3.45 GHz auction hits make-or-break stage

Talk about a white-knuckle ride. The 3.45 GHz auction threw a lot of folks in a tizzy after Thursday’s bidding rounds. Will the auction collapse?

The 3.45 GHz auction, which started October 5, completed 23 rounds on Thursday, with bids tallying more than $4 billion. Demand started out high at the beginning of the month, but Auction 110 observers saw a large drop in demand last Friday. Actions over the past week suggest the auction is at risk of closing.

If demand reaches supply before the minimum price of $14.8 billion is reached, the auction will fail, warn analysts at New Street Research. This, after the Federal Communications Commission (FCC) has conducted more than 100 auctions, bringing in untold billions of dollars for U.S. government coffers.

Going into the auction, the prevailing thought was that Verizon and T-Mobile didn’t need the spectrum as much or in the same way AT&T needs it. So if one or both dropped out or substantially reduced their demand, and nobody else - like Dish or UScellular - hung around, it could push the auction to the brink.

RELATED: What’s in the cards for the 3.45 GHz auction?

Analysts at New Street expected AT&T to claim the maximum of 40 MHz, followed by T-Mobile at 31 MHz, Dish at 19 MHz and financial buyers and small carriers getting 9-10 MHz. They figured Verizon would sit out, with AT&T and T-Mobile pegged to spend $10 billion and $8 billion, respectively. (Bidders aren’t allowed to get more than four out of the 10 available licenses in a Partial Economic Area (PEA), or 40 MHz of spectrum.) 

What just happened?

Thursday ended at Round 23, with the next five 30-minute rounds scheduled for today and more rounds next week. If things go further south in a hurry, the outcome could be known by Wednesday.  

RELATED: 3.45 GHz auction surpasses $1.5B, loses one large bidder

Round 22 saw significant drop in demand, the equivalent of almost one nationwide block, according to Sasha Javid, COO of BitPath and former chief data officer and legal advisor for the FCC Incentive Auction Task Force. He’s been closely tracking the auction here and sending out daily email updates.

This drop follows that even larger drop in demand in last Friday’s Round 10, where the eligibility equivalent to two nationwide blocks vanished. “As a result, demand is sparse outside of a small handful of markets in the Top 20,” Javid told Fierce. “Indeed, as of Round 23, five markets in the Top 20 already have no excess demand.”

The FCC “will have to pray that demand in these largest markets holds even as prices still need to increase by almost 3.5 times to reach the reserve price (assuming the current split in gross proceeds between these 20 markets and the rest continues),” he said. “It will be a cliff-hanger.”

The last spectrum auction where its ultimate success was so uncertain was Stage 4 of the 600 MHz auction, according to Javid. Fortunately, unlike that auction, which took a year to close, whether this auction meets the reserve price should be known by Wednesday.

The C-band auction didn’t have a reserve price. Winning bidders were on the hook for auction costs plus additional accelerated clearing costs. “This is really the first time you’re seeing a reserve price coming into play because prior instances were substantially lower and easily cleared,” Javid said of not meeting the reserve price.

No doubt, large policy implications are in play. The wireless industry pushed the Department of Defense (DoD) and National Telecommunication and Information Administration (NTIA) to clear the spectrum and routinely pushes for more. If wireless players don’t step up and buy the spectrum, it could make lawmakers or regulators far less likely to hunt for or grant new spectrum.  

Javid noted as well that if this auction fails, difficult questions regarding the 40 MHz limit on bidders and even the $14.77 billion reserve price will need to be addressed. “Worse, it may lead the DoD and NTIA to slow walk the clearing of additional spectrum bands (e.g., 3.1 to 3.45 GHz band),” he said.

It’s worth remembering that auction participants can’t talk about what’s going on. That dates back many years ago to when the FCC developed anti-collusion rules. Auction participants are forbidden from talking about the auction for a period of time before, during and after the actual event, so if you’re trying to figure out what’s going on, it’s a bit like reading tea leaves.

“With at least 16 rounds remaining until the auction minimum is reached and excess demand having halved since the auction started, our confidence that the auction will close is waning,” wrote New Street’s Philip Burnett in a note to investors Thursday. “If it’s going to close, we are likely to see the first positive sign early next week when aggregate proceeds clear the minimum ahead of excess proceeds doing so a few days later. Until then, we’ll be watching with white knuckles.”