On Thursday, the Federal Communications Commission will vote to adopt a Report and Order in the broadcast spectrum incentive auction proceeding.  The Report and Order will establish the framework for the incentive auction and the subsequent repacking of television stations.  Although some details of the Report and Order were still unresolved last week, when the Sunshine Period commenced, we have a good sense of what issues will be resolved in the Report and Order, how they will be resolved, and what issues will be addressed in subsequent public notices.

Our analysis focuses on the three main components of the Incentive Auction:

  1. Reverse Auction for Broadcast Spectrum
  2. Forward Auction of Wireless Spectrum
  3. Repacking of Television Stations

Reverse Auction

The reverse auction is the mechanism by which the FCC will reclaim broadcast spectrum for reallocation to mobile broadband.  Only full power and Class A television stations (both commercial and non-commercial) will be eligible to participate in the reverse auction.  Originally, the Commission proposed limiting participation to stations that were licensed as of February 22, 2012 – the date the Congress adopted the Spectrum Act.  However, the agency appears poised to expand eligibility to include stations that had pending construction permits on that date, as long as those stations are licensed by a Pre-Auction Licensing Deadline, which the FCC will not announce until after it has adopted the Report and Order.  The Commission also will declare as auction eligible stations that were not licensed due to unique circumstances and, as proposed in the NPRM, Class A stations that had not yet completed their digital facilities in February 2012.

We expect that the auction itself will be a “descending clock auction” similar to the one proposed by the agency’s auction experts in an attachment to the auction notice of proposed rulemaking.  In a descending clock auction, the FCC will establish the initial offer prices – in this case for every eligible television station.  These are the starting prices that the FCC will offer to a station at the beginning of the auction and prices will fall from there.  After learning these prices, each station will have several options. It can: (1) choose not to register for the auction and commit to remaining a broadcaster; (2) register for the auction and accept the initial price to relinquish all of its spectrum and go off the air; or (3) register for the auction and accept an initial price for an option that will allow it to continue as a broadcaster, but with some limitations.  These limitations include: (1) relinquishing a station’s own 6 MHz of spectrum to share a single 6 MHz allotment with another television station (“channel share”); (2) trading a station’s UHF channel assignment for a high VHF channel assignment; or (3) trading a station’s high VHF channel for a low VHF channel.  In an earlier post, we described each of these options in detail.

Once the FCC knows which stations are participating in the auction, it can determine the maximum amount of spectrum that it can reallocate – a clearing target.  The National Broadband Plan called for the Commission to reallocate 120 MHz of spectrum in the incentive auction, but this goal was not codified in the Spectrum Act, so the FCC may reallocate less spectrum.  The FCC is expected to adopt a national clearing target, but with the recognition that it may not be able to reach this target in all areas – particularly those along the Mexican and Canadian borders.

Each round, in areas where the FCC has an excess supply of participating broadcasters, the Commission will lower its offer price, and broadcasters will have the option to decline the offer or accept the offer and submit a bid to go off the air and/or elect one of the other participation options.  Generally, once a station declines the FCC’s offer, it will be repacked.  However, if the FCC drops the offer below what a station is willing to accept in a round, the FCC is likely to use intra-round bidding, requiring the station to specify the price at which it would sell between the prior round offer and the new offer.  This allows the FCC to determine which station it will repack and which station’s spectrum it will buy when too many stations exit in a given round.  To illustrate this scenario, assume the FCC is looking to buy the spectrum of 10 television stations and it has 11 active bidders at $100.  In the next round, the offer drops to $90 and two stations drop out, which would leave the FCC with fewer than the 10 stations whose spectrum it desires to purchase.  Rather than allow both stations to drop out and purchase the spectrum of only nine stations, the intra-round bidding mechanism would determine the price between $100 and $90 that each station would accept, and the Commission would buy the spectrum of the station that would sell for a lower price.  The other station would then be repacked.

At the end of each round, the FCC will conduct a feasibility check to determine whether each of the stations remaining in the auction can be repacked with the stations that either never entered the auction or those that have dropped out.  If a station cannot be repacked, it becomes conditionally “frozen,” meaning that the Commission will purchase that station at the current offer price as long as all of the closing conditions for the auction are met.

