T and Verizon,” said Menezes.

FCC Conclusions:

From the FCC website:

“Forward auction bidders have the largest possible nationwide supply of low-band spectrum available to them, and this summer (end of July 2016?) they will have the opportunity to bid on it.  The end result of the auction will be the repurposing of as much spectrum for wireless broadband use as the market demands.”

Author’s Closing Comments:

Which wireless carriers (or other parties) actually bid and obtain spectrum in the forward auction will be extremely important to the success of 5G broadband services. That’s because 5G will require enormous amounts of bandwidth and higher speed backhaul.

There will be plenty of speculation about which wireless carriers made bids and how much each bid (the FCC hasn’t disclosed this yet but will after the forward auction has been completed).

Once forward auction bidding is completed, the FCC will take the winning bids and assign them to specific frequency bands.  It’s highly likely the FCC will attempt to award wireless carriers with contiguous bands across all its markets wherever possible.

Wall Street analysts, however, don’t expect the carriers to spend nearly that much in the auction. Some estimates suggest it may be closer to $30 billion to $40 billion, which is less than half of the FCC’s target of $86.4 billion.

If there isn’t enough demand at the forward auction, the government will scale back the amount of spectrum it’ll make available and reduce the amount of money it’ll take for the bidders to end the auction. How much less will likely depend on how much (or little) demand the wireless carriers express, as well as what price the TV broadcasters will accept in exchange for handing over their airwaves.

The conclusion to all of the above will affect the future capabilities and costs of mobile data services in the U.S.