Bidders unlikely to meet $54.6B clearing cost as FCC incentive auction resumes tomorrow

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Stage 2 of the forward portion of the FCC’s incentive auction for 600 MHz airwaves kicks off tomorrow, with the Commission returning to bidders looking to deploy wireless services on TV broadcasters’ spectrum. And while no one knows just how long the next round will take, few expect the auction to end soon.

The first stage of the event ended in late August when bidders offered a little more than $23 billion, a far cry from the $88.4 billion that was needed to end the selloff of 126 MHz airwaves. So the FCC lowered the amount of spectrum it would free up to 114 MHz and returned to TV broadcasters for a second reverse auction.

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Last week it set the clearing cost – the price that bidders must meet to end the event – at $54.6 billion, knocking nearly 40 percent off the initial target price. Analysts generally agree a third round will be necessary – and maybe even a fourth – but the steep decline may indicate the FCC would be able to deliver more spectrum than recently thought.

“This reduction is larger than we expected, and suggests the auction could end more quickly (i.e., before year-end),” UBS wrote last week in a research note. “In addition, the auction could free up more capacity than the 60-70 MHz that we estimated after Stage 1.”

UBS predicted AT&T will spend roughly $10 billion at auction, T-Mobile will offer up $8 billion, and Verizon will spend $6 billion, while Comcast will bid $5 or $6 billion as it positions itself to enter the mobile market. While 600 MHz spectrum is often referred to as “beachfront” property because of its propagation characteristics, carriers are increasingly focusing on higher bands of spectrum that offer increased capacity. That’s one reason why pricing in the incentive auction will likely be lower than it was in the auction of AWS-3 spectrum, UBS said.

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The FCC is serving as something of a matchmaker in the auction of 600 MHz airwaves, going back and forth between broadcasters and bidders to settle on a price that strikes a balance between supply and demand. And as Barclays analysts noted, the gap between the two is still significant entering the second phase of forward bidding.

“The bid-ask between what the broadcasters want and what the operators are willing to pay continues to be quite wide,” Barclays analysts wrote this week in a research note. “As we have highlighted in the past, spectrum value in the reverse auction will be determined by the maximum of the present value of the station’s FCF (free cash flow) stream and the per-MHz POP value agreed to be paid by operators. Consequently, we believe there are likely to be additional rounds to eliminate broadcasters for whom this equation is not satisfied.”

The FCC will initially hold two rounds of bidding per day during Stage 2 of the forward auction, although the Commission may increase that number as the event unfolds to spur activity. Stage 2 is expected to conclude by early- to mid-November.