Analysts: 600 MHz incentive auction could generate $60 billion, but per-MHz prices could be lower than AWS-3 auction

Despite Sprint's (NYSE: S) announcement that it will not participate in the FCC's planned incentive auction of TV broadcasters' 600 MHz spectrum next year, analysts still expect the event to generate as much as $60 billion in total bids. That amount would make the auction by far the government's most successful spectrum auction ever in terms of total money raised. However, some analysts are predicting that average spectrum license prices might be lower in next year's auction than this year's AWS-3 auction due to the FCC's tightened bidding rules, the 30 MHz spectrum reserve, and wireless carriers' tightening balance sheets.

"In 2016, we expect large M&A deals to be limited due to the upcoming broadcast-spectrum auction, which is scheduled to start on March 29, 2016," Moody's recently said in a report on the U.S. wireless industry. "The Advanced Wireless Services (AWS-3) spectrum auction that ended in January 2015 raised nearly $45 billion in provisional winning bids. We anticipate bids in the broadcast-spectrum auction could approach $60 billion if non-traditional bidders -- cable MSOs and technology companies, such as Comcast, Dish Network, and Google -- decide to participate."

That $60 billion total matches a similar figure from Kagan Media Appraisals, which issued a report earlier this year predicting that the auction could raise between $60 billion and $80 billion in value, depending on the amount of spectrum that is released to bidders. Kagan's report was commissioned by the Expanding Opportunities for Broadcasters Coalition (EOBC), which included 87 member TV stations and was formed to help shape auction rules that favored TV broadcasters. The group disbanded earlier this week because of the FCC's anti-collusion rules for the auction and because most of the rules that it had sought for the auction have been established. 

Wall Street research firm Barclays issued a report earlier this week largely agreeing with the $60 billion figure. However, the firm pointed out that the total amount of spectrum released in the AWS-3 auction, 65 MHz, will be less than the 84-100 MHz of broadcast spectrum that is expected to be made available through next year's 600 MHz incentive auction. Further, Barclays also pointed out that the average value of spectrum in the 600 MHz incentive auction is expected to be around $2.50/MHz-POP, which would be lower than the $2.72/MHz-POP generated from the AWS-3 auction.

Barclays explained that several factors will likely drag down the average value of spectrum licenses in the 600 MHz spectrum auction. First, the firm said the FCC's tightened rules on Designated Entities will likely curtail the kind of massive bidding that Dish Network engaged in through its DEs in the AWS-3 auction. Indeed, the FCC has rejected Dish's DE strategy, which will prevent Dish from obtaining a $3.3 billion discount on its AWS-3 spectrum licenses.

Further, Barclays said that the FCC's 30 MHz spectrum reserve could shrink its auction revenues. The FCC plans to essentially forbid AT&T (NYSE: T) and Verizon (NYSE: VZ) from bidding on up to 30 MHz of spectrum in specific markets, thereby reserving those licenses for smaller carriers like T-Mobile US (NYSE:TMUS). "We believe that the limited ability of larger carriers -- specifically AT&T and Verizon -- to participate in the auction, could ultimately lower the average bid price for the broadcast spectrum by limiting competition during the auction process," Barclays said.

Barclays added that carriers might not have the cash to make major spectrum purchases next year. "Ultimately, it is likely that the spectrum is not available for use until at least 2018, if not later. This would mean that carriers would be taking on debt for an asset that does not generate returns for at least 24 months. We believe this factor, together with balance sheet concerns, may limit how aggressively carriers bid during the upcoming auction," the firm said.

Finally, Barclays said that low-band spectrum like the 600 MHz band might not be strategically critical to AT&T and Verizon. "Given that both AT&T and Verizon have significant low band spectrum holdings, we believe that this may temper participation from the two carriers during the auction process," Barclays said. "Further, Verizon has outlined the possibility of interference between 600MHz and 700MHz auction. That said, a potential draw for the carriers could be future spectrum swapping opportunities, where AT&T and/or Verizon, possibly swap low band spectrum for mid/high band assets and the ability to keep spectrum out of the hands of potential competitors."

Interestingly, Barclays also investigated which TV stations might participate in the "reverse" portion of the 600 MHz incentive auction, where TV station owners will be paid for the spectrum they relinquish. That spectrum will then be made available to wireless carriers and other bidders in the traditional "forward" part of the auction. "CBS and Comcast have the most number of stations that can participate in the auction, although other strategic reasons (e.g., wireless) could limit this participation for some," Barclays said. "If CBS decides to participate fully and realizes the median payout in line with the FCC commissioned study earlier this year (assuming independents don't push prices down below this), then it could receive ~$1.1bn from the process overall."

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