Broadcaster Uncertainty Pervasive About Incentive Auction

Such uncertainty, if not reduced, may trim the amount of spectrum the reverse auction gets from broadcasters, leaving less to be sold in the forward auction and raising less money, said some economists and broadcasters in recent weeks. The main area of near-term uncertainty involves whether the FCC decides to change the band plan in last year’s auction NPRM, so that TV stations and carriers aren’t on the same channels in nearby markets, said CEA and NAB officials. As that’s addressed, which those and other associations hope is in the form of the alternative “Down from 51” channel plan, the agency can answer border coordination issues so it’s clear what repacking of TV channels will entail after the incentive auction, said executives from NAB and its members.

The lack of clarity involves smaller and mid-size markets where broadcasters said they're uncertain if the FCC wants to buy any of their spectrum or whether such purchases won’t be needed because there are more available frequencies. “There are an increasing number of broadcasters of this opinion,” said Vice President-Advanced Technology Mark Aitken of Sinclair, owner of more full-power TV stations than any other company. They “would like the FCC to put a little more meat on the bones,” said Aitken, whose company doesn’t plan to sell spectrum. “It would be really nice to know” if a reverse auction will be needed for a market like Butte, Mont., he said. Other stations want to know “should I be paying attention to any places in particular,” Aitken said. “Unless they provide a clearer picture of where the auction needs to happen, it is too confusing.” Commission spokespeople had no comment for this story.

"All hands should be on deck” at the FCC about which markets will be involved and how much spectrum may be cleared, because it’s hard for broadcasters not to have answers, said NAB’s auction pointman, Rick Kaplan. “The FCC right now is in a totally different airspace” than such IDs, said Kaplan, NAB executive vice president. “They're not picking a number” and “they're not doing repacking first, which is how we'd approach it,” he said. “You're going to have uncertainty for quite some time until they narrow down the band plan.” Stations and carriers will have difficulty sharing channels in neighboring markets, as the first joint blog post by NAB, AT&T and Verizon last month pointed to (http://bit.ly/191hcK7; CD May 22 p4), Kaplan said. “Crucial to holding a successful auction” is coordination between Canada, the U.S. and Mexico, Kaplan said. He pointed to the government-industry task force CEA first proposed that NAB backs. Both associations last week jointly stumped for such a group, in a letter from CEA Vice President-Regulatory Affairs Julie Kearney and Kaplan to acting FCC Chairwoman Mignon Clyburn, Kaplan’s former boss (http://bit.ly/17je6Cc, CD June 3 p16) .

CEA sees the band plan as “the first piece of the puzzle” to issuing auction rules, said Kearney. “The focus right now needs to be on getting a band plan that everyone is comfortable with, and the pieces will come together.” That’s “a prerequisite to a lot of the work that is going to happen,” said Kearney. CTIA Vice President-Government Affairs Jot Carpenter recently said he knew of no one outside the FCC who supported what a Wireless Bureau public notice last month sought comment on in disfavoring the Down from 51 plan (CD May 24 p3).

CTIA wants the auction “done quickly because we need the spectrum, but we also need it to be done right because we need the spectrum,” said Carpenter. “If the commission doesn’t produce a product that makes the broadcast industry feel good about participating, then the input that we need on the back end doesn’t ever come in the front end of the process.” Broadcasters won’t get everything they want, Carpenter said. “But they're going to get a series of answers about the band plan, about the plan for repacking that should give them a sufficient comfort level to make an ‘I'm in, I'm out’ sort of decision.” Carpenter expects “a sufficient number of takers to make this thing work,” he said of broadcaster participation in the reverse auction. “Our hope is that the commission gets the rules done this year, but at the same time they don’t make it too complicated. Complicated might win an economics award. Complicated is not going to get us the best auction."

AT&T thinks broadcasters will show up to the reverse auction, while Sprint Nextel sees that as hard to do when the rules are unclear, their executives said at an FCBA event Thursday. AT&T Vice President-Federal Regulatory Joan Marsh doesn’t believe participation in the incentive auction will be a problem, she said. “It’s inconceivable that the FCC would have an auction for spectrum and the industry not show up.” Carriers including Sprint have questions about the auction, said Sprint Vice President-Legal and Government Affairs Lawrence Krevor. “It certainly is hard to invest when you don’t know what the government is going to do."

It’s a problem for broadcasters that they have a lot of unanswered questions, said President Paul Karpowicz of Meredith Corp.’s Local Media Group, which owns 13 TV stations. “You don’t know who will participate, you don’t know what the kind of parameters will be around the bidding, what that’s going to look like,” said Karpowicz, also chairman of NAB’s joint board. “There is just a lot of stuff that broadcasters just don’t know. And the more we know, the more comfortable everyone can get around the whole process.”

