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The End of Broadcast TV: Incentive Auctions

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September 20, 2012

The End of Broadcast TV: Incentive Auctions

By Barlow Keener

On September 28, 2012, the FCC’s (News - Alert) open meeting will address the implementation of the TV inventive auction requirements contained in February 2012 $150 billion "Payroll" bill, or the “Middle Class Tax Relief and Job Creation Act of 2012.” The Payroll legislation was amended at the last minute to require the FCC to design and hold spectrum auctions that will result in the “voluntary” sale of 120MHz of broadcast television channels. It is estimated that the sale will generate $22b in revenue. Mobile carriers were crying “spectrum scarcity” at the time the bill passed and were pleased that more spectrum was being made available to help solve the data demand issue created by smartphones like Android and iPhones.

The legislation, initially opposed by some TV station owners, may actually turn into the TV station relief act.  TV stations may now see the incentive auction as a potential cash out opportunity, especially in light of projected declining television advertising revenue and dropping viewer numbers. In other words, we are looking at the possible closing down of TV stations across the country. 

Technology advances are now rapidly driving legislative and regulatory policy toward ending more than 60 years of broadcast TV.  Broadcast TV is being sacrificed to create more mobile spectrum and more broadband spectrum.  The TV sacrifice will generate revenue for the purpose of building a nationwide public safety mobile network.  Over the air TV spectrum will become mobile spectrum. 

As everyone with a TV set remembers, in 2009 the FCC juggled around the broadcast TV station channel numbers opening up new spectrum for TV broadband white spaces.  TV stations changed channels they had used for more than 50 years. The only reason these TV stations could have moved to new channels was because of technology advances in the form of digital signaling – a technology advance over analog signaling.   It is same basic digital signaling technology that has built the runway for mobile networks, for Wi-Fi, and for cable television.  Digital signaling was used to take away the many guard bands from TV stations (the channels of white fuzz between the TV channels).  The TV station occupants were forced by the FCC to move.   Now three years later, the TV stations are being forced to move again and, rather than having their own dedicated 6MHz channel, like channel 30, they are going to be required to “share a room” on the channel with one or more stations or, if they wish to sell out, close down.  

It is expected that 120MHz of spectrum will be available to be auctioned off.  This amount, however, depends on how many stations volunteer to sell off their 6MHz broadcast channels. 120MHz equals 20 6MHz channels in the highly desired 470MHz to 700MHz TV range.

The auction and technology changes required by TV stations, as outlined in the Payroll bill, will not be simple or easy.  Just imagine TV stations changing from one large TV antenna to another.  The Payroll bill allocated $1.75b for the TV stations’ relocation and re-packing costs. These difficult issues were raised in part by the TV stations at the FCC’s June 25, 2012 workshop. 

FCC TV Broadcaster Relocation Fund Workshop – June 25, 2012 

The FCC will release a NPRM (Notice of Proposed Rule Making) and allow 60 days for comments, 45 days for reply comments putting the final NPRM in 2013 with the auction process to start in 2014. 

The incentive auction proceeding, and NRPM, will raise many, many issues that have never been faced by the FCC, the TV stations, or the TV investors.  Already investors like Michael Dell’s (News - Alert) MSD Capital LP are reported to be eying the possibility of buying stations in order to sell the licenses in the incentive auction. The Deal reported:

Private equity firms have been studying the possibility of buying stations and selling their licenses in the auctions, sources said. In some cases the spectrum auctions may be a Plan B … Michael Dell’s MSD Capital LP and Fortress Investment Group LLC have provided funds to station groups that could be prime candidates for participation in the broadcast incentive auctions, according to regulatory filings and court pleadings. MSD backs OTA Broadcasting LLC, while Fortress has provided loans to NRJ TV LLC.

Another key issue involves white spaces.  The legislation will require the FCC to sell off spectrum in rural areas that may be currently used for the innovative and newly ordered unlicensed white spaces.  White spaces are the result of years of work by the FCC and industry and should be able to solve many of the radio propagation difficulties caused by trees and mountains found in rural areas.  White spaces can deliver broadband to rural homes and businesses in areas where there is none now.  Selling the TV spectrum on an exclusive licensed basis may result in the possible loss of broadband connections to these customers.   On the other hand, it is highly unlikely that there will be bidders for this White Spaces rural spectrum.  In addition, it is likely that new white spaces spectrum in urban areas may open up giving White Spaces the same dedicated spectrum nationwide.

