12.22.16

The biggest loser…

Posted in Regulatory, Spectrum at 11:28 am by timfarrar

Given the current status of the FCC incentive auction, which is making broadcasters (or at least their auction advisers) suicidal and leaving Wall St analysts perplexed, it important to note that this really is a “great game” with billions of dollars at stake for the winners and losers. So I though it might be helpful to summarize the winners and losers in previous large FCC auctions, and take a stab at predicting how this time will be different.

2006 AWS-1 auction: Winner: SpectrumCo, Loser: Wireless DBS (DISH/DirecTV), Biggest Loser: Verizon
In the AWS-1 auction, SpectrumCo picked up a national 20MHz block of licenses at the cheapest price per MHzPOP of any participant due to smart advice from Paul Milgrom, which saved them over $1B, as highlighted in this excellent paper. In contrast, Wireless DBS, the partnership of DISH and DirecTV pulled out early without buying any licenses, while Verizon paid the most for its F-block spectrum and didn’t even come away with a national footprint because it ran out of eligibility.

2008 700MHz auction: Winner: Verizon, Loser: Google, Biggest Loser: AT&T
In the 700MHz auction, AT&T painted a target on its back by buying Aloha’s lower C-block spectrum just before the auction. That made it entirely predictable that AT&T would want to acquire the adjacent lower B-block, allowing Verizon to park eligibility in that block and push up the price, while leaving Google to bid against itself for the upper C-block with its open access conditions. This was so obvious that I pointed the situation out while the auction was still going on, even though the bidding was anonymous. Verizon ended up getting the 22MHz upper C-block spectrum very cheaply, while AT&T paid at least $5B more for a similar amount of spectrum.

2014-15 AWS-3 auction: Winner: DISH, Loser: T-Mobile, Biggest Loser: AT&T
In the AWS-3 auction, DISH confused all the other bidders and most external observers, by bidding through three entities simultaneously, and ultimately acquiring all of its licenses via its two Designated Entities, Northstar and SNR, while pushing up the prices to astonishingly high levels. This forced T-Mobile to exit from the auction without gaining the spectrum it wanted, but more importantly, AT&T’s fixed going in position of “get 10x10MHz everywhere” caused it to spend far more than either DISH or Verizon (which was either smarter or just read my blog post on what was happening). Again AT&T spent at least $5B more than necessary in the auction.

Its notable that AT&T has been the biggest loser in both the 700MHz and AWS-3 auctions and has wasted over $10B in the process. But as I noted above, I think this time will be different, presumably because AT&T has hired some smart consultants, and decided to play the game strategically rather than conforming to a fixed spectrum target from the start. So my prediction for the incentive auction is as follows:

2016-17 Incentive auction: Winner: AT&T, Losers: T-Mobile, DISH, Biggest Loser: Broadcasters
AT&T appears to have been the driving force in Stage 1 of the auction, threatening to strand DISH in a handful of expensive top licenses (New York, Los Angeles, Chicago and San Francisco) in Stage 1 and forcing DISH to exit. Then with Comcast also trying to get out after its MVNO deal with Verizon, Verizon not even playing the game, and AT&T set to win the FirstNet spectrum, AT&T clearly holds the winning hand. AT&T can now keep dropping the licenses it held at the end of Stage 1 until broadcasters are forced to accept a tiny fraction of their originally expected receipts, leave T-Mobile (plus a bunch of spectrum speculators in various DEs) holding most of the spectrum (that AT&T can later strand, by supporting the broadcasters in their efforts to delay the transition and ensuring that it remains non-standard because AT&T and Verizon won’t bother supporting the band) and screw DISH by setting a new national benchmark of ~$0.90/MHzPOP for low band spectrum (helpfully also making sure T-Mobile doesn’t need any more spectrum from DISH because it has a surfeit of low band holdings).

Am I giving AT&T too much credit? After all, there is not much existing evidence that they know how to behave smartly in FCC auctions. Perhaps, but on the other hand, I think this is the scenario that best fits what we’ve seen so far (though by stating it so explicitly, I do worry that I might trigger a rush for the exits in the next stage(s) of the forward auction).

What will broadcasters do now? Will they cave on price and accept less than $14B for 84MHz of spectrum cleared (so the auction can close at the Stage 4 reserve price)? Will this drag on further, with both the dollars raised and spectrum sold falling further? That’s unclear, but either way, its not going to be a Happy New Year if you are a broadcaster trying to sell your spectrum.

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