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FCC's Incentive Auction Rakes in $19.63B, Lags Expectations
Zacks Equity Research
Updated
The much-hyped 600 MHz low-band wireless spectrum auction, popularly known as an Incentive Auction, conducted by the U.S. telecom regulator, the Federal Communications Commission (FCC), has turned out to be a massive disappointment. The spectrum auction finally cleared all criteria at the Stage 4 of the forward bidding process with an accumulated bid of $19.63 billion.
The Incentive Auction, which commenced on Mar 29, 2016, completed its first part in Jul 2016. In this part, which was essentially a reverse auction, the airwaves were freed by TV broadcasters that no longer had any productive use of the same. The TV broadcasters had agreed to free a substantial 126 MHz of spectrums for a massive $86.4 billion.
As per the Final Stage Rule of the FCC, the proceeds from the forward auction (net of bidding credits and impairment discounts) must be sufficient to cover Incentive Auction costs. These costs include the aggregate of broadcaster clearing costs, approximately $226 million to cover the FCC’s costs for conducting the auction and $1.75 billion for the TV Broadcaster Repacking Fund. Accordingly, the forward phase of the Incentive Auction must generate $88.4 billion for the whole process to be successful.
The FCC has received as many as 12 applications for the second part of the Incentive Auction. All 12 bidders have made upfront payments. Important bidders include national telecom giants Verizon Communications Inc. VZ, AT&T Inc. T and T-Mobile US Inc. TMUS, satellite TV operator DISH Network Corp. DISH and cable MSOs (multi-service operators) Comcast Corp. CMCSA. Each of these stocks currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Stage 1 of the second part (forward auction) of the Incentive Auction witnessed total bids worth $23 billion after the twenty-seventh round of bidding. Notably, the FCC’s first Final Stage Rule was that the minimum bid should reach $15.9 billion for the spectrum auction to continue.
In stage 2, the FCC reduced the event clearing spectrum size to 114 MHz instead of 126 MHz decided previously. However, the FCC further reduced the option clearing spectrum size to 90 MHz for a clearing price of $54.6 billion. Nonetheless, stage 2 of the Incentive Auction came to an abrupt end after a single round of bidding generated only $21.5 billion.
In Dec 2016, the FCC commenced stage 3 of the auction process. The regulatory body had set a target price of $40.3 billion for 108 MHz of broadcasters’ spectrum that would free up 80 MHz for wireless use. Surprisingly, stage 3 also ended just after one round of bidding with a total bid size of just $19.7 billion, far below the FCC’s target clearing price.
In Jan 2017, the FCC had initiated the stage 4 of the auction with a target price of a little more than $10 billion for 84 MHz of broadcasters’ spectrum. This was in sharp contrast to the FCC’s initial expectation of collecting at least $60 billion from Incentive Auction.
The auction finally generated $19.63 billion as total bid. With this, the FCC will complete the whole Incentive Auction process after declaring the name of the spectrum winners. Bidders will gain access to 70 MHz of spectrum and TV broadcasters will receive about $10 billion for airwaves, while the government will receive roughly $7 billion. The remaining amount will cover administrative costs of the auction, and the extra 14 MHz of spectrum will be used for guard bands to address interference concerns.
In Jan 2016, the then FCC Chairman Tom Wheeler had asserted that Incentive Auction will be the “world's largest spectrum auction that has ever taken place.” However, the optimism finally has become a distant dream. Notably, the regulator had collected a substantial amount of nearly $44.9 billion from the AWS-3 spectrum auction that was concluded in Jan 2015.
Low-band spectrum is essential for wireless operators as the signals can be transmitted over longer distances and through brick-and-mortar walls in cities. However, several industry experts believe that telecom operators may be unwilling to shell out such a hefty sum for low-band airwaves.
Further, wireless operators are of the opinion that high-band spectrums can boost capacity. The U.S. wireless industry is currently suffering from cut-throat pricing competition. Two large national carriers, namely, Verizon and AT&T are facing significant competitive threat from low-cost pricing plan of T-Mobile US and Sprint Corp. S.
Additionally, leading cable MSOs, Comcast and Charter Communications Inc. CHTR are likely to enter the field in 2017. Consequently, it will be easier for incumbent operators to merge with a suitable company to enhance spectrum portfolio rather than spending huge sum on new spectrum buying.
However, during the previous Obama regime, the FCC was very strict regarding consolidation in the wireless industry. Nevertheless, general consensus so far is that the new Trump administration may be more liberal about merger and acquisition proposals in the U.S. wireless market. Thus, the incumbent wireless operators may not be interested to spend huge sums of money on FCC conducted Incentive Auction.
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