Sticking with the current software the Office of Engineering and Technology uses for TV contours and using that in the repacking, not updating the OET-69 software as the FCC seeks, would also reduce broadcaster uncertainty, said Karpowicz, other broadcasters we interviewed and Kaplan. Kaplan also wants the FCC to lift the freeze the Media Bureau imposed in April (CD April 8 p5) on expanding broadcaster contours that are protected from interference. That application freeze “only creates uncertainty,” said Kaplan. Staff from the bureau may not need to wait until a band plan is finalized to decide whether to allow certain applications, he said. “Because the band plan is going to take longer to come out, especially with the direction they're going."

Noncommercial Uncertainties

Noncommercial broadcasters are still trying to pin down the benefits of participating and ensure they aren’t hurt by the repacking process, said TV station representatives and lawyers. While noncommercial broadcasters seem reluctant to participate in the auction, some stations are considering channel sharing, they said. It’s difficult for stations to decide whether to participate without understanding what the value of the spectrum will be, said National Religious Broadcasters and Association of Public Television Stations executives. Stations are wondering what is the value of the spectrum and their chances of faring well if they participate, said APTS General Counsel Lonna Thompson.

APTS members are most concerned about protections and opportunities, said Thompson. “We're making sure all of the possible protections we can get for stations are in place because that is worrisome.” Most stations will be affected and will go from one channel to another, she said. “Unlike the digital transition where we had an analog and a digital channel, this will be from channel A to channel B, virtually an overnight switch."

NRB hasn’t seen any interest among its TV members to relinquish any of their spectrum, said General Counsel Craig Parshall. The assumption that the FCC is making is that TV stations “have excess frequencies and they're inefficiently using” the spectrum “that they have, and we don’t agree that’s the case,” he said. “The manner in which the commission has approached this process has generated more uncertainty and less assurance of any outcome."

In terms of participating, “things are very uncertain on the public side,” said Todd Gray, a Dow Lohnes attorney who represents some noncommercial broadcasters. They're in the business that they're in because they believe they have a mission to provide a service, he said. They have to calculate whether the financial compensation they might receive will put them in a position where they are better able to provide services to the community, he said.

Repacking remains the greatest concern, said noncommercial officials. If noncommercial stations have to change channels, they have to make sure they're compensated for it, said Peter Tannenwald, a Fletcher Heald attorney. “Who knows if there’s going to be enough money in the compensation pools for that or what expenses will be allowed and what expenses won’t."

Channel sharing may be an option in markets that have more than one station, Tannenwald said. In the markets that have only one TV station, they're not interested in auctioning, he said, “They're not interested in sharing channels because they want to do hi-def, mobile TV and the new things that are coming along, and you can’t do that if you share channels.” The other station has to look at whether there’s a future for a second station, he said: “They have various options, including sharing channels with commercial operators or a class A station for financial support."

There has been some interest in channel sharing in a number of overlapping markets where a full PBS member will be in the same market as a partial member, said Dennis Haarsager, executive director of noncommercial consulting firm Public Television Major Market Group. But “I don’t know of a single deal that’s being negotiated for that right now,” he said. “If a station is your competitor, why would you make your competitor stronger and yourself weaker at the same time? ... It’s not something people are going to jump up and down to do.” There doesn’t seem to be a whole lot of chatter about NAB members sharing spectrum with public TV stations, an NAB spokesman said. “That’s not to say that it won’t happen."

The Media Bureau is interested in any broadcaster participating in the auction, Thompson said. If there’s just one public station in a market, “we certainly don’t want it to go away or lessen its impact,” she said. “The commission understands that.” The FCC is looking at working with stations volunteering to take part in channel-sharing pilots, she said. “They called for some stations who may be interested in this, and it makes sense that its in everyone’s best interest to see how will these channel-sharing arrangements work."

Broadcasters Will Do the Math

Some in the broadcasting industry aren’t bothered by the uncertainty, our survey found. Carpenter and economists aligned with carriers, as well as those who are independent, said some uncertainty is to be expected. Broadcasters closer to the time of the auction will make an economic decision about whether selling spectrum will net them more than the cash flow they'd get in future years of selling ads for their stations’ regular terrestrial signals and in the future perhaps also from mobile DTV, getting retransmission consent fees for pay-TV carriage and any other revenue. That’s according to President Robert Prather of Gray Television, with 40 stations and not planning to sell any of its frequencies, broadcast broker Frank Kalil, Moody’s broadcaster debt analyst Carl Salas and economists Gregory Rosston of Stanford University, who is consulting for T-Mobile in the incentive auction, and unaligned economists Thomas Jeitschko of Michigan State University and James Alleman of Columbia University.

"If spectrum looks like the way to go, there will probably be a bunch of people jumping in” to the reverse auction, said Prather. “We're using most of the spectrum,” so “I don’t really think about it much,” he said of the auction. “But I watch it close,” he said. “It wouldn’t surprise me if it got put off,” he said of a delay from next year’s target.

