US wireless operators only interested in new spectrum if the price is right (and it’s not)

• So what happened to the spectrum crisis?
• FCC’s broadcast incentive auction (temporarily) ends in failure
• Regulator quick to restart a “Stage 2” with less spectrum up for grabs
• Wireless operators bid just $23bn of the $88bn required

Oh dear, the incredibly clever and sophisticated US spectrum auction for the reallocation of broadcast TV spectrum hasn’t quite worked out the way the FCC planned. Sometimes, the simple way is often the best. The hoped for cash bonanza of $88 billion never materialised, and so the FCC has decided to restart the auction with a “Stage 2” comprising lower targets.

So what went wrong? Firstly, the auction was a complex affair that pitted broadcasters against wireless operators (see our introductory coverage from last year: “FCC sets opening prices for the world’s most complex and mind-numbing spectrum auction”). Broadcasters had to bid to voluntarily relinquish UHF spectrum rights in exchange for a portion of the proceeds from the forward auction – which is when mobile broadband providers were expected to make their bids in the reverse auction for the released UHF spectrum, in the mobile-friendly 600MHz band.

The whole process involved “repacking” channels to the remaining broadcast television stations in order to create contiguous blocks of cleared spectrum suitable for flexible use. The reverse and forward auctions would be integrated in a series of rounds, each consisting of a reverse auction and a forward auction bidding process, and additional stages would be run if necessary.

Well, it’s now proven necessary, but not for the reasons the FCC had hoped.

The FCC announced on Tuesday this week that the incentive auction had closed after round 27 without meeting the conditions necessary to extend to a further round – and more importantly, without meeting the $88.4bn target that wireless operator bidders needed to cover the cost of payments to the TV broadcasters. In fact, the auction got nowhere near the £88.4bn target, generating only $23.1bn, with bidding slowing to a crawl in the final rounds.

The FCC was left with no choice but to restart the whole process. Accordingly, it announced yesterday that it would start Stage 2 with bidding from September 13. But this isn’t just a new round of forward bids – the process has to go right back to the start with a new reverse auction for broadcasters, followed by another series of forward bidding rounds from wireless operators. We said it was complex…

In order to avoid a repetition of the failed first stage, the FCC has set a lower clearing target of 114MHz for Stage 2 (actually 90MHz of re-usable spectrum plus guard bands, compared with a 126MHz total in Stage 1). With less spectrum on offer – 9 blocks of paired spectrum as opposed to ten – it is hoped that the relative scarcity will push up bids from the wireless operators. The TV industry also believes that this second stage means that its broadcast members will receive less money for their relinquished spectrum. Spotting the winners here is nigh on impossible.

True, the FCC persuaded plenty of broadcasters to part with their valuable spectrum, but it failed to attract the necessary level of financial interest from the wireless operators. And we all thought there was a spectrum crisis and that operators would sell their own grandmas for an additional slice of bandwidth.

“NAB is surprised by the modest participation by wireless carriers in the first stage of the TV auction," said National Association of Broadcasters (NAB) spokesman Dennis Wharton. "Perhaps the notion of a ‘spectrum crisis’ pedalled in Washington for the last seven years is not as acute as policymakers were led to believe. We look forward to the second round of the auction where wireless carriers will be afforded another bidding opportunity.”

"The auction results are unsurprising, albeit disappointing to some,” said Dan Hays, Principal at PwC's Strategy&. “The results demonstrate just how much pressure the mobile industry continues to face to limit its capital spending. The ball is now back in the court of TV broadcasters, who will need to decide whether to accept lower prices for their spectrum or bet on future opportunities to cash in on their airwaves.”

Expect another four weeks of reverse auction bidding, followed by two weeks of forward bidding. By November, we should learn if this second stage has proved more successful than the first.