Broadcast TV Spectrum Auctions Will be Delicate, Complicated

By Gary Kim January 18, 2013

The Federal Communications Commission faces a set of delicate problems as it prepares to hold a broadcast TV spectrum auction that tries to earn existing license holders enough money that they will voluntarily relinquish their “rights” to use the spectrum, but not so much that the potential buyers balk, while balancing other key concerns as well.

The key there is “voluntary.” The FCC does not plan to compel broadcasters to vacate their spectrum, and instead will rely on voluntary, commercial deals between buyers and sellers to redeploy the spectrum.

The problem is that the auction hinges on sellers being willing to part with their assets, and they may conclude they do not wish to do so, as many will reason they can build businesses of their own using that spectrum.

The other problem is buyers who might conclude they do not wish to buy, since other spectrum assets are available, or will be available. In some ways, the simultaneous moves to free up much more unlicensed spectrum, while reallocating mobile satellite spectrum for use by terrestrial Long Term Evolution networks are aimed at convincing sellers that their assets face viable substitutes, encouraging willingness to sell.

At the same time, though, the availability of those other assets also might reduce the buyer willingness to pay too much for the TV broadcast spectrum, especially if uniform national spectrum cannot easily be obtained.

As always with large spectrum auctions in the telecommunications arena, control of the new spectrum will have potential market share implications, and therefore could potentially affect the structure of the U.S. mobile market.

It typically is in a regulator’s interest to design such auctions to balance competing outcomes. On one hand, the entities most likely to be able to buy the spectrum, and bring such spectrum to market quickly are the largest existing providers. That always draws criticism that regulators, intentionally or not, are simply reinforcing the status quo, in markets that typically are highly concentrated.

On the other hand, when regulators attempt to set aside some amount of spectrum for new entrants, they face other problems.

To encourage innovation, it often seems logical to forbid bidding by the logical buyers (existing leading service providers), encouraging new entrants into the market. That is itself problematic, given the huge amounts of capital that would have to raised, first to acquire spectrum, then to build and operate the new networks.

The danger there is that truly new competitors will not be able to raise the investment capital to acquire spectrum, then build expensive new networks, then take share from the existing market leaders.

In fact, history suggests the costs are so daunting that really new entrants will not be able to afford to build the networks. So “speculators” will simply buy spectrum, then flip it to the leading service providers anyway, essentially raising spectrum costs for the networks that ultimately are built.

Although many will argue the lower-frequency former TV broadcast is more valuable because of better signal propagation, there are tradeoffs. The higher-frequency former mobile satellite spectrum will have higher bandwidth potential.

The reason is simply that coding methods hinge on frequency. The higher the frequency, the more data can be coded in any time period. In other words, higher frequency means higher capacity, at the cost of signal propagation. So buyers must balance propagation with bandwidth potential.

Beyond that, there is the obvious other qualification that were the two top providers buy out the number three and number four providers, those spectrum assets also could be obtained. It is not likely regulators would approve such deals, though.

That also tends to dampen buyer interest, at least on the part of the leading contestants. If the government says they cannot grow any bigger in the domestic market, those suppliers will simply shift to growth elsewhere.

So the auction process will be tricky.

Edited by Rachel Ramsey

Contributing Editor

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