Here’s a question for FCC incentive auction watchers: why did Stage 1 of the forward auction stop suddenly in Round 27 with proceeds of $23.1B? After all, that was substantially more than the first component (reserve price) target of $15.9B and dramatically less than the second component target (clearing costs) of $88.4B. So was it just random, or was there a deliberate decision by one or more large bidders to stop in that round by dropping demand to match supply in all of the top 40 high demand markets?
If you analyze the data carefully, you can see that in fact that stopping in Round 27 was precisely calibrated to match the reserve price target in Stage 4 and beyond, when it resets to a subtly different formulation. To be specific, “the first component, which aims to ensure that winning bids for forward auction licenses reflect competitive prices, will be satisfied if, for a given stage of the auction:
The clearing target is at or below 70 megahertz and the benchmark average price per MHz-pop for Category 1 blocks in high-demand PEAs in the forward auction is at least $1.25 per MHz-pop; or
The clearing target is above 70 megahertz and the total proceeds associated with all licenses in the forward auction exceed the product of the price benchmark of $1.25 per MHz-pop, the forward auction spectrum benchmark of 70 megahertz, and the total number of pops associated with the Category 1 blocks in high-demand PEAs.”
[UPDATED 12/21] Its clear that Round 27 was the first round in which “the benchmark average price per MHz-pop for Category 1 blocks in high-demand PEAs in the forward auction is at least $1.25 per MHz-pop” (although this will only be achieved in Stage 4 if one or more of the spare licenses in Los Angeles is taken up). Thus, at least one bidder was looking ahead to a situation where the auction would have to go into Stage 4 or beyond (the FCC pointed out in its public notice that the starting price for high demand markets in Stage 4 was $1.22/MHzPOP). That conclusion very likely explains why we saw no further bidding in Stages 2 and 3, as additional bids were dropped. It also tends to confirm that DISH was no longer present at the end of Stage 1 to force up the price of spectrum above the minimum necessary.
Now we’ll have to see how the game continues (and you can read more about who we think is responsible in our industry report for subscribers published last week), but the carefully calibrated outcome of Stage 1 ensures that the first component can be met as soon as one or both of the spare licenses in Los Angeles are taken up, but (if they still have eligibility to play with in the top 40 markets) the bidders could continue to drop license demand and simply wait until the clearing costs drop below the total forward auction bids. That would mean a realized average price for spectrum across the US as a whole of less than $0.90/MHzPOP.
When could that happen? Well, with FCC staff apparently suggesting that as little as 40MHz of spectrum might be sold, it could be a while yet, and net proceeds might be as low as $10B (at 40MHz sold in Stage 7) or $12-13B (at 50MHz sold in Stage 6). With $1.9B deducted from that figure for repacking costs, broadcasters could quite plausibly be left with little more than $10B in reverse auction payments. That might be too pessimistic, but at this stage it seems like a decent bet that the final net proceeds in the forward auction will be below the $19B raised (from 52MHz of spectrum sold) in the 700MHz auction back in 2008 and essentially certain that the average price per MHzPOP will be lower than the $1.28/MHzPOP achieved back in 2008.