There are more and more signs that the FCC is moving forward aggressively with its “incentive auction” to purchase TV stations so that their licenses can be cancelled and their spectrum sold to and reused by wireless companies for wireless broadband purposes. In two significant actions this week, the FCC gave broadcasters a first peek at the anticipated value of their stations in an incentive auction, and also clarified the interference standard that will be used by the FCC when they “repack” the stations that do not sell their licenses into a smaller post-auction TV band. This Declaratory Ruling clarification seems to be addressed to answering some of the questions raised by the NAB in its appeal of the incentive auction order, about which we wrote here (an appeal which has been combined with a separate appeal of the incentive auction order by Sinclair Broadcasting). But, to most television operators, the more interesting of the two actions is the report issued by the FCC suggesting the values that licensees in the various TV markets might get if they surrender their TV licenses in the incentive auction.
The Report was prepared by an investment banking firm retained by the Commission. It sets out the procedures for the auction, and how the bidding will work. The report also contains an IRS letter suggesting the tax treatment that would be accorded licensees for incentive auction payments in various scenarios (e.g. a pure surrender of the license, or a surrender of a license as part of a channel sharing agreement, or a decision to move a station from UHF to VHF in exchange for FCC compensation). But what most broadcasters were most interested in was the chart of projected maximum and median payments to full-power and Class A stations in each of the television markets across the country. Those projected payments ranged from Los Angeles, where the FCC projected that the maximum that could be paid to a broadcaster for surrendering their license could be as much as $570,000,000, with the median value of a surrendered license being $340,000,000, to much smaller markets where the value, in the smallest television market of Glendive, Montana and in several smaller Alaska markets, where the FCC did not foresee any payments to TV broadcasters for surrendering their licenses.
The projected payments were not uniform by market size, but depended on proximity to congested spectrum areas and similar factors. Thus, in a smaller market like Palm Springs, the Commission saw potential values of between $100,000,000 and $180,000,000, or in Springfield, Massachusetts where the FCC saw a potential value of $100,000,000. These are by no means guaranteed payments, but instead are based on the assumption that the FCC will receive value from wireless operators of approximately $1.50 per MHz-pop in the wireless service areas carved out of the cleared spectrum. The values projected by the study could end up being less if less is paid by the wireless operators, or if more stations decide to participate in the auction and sell their stations (as the FCC expects to need to buy out only a limited number of stations in each market – more in some and less in others – so as to meet their reclamation goals). The Commission also bases these calculations on reclaiming over 120 MHz of TV spectrum (20 TV channels). If less is ultimately reclaimed, presumably the payments would be less as fewer stations will need to be bought out to achieve the Commission’s goals.
In trade press reports in the last day, some observers have suggested that these values are what was anticipated in the planning that has been done leading up to this point, while others have expressed some surprise at the amounts set out in the report to be paid to TV licensees. There is expected to be further Commission outreach to television broadcasters to further explain the auction processes and the projected values for stations that surrender their licenses, but this document should clearly be on the nightstands of all TV owners, financial analysts and others interested in the spectrum auction.
But before the auction can happen, the FCC needs to resolve some of the challenges to their initial rules that they adopted. As we recently wrote, the NAB challenged the decision in Court (and several other appeals and requests for reconsideration have followed). The NAB announced that their objection was principally to the revisions in the OET-69, the methodology mandated by Congress to measure interference between TV stations. The legislation mandated that the FCC use “all reasonable efforts” to minimize interference to television stations after the auction to preserve their service area, even after the stations that don’t sell out in the incentive auction are repacked into a more compressed TV band. Obviously, this is an important issue for broadcasters who are not planning on selling in the auction. The NAB has argued that the FCC effectively redesigned OET-69 to minimize predicted interference in the post-auction world, threatening the coverage of some TV stations that don’t plan on selling in the auction. The Declaratory Ruling issued by the FCC this week clarifies the FCC’s methodology in computing the protection to be afforded to TV stations, clarifying that they will not protect station service to unpopulated areas and areas already subject to interference from other stations. The FCC offers justifications for making that determination – basically saying that stations should not get protection in areas where they don’t serve viewers with their over-the-air service currently.
At the FCC meeting this week where the Declaratory Ruling was adopted, there was much argument among Commissioners about the intent of the Ruling and the procedure used for adopting it without prior public notice and comment. The Democratic Commissioners indicated that this was simply a clarification of what had already been said in the earlier incentive auction order, while the Republicans argued that it was an attempt to shore up weaknesses in the original decision so that it was not as vulnerable to the NAB’s appeal, and that this attempt came too late to be admissible in that appeal. How this plays out over time remains to be seen.
But these actions indicate that the FCC’s majority is still moving full-steam ahead on the incentive auctions, so TV broadcasters and investors need to watch these developments very carefully – along with the additional actions and information about the auction process that will no doubt be coming from the FCC soon.