A number of important details about the reverse auction will not be resolved until subsequent public notices.  One such issue is how the FCC will differentiate among stations when making offers.  The NPRM proposed using “scoring” to make higher offers to some stations than others.  In practice, this could mean that the starting bid for all stations is the same, but each broadcaster will have a multiplier that will determine the unique amount that it would receive.  For example, if the national price is $100, the offer to a station with a multiplier of 2 would actually be $200 while the offer to a station with a multiplier of 0.5 would be just $50.  We expect the Report and Order to preclude the use of a station’s “enterprise value,” or its value as an ongoing broadcaster, as a factor for determining a stations “score” (the FCC has indicated that it will adopt a different name for the multiplier).  It is not clear if the Report and Order will preclude the use of any other factors, such as the population covered by a station’s contour.  Ultimately, however, we expect the scoring methodology to be released for public comment at a later date.  Additionally, the Report and Order likely will defer consideration of how opening offers to broadcasters will be determined.

By statute, the reverse auction is to be “voluntary”; however, that does not mean that the Commission is merely a neutral facilitator.  There are several ways that the FCC will expressly try to encourage stations to participate in the auction.  First, the Commission has indicated that it will set initial prices “very high” in an effort to encourage as many stations as possible to enter the auction (although it has not provided any further guidance on what “very high” means to the FCC).  Second, the agency plans to conduct direct outreach to broadcasters to generate interest in the auction.  In Congressional testimony, Chairman Wheeler has described this as presenting a “book” to each broadcaster with information about the proceeds it can expect to receive in the auction.  Finally, Chairman Wheeler has not been shy about promoting channel sharing as an option for broadcasters.  In his speech at the NAB Show, Chairman Wheeler called channel sharing “a once-in-a-lifetime, virtually risk-free opportunity to expand your business model on somebody else’s dime.”  As we previously have explained, however, channel sharing arrangements between arms-length parties can be extremely complicated and require great foresight.

Many broadcasters have expressed concerns that the FCC is taking other, less transparent, steps to create a hostile environment for broadcasters that will force some stations to participate in the auction or, worse, relinquish their spectrum with no compensation.  These actions include issuing notices of apparent liability and show cause orders to Class A stations that encourage those stations to downgrade their status (and thus lose auction eligibility and repacking protection), the recent crackdown on television joint sales agreements, and a pending rulemaking on the Commission’s network non-duplication and syndicated exclusivity rules.  Some broadcasters also have expressed concerns that the direct auction outreach proposed by the FCC also could be perceived as coercing stations to participate in the auction.

Forward Auction

The forward auction is how the FCC will sell reclaimed spectrum to wireless carriers and other bidders looking to license that spectrum for mobile broadband use.  Although broadcasters generally are not concerned with forward auction issues, there are two issues that will directly affect the broadcast industry: (1) how much revenue the forward auction will generate (and, therefore, how much money the FCC will have available to pay broadcasters); and (2) how the FCC will construct the 600 MHz band plan, which will impact the availability of dedicated spectrum for wireless microphones and could result in inter-service interference issues if it is not handled properly.

The amount of revenue generated by the forward auction is important to broadcasters interested in participating in the auction because the statute includes a closing condition that only allows the auction to close if the revenue generated in the forward auction covers: (1) the amounts due to broadcasters from the reverse auction; (2) $1.75 billion for the television broadcaster relocation fund; and (3) the FCC’s auction expenses.

There are two specific components of the Report and Order that could affect how much revenue the forward auction will generate.

First, the FCC must determine how to divide licenses by geographic unit and whether to allow “package bidding” – where bidders can bid on a combination of licenses together rather than individual licenses.  We expect the FCC to adopt partial economic areas (“PEAs”) as the geographic unit for forward auction licenses.  The larger carriers have supported the use of the larger economic areas (“EAs”), while smaller and rural carriers have argued for smaller cellular market areas (“CMAs”).  The PEAs are a subset of EAs, and therefore a compromise between these two positions.  Verizon has indicated that it could accept the use of PEAs in some form as long as it is allowed to use package bidding.

