The session Spectrum: The Air We Breathe at the NAB Convention last week examined the issue of the proposed incentive auction for some of the spectrum now used by local TV stations. The question-and-answer format between the audience and my fellow panelists — Bill Lake (FCC), Alan Frank (Post-Newsweek), John Hane (Pillsbury Winthrop) and Jane Mago (NAB General Counsel) — covered a wide range of issues and honed in on the issues of what “voluntary” really means and what the value of the TV spectrum is in its present use.
A considerable amount of the debate on the reclamation of the TV spectrum cites several studies that seem to unrealistically estimate the net proceeds of a spectrum auction. For example, the most recent anonymously authored study offered by CTIA and CEA suggests a $33 billion to $34 billion value to the Federal Treasury will result from the auction. However, this estimate seems dramatically off because the price of spectrum has to decrease with the greater amount of supply that will be available, an economic fact not taken into account by this study. In fact, it actually uses a higher price than listed in an earlier CEA study even though a recent sale of spectrum clearly suggests more reasonable pricing. Without realistic revenue estimates, everyone is still unsure of what the proceeds of this auction would generate.
Most revenue estimates of the sale of this reclaimed spectrum assume that everyone will be allowed to (and probably will) participate in the auction. This begs the question, will the FCC bar companies that own a certain amount of spectrum from the auction in order to best serve the interests of competition? Additionally, AT&T, if allowed to acquire T-Mobile and all of that spectrum, may not be as active a bidder. Finally, with the present or expected owner concentration of wireless spectrum, will there really be many companies with enough financing to enter into this marketplace on widespread basis? The answers to any of these questions could seriously affect the levels of revenues generated by this auction.
This discussion then bleeds into the concern that the CEA/CTIA, like many others, understates the amounts that broadcasters will receive in the incentive auction. The FCC has stated that this auction will be truly voluntary. (As a side note, Alan Frank cautioned everyone when he said at the session, “I was in the Army, I know what voluntary really means.”) In a voluntary incentive auction, television broadcasters will not just ask for the value of their operations (sometimes referred to as their enterprise value). Instead, they could take the value of their spectrum (as possibly estimated by a third-party valuation firm), and combine that number with the powerful knowledge that their participation is necessary for the sale of this spectrum. That analysis could result in much higher revenues going to individual local television broadcasters. Given the number of large markets that are in hot demand, and the number of local television stations that have to participate in those markets to clear up enough spectrum, the total amounts earned by local television stations could be substantially higher than the total enterprise value of these stations. Hence, the net proceeds earned by these auctions will be noticeably less than what has been suggested.
With so many questions on the table, everyone is turning to the FCC for answers, but for now the FCC says it is focused on securing the rights to hold an incentive auction and that all questions will be answered in time. Consequently, all questions will continue to be carefully examined until the start gun goes off.