The auction is “a great idea -- I love it,” said Kalil. “I wish we could do the same in radio.” The FCC has licensed too many radio and TV stations, he said. “The more of the spectrum that is sold and television stations are taken out of a given market, the more valuable the remaining stations become. It’s a simple law of economics. I think it’s the best thing that can come.” Kalil & Co., the brokerage of which Kalil is president, is working with five or six clients who may either buy or sell stations based on the coming auction, he said. “The ones that are being speculated on just for spectrum have gone up in value, and the ones that will be left are obviously going to go up in value. The programming will have no other place to go, theoretically.” The auction will “be good for buyers and sellers alike,” said Kalil.

A certain amount of uncertainty isn’t unexpected, said Carpenter and others. “That’s pretty normal for where we are in the process,” said Carpenter. “If you go back and look at the DTV transition and the 700 MHz auction, when you look at the AWS-1 auction, if you were six months out from them writing rules, there was uncertainty ... about which wireless providers were going to want to participate and did they have enough clarity about what the rules are going to be. That’s what the next six months are going to be about is providing that clarity, that certainty to the broadcasters."

The public stance of many TV station owners has firmed up in recent months, in that many are saying they don’t plan to sell any spectrum, said Salas, the Moody’s vice president. Those with stations in major markets probably will “keep an open mind,” but with multicasting “they don’t really want to give up that extra 3 MHz” and remain on-air with half their current allotment, he said. “They kind of like the spectrum they have,” as mobile DTV “could become more of a commercial reality” and with it develop into an ad-revenue stream, said Salas. “It’s looking a lot better than it was a few years ago.” A decision on whether to participate “is a non-starter until you know what you're going to get,” Salas said. “It’s consistent across the operators, and that only makes sense.” Knowing which markets will be involved “doesn’t eliminate the key question of what are you going to get” for selling, he said.

Known Unknowns

All auctions have inherent uncertainty, noted economists, some critical of broadcasters’ complaints. They said the point of developing auction rules is to decide beforehand what principles to take into account, such as participation. Stations can decide to make their reserve price so high that they'd earn a large return if the FCC accepted their bid over their projected cash flow in whatever amount of time the broadcaster picked, economists said. The commission may not be able to provide more details other than in what markets it wants volunteers, said Rosston. Listing which markets won’t be involved in the reverse auction may be the best the agency can do, he said: “Where it’s positive, it’s probably hard for them to say” how much spectrum is needed.

There’s “uncertainty about the institutional design,” said Jeitschko, an associate professor at MSU who worked for the Justice Department’s Antitrust Division from 2010-2012. “It really is important as a first step to resolve any type of institutional questions that may play a role here.” The answers could clear up the costs to participate, he said: “The more uncertainty there is, the less you're going to get” from the auction.

There are some things the FCC can do to lower the cost of participation, said Rosston, deputy director of the Stanford Institute for Economic Policy Research and co-chairman of the U.S. Department of Commerce Spectrum Management Advisory Committee. Having a “very standard agreement” for broadcasters to sign to take part in the reverse auction, where they can “check a box” and “it only takes five minutes to participate,” would “be great” by making it even easier, he said. “You don’t have to hire a law firm” under that scenario, said Rosston. Already, “the FCC is trying really, really hard to make this as simple as possible to the broadcasters,” he said. “They've said, all you have to do is say a price,” and stations not participating will be held harmless, said Rosston. “It can’t get a whole lot simpler than that for broadcasters to figure it out."

"That’s a crazy default” if broadcasters will sit out the auction entirely if there’s any uncertainty, said Rosston: “At some point” each of them “bought a business,” and many have sold stations, too, so they have a sense of their value. “It’s not that hard to do” since “all you have to do is pick a number” for a reserve price to take part, he said. Alleman sees broadcasters as “only worried about how much money they'll get,” he said of an industry that’s “been in a very privileged position.” Determining a reserve price is a function of “whatever their time-horizon is,” of comparing such a price to cash flow over time, said the research director of the Columbia Institute for Tele-Information. “I would think that they'd be very happy that they are held harmless” if they don’t sell, and “stand to have a very significant gain in profits, free profits” if their bid is accepted, he said.

The agency needs to continue to make clear to non-participating broadcasters that their coverage areas and signals won’t deteriorate after the repacking, broadcasters said. Goodwill between the FCC and broadcasters generally has improved since our last survey in early 2012 just after the Spectrum Act became law (CD March 5/12 p2). “I don’t think there is anything wrong if the FCC wants to continue to reinforce that message of ‘don’t worry, we'll take care of you in these areas,'” said Karpowicz. “I don’t think you can say that enough.” There’s “probably a better feeling and better communication than existed a year ago” among broadcasters about the FCC, he said. Not all broadcasters see it that way. “A dialogue is a conversation,” said Aitken, “not a one-way force feeding of assumed facts” from the FCC to the industry.