Q&A: Strategy&s Dan Hays on Auction Price Point Divide

WASHINGTON-Broadcasters sold 126 MHz for $86.4 billion in the reverse portion of the TV spectrum incentive auction. On Friday, the Federal Communications Commission revealed that 62 bidders would vie for 100 MHz of that spectrum; (the 126 MHz clearing target minus 26 MHz set aside for buffer zones). Of those 62 bidders, 19 will be able to bid at discounted prices.

The auction will not be able to close if bidders do not cover the $86.4 billion sale price, plus another $1.75 billion to move broadcasters and $207 million to cover the FCC's cost. If it fails to close, the whole process will have to begin again in a reverse auction with a lower clearing target. Here are some thoughts from Dan Hays, principal with PwC's Strategy&, on the process.

TV Technology: What if the reverse and forward auction price points do not initially come together?

Hays: A gap between the reverse auction commitment and the forward auction commitment to be seen in the coming months would likely see the auction extended by as much as four to six months. For broadcasters, this would mean a delay in seeing auction proceeds until at least the middle of 2017, with both a reduction in proceeds to some and others being eliminated from the auction altogether.

TV Technology: What is the potential impact of this?

Hays: For broadcasters who were not prepared to relinquish their spectrum immediately upon the auction close anyway, this will have little impact. For others who are anxious to cash in and go off the air or begin sharing channels with fellow licensees, the addition of a second stage presents a modest delay to their expectations. The net impacts to tax liabilities could be minimal.

The same delay in the availability of this new spectrum for mobile operators may have somewhat less consequence, but could force them to find alternative ways to fulfill growing demand for mobile data, as well as their planned deployment of 5G networks. The delay could accelerate the use of less attractive and efficient spectrum bands, and it may accelerate the use of alternative network technologies such as small cells.

TV Technology: Why have these not been more widely deployed already? Do small cell networks cost more in terms of infrastructure or otherwise than building out low-band spectrum?

Hays: Mobile network operators have already begun deploying small cells, but have been hindered by slow-to-change environments for zoning, permitting, and leasing. The operators themselves are also still experimenting with new operating models for these less-costly, lower-capacity cell sites, in the hope of finding a formula that balances cost with performance. Access to low-band spectrum promised to stave off some of the need for small cells, but this could accelerate if significant delays are encountered.

TV Technology: At the $88 billion price point where this first reverse auction ended and that the forward auction would have to cover-$2.75 per MHz/pop, according to Wells Fargo's Marci Ryvicker-would alternatives such as small cell networks and accelerating the use of less attractive and efficient spectrum bands be a less expensive option?

Hays: The calculus of mobile network capacity and coverage is extremely complicated and difficult to paint with a broad brush, but given the high total clearing cost from the first stage of the reverse auction, it's likely that the spectrum costs in some markets would be much greater than the other options available to mobile network operators, including small cells.

TV Technology: Is 100 MHz of low-band spectrum that will be available for auction worth $86 billion to the wireless industry, and specifically, the forward auction bidders?

Hays: With mobile phones now above 100 percent penetration in the United States, mobile operators are increasingly under pressure to watch every penny of capital expense. Given this, an outlay of $86 billion seems highly unlikely at this time. To put it in perspective, this is two to three times the typical annual capital spending of the industry. That's an awful lot to bite off in one big chunk.

Also see...

FCC: 62 Applicants Qualified to Bid for TV Spectrum.

Many of the smaller entities will receive bidding credits, which amount to a discount on spectrum. Of the total 62 applicants, 19, or 30 percent, received a bidding credit related to rural service or a small-business revenue threshold.

For comprehensive coverage, see our Spectrum Auction silo.

LINK:	http://www.tvtechnology.com/business/0011/qa-strategy-dan-hays-on-auct...
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