Another major issue will be if the FCC, in a separate proceeding that will be started on September 28th, proposes to limit the amount of spectrum a single mobile carrier company may purchase.  Such a decision may be in the public interest to increase the number of competitors, but also may result in the failure to meet the bill’s revenue targets because only the top four mobile carriers may have the capital to deliver the expected auction dollar results.

The incentive auction is also unique as an auction. It will be the first "incentive" auction held by the FCC. The auction process will allow TV stations to bid to be low bidders to supply spectrum (the “reverse auction”) and buyers would compete to be high bidders to license the spectrum for mobile broadband use (the “forward auction”).     Stacey Higginbotham, at GigaOm, gave an excellent description of some of the issues related to the Incentive Auction:

[T]there were no guarantees that urban [TV] broadcasters who had the most valuable spectrum would want to vacate their bands. That meant that the FCC’s plans might free up a lot of spectrum in rural areas where no one particularly needed it. … There were also gripes about paying broadcasters for airwaves that were technically a public good given over to them, and debates on whether there was even a spectrum shortage to begin with.

The funds generated from the auction will also be used for a unique purpose, rather than going back into the -$16 trillion General Fund as funds from other auction have.   A portion of the auction proceeds will be paid to the TV stations that re-pack and sell ($1.75b), a portion will placed in the General Fund (~$13.2b), and another portion will given to a public safety wireless company created in prior legislation for building out a national public safety network, around the ($7b).

  Spectrum Management: Prioritization & Sharing, A New Wireless Ecosystem

The other real possibility that may come out of the auction is the creation of a new wireless ecosystem that is neither exclusively licensed or exclusively unlicensed.   The FCC is likely to allocate a mix of licensed and unlicensed for the freed up TV spectrum but could also initiate the start of a future vision of a new wireless ecosystem.  These concepts where outlined in the recently released PCAST report.  New FCC spectrum regulatory policy could require the use White Spaces database technology, registration of devices in the database, carrier priority sold in on an auction basis, and – in the same spectrum – shared, lower-priority, “unlicensed” use.  

FCC Chairman Julius Genachowski (News - Alert) recently summed up the significance of the incentive auction:

"In freeing up spectrum for wireless broadband, incentive auctions will drive faster speeds, greater capacity, and ubiquitous mobile coverage. These are essential ingredients for innovation and leadership in the 21st century economy where smartphones and tablets powered by 4G LTE [long term evolution] and Wi-Fi networks are proliferating, and the mobile Internet becomes more important every day. Over the last few years, the U.S. has regained global leadership in mobile innovation —and we must not let up now." (here)

Aside from the reported moves by TV investors, it just makes common sense that TV stations faced with advertising dollar declines and lower numbers of viewers, might jump at the opportunity to sell out to an investor willing to take a risk with the FCC’s innovative auction process.  What station owner, with the shareholder in mind, would not seriously consider taking this early "safe" opportunity to sell out now with the incentive auction, rather than face the real risk of selling out in a less opportune moment.  With the FCC holding the auctioneer’s gavel, we will witness over the next two years the end of 60 years of dominance by over the air television.

The White spaces industry and PCAST spectrum report participants will be gathered for 3 days (Oct 3-5) in Austin at the Super Wi-Fi Summit. Speakers include among others: Blair Levin (GiG.U.), Mark Gorenberg, Rick Whitt (Motorola), Aparna Sridhar (Google), Vanu Bose (VANU), Preston Marshall, John Malyar (Telcordia), Bob Nichols (Air.U.), Jim Carlson (Carlson Wireless (News - Alert)), Mark Lowenstein (Mobile Ecosystem), and Paul Garnett (Microsoft).  Attorneys include Marty Stern (K&L Gates), Steve Coran(Rini Coran), and me.  Carl Ford (News - Alert), the conference organizer, has given us a discount code for attendees (KLG2012).  #PCAST #WhiteSpaces #SuperWiFi

Want to learn more about the impact and potential future of White Spaces? Then be sure to attend the Super Wi-Fi Summit, collocated with ITEXPO West 2012 taking place Oct. 2-5 2012, in Austin, TX.  Stay in touch with everything happening at Super Wi-Fi Summit. Follow us on Twitter.

Edited by Brooke Neuman

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