Second, one of the most controversial forward auction issues is whether to limit the amount of spectrum that carriers already holding licenses for the most low band spectrum can obtain through the auction.  The Commission has indicated that it plans to adopt such restrictions, but that they only will become effective once some financial target is reached.  These restrictions were the subject of extensive lobbying over the past several weeks, and it is possible that the FCC will modify its approach in the Report and Order.

Finally, as to the 600 MHz band plan, the Commission has indicated that it will eliminate the current two reserved channels for wireless microphones and instead consider dedicating a portion of the “duplex gap” (the spectrum between wireless downlink and uplink spectrum) for licensed newsgathering and/or wireless microphone use.  Originally, the FCC was not planning on reserving any spectrum for wireless microphones, and this issue remains in great flux.  Further, we expect the Commission to adopt a national band plan that will only include paired spectrum.  What this means for broadcasters is that, in theory, there would not be a broadcast station operating on certain frequencies in one area and wireless operations on the same frequencies in a nearby area.  However, the FCC has indicated that it may reallocate less spectrum in certain markets – particularly those in border areas – meaning that some inter-service interference may be possible if this is not properly implemented.

Repacking

Sequentially last, but certainly not least in the minds of most broadcasters, is the post-auction repacking of television stations.  Through repacking, the FCC will consolidate those TV stations remaining after the auction into a smaller swath of spectrum (e.g., channels 2-36) to leave a continuous band of spectrum for wireless broadband use.  Even stations currently assigned to channels below 37 could be repacked to create a more efficient and tightly-packed broadcast band.

The Spectrum Act includes two significant protections for broadcasters once the auction is complete.  First, the Commission must make “all reasonable efforts” in the repack to protect both the population served and coverage area of broadcast stations.  Second, the Spectrum Act allocated up to $1.75 billion of forward auction revenue to compensate broadcasters (and MVPDs) for costs associated with the repack.

The FCC has indicated that it will adopt a relatively narrow reading of the “all reasonable efforts” requirement, permitting only a de minimis change in a station’s coverage area or population served.  However, in comparing coverage areas, the Commission has adapted the methodology outlined in OET Technical Bulletin 69 in its new TV Study software, which can result in different predicted coverage for many stations.  Additionally, as with auction eligibility, although the Spectrum Act only requires the Commission to protect licensed facilities as of February 22, 2012, the Report and Order will extend protection to stations that had pending construction permits on that date, as long as those stations are licensed by the Pre-Auction Licensing Deadline, Class A stations that had not yet completed their digital facilities in February 2012, and other stations that were not licensed due to unique circumstances.

With regard to expenses, the FCC has indicated that it believes that $1.75 billion will be sufficient to cover all reasonable repacking expenses, but several commenters have taken issue with the FCC’s proposed catalog of eligible expenses, both in terms of the type of expenses that will be covered and the cost of those items.  Given the diverse needs of the broadcast of community and the large number of customized transmitters, antennas, mask filters, etc. that will be needed, these parties argue that it is impossible for the Commission to accurately predict repacking expenses in advance.

Another issue for broadcasters will be the timing of the repack.  The FCC is proposing to provide broadcasters with three months to apply for a construction permit and 39 months to complete the construction of their post-auction facilities – both measured from the date that the Commission announces the results of the repack for broadcasters.  The construction deadlines will be customized for each station based on the complexity of moving to its new facilities (so some stations will receive much less than 39 months).  Of note, a report recently commissioned by the agency indicated that, under optimal circumstances, it could take 42 months to complete new facilities at a super-complicated site such as Sutro Tower in San Francisco.  We expect the Report and Order to acknowledge the challenges that the 39 month construction deadline presents, but not to offer any concrete solutions.

Lastly, the Spectrum Act only requires the FCC to protect full power and Class A broadcasters.  The Report and Order will adhere to this approach and not provide any guarantee for low power television stations.  However, we expect the Commission to indicate that it only will repack based on the amount of spectrum that it needs, meaning it will not squeeze out low power stations just because it can.  Further, the FCC intends to release a notice of proposed rulemaking on the future of low power television that will propose, among other things, providing some form of priority to post-auction LPTV displacement applications.