The forward portion of the incentive auction starts tomorrow, and no one knows what to expect

The FCC’s incentive auction of 600 MHz spectrum shifts into forward tomorrow when as many as 62 bidders begin to make offers for TV broadcasters’ airwaves. But exactly when the event will actually be over remains a mystery.

The Commission announced the conclusion of the first stage of the incentive auction in June, setting the clearing cost for broadcasters’ airwaves at $86.4 billion for the 126 MHz it cleared for wireless use. That price must be met by carriers and would-be wireless service providers during the forward auction to end the event; otherwise the FCC must reduce the amount of spectrum it will free up and resume bidding with TV broadcasters in the reverse auction where it ended during the previous stage.

Verizon, AT&T and T-Mobile are all expected to bid aggressively in the forward auction in an effort to keep pace with ever-increasing demand for mobile data, while Sprint – which continues to struggle financially – is sitting out. Comcast will participate as well, and is expected to spend several billion dollars as it prepares to launch wireless service. Dish is also among those companies that will participate.

But some industry onlookers have been disappointed that the final list of bidders doesn’t include some deep-pocketed players that might have leveraged 600 MHz airwaves to try to disrupt the U.S. wireless market. Google quelled speculation that it would participate when it said in May that it would opt out. And former Facebook executive Chamath Palihapitiya made headlines last fall when he announced plans to bid anywhere from $4 billion to $10 billion at auction – but his firm wasn’t on the final list of bidders announced last month.

But the $86.4 billion clearing cost, which was announced in June, is far higher than analysts’ estimates that were generally in the range of $30 billion to $40 billion. Given the lack of potential upstarts with big bankrolls participating, many analysts say the auction won’t meet the initial clearing cost and will likely drag into next year.

Barclays, for instance, predicts the FCC will ultimately free up only 84 MHz before the event concludes in the first quarter of 2017. And repacking the spectrum for use by wireless service providers is likely to extend beyond the FCC’s 39-month timeframe, Barclays suggested, which could mean carriers won’t be able to use much of the spectrum as soon as they hope.

“It is unlikely that a shift in administration would alter the timeline of the auction, given where the process is,” Barclays analysts wrote recently in a research note. “The mandated time for vacating the spectrum bands and amount allocated towards relocation expenses are expected to increase, however.”

Indeed, the FCC may have to shift back and forth between the reverse auction and the forward auction a few times as the event progresses, gradually closing the gap between what TV broadcasters are willing to sell their airwaves for and what bidders are willing to pay. But as Jonathan Cohen of the law firm Wilkinson Barker Knauer LLP recently pointed out, it’s impossible to determine just how much demand there is for the 600 MHz airwaves – so it’s plausible that the clearing cost is met during a single forward auction.

And even if the FCC has to hold multiple reverse and forward auctions, each will build on the progress made during the previous auctions.

“To be sure, revenues in the initial stage of the forward auction would have to far exceed most analysts’ expectations in order for the auction to close in this stage, but the level of demand for the new mobile broadband licenses is as yet uncertain,” Cohen wrote. “We just don’t know for sure whether the forward auction bidders will pony up the funds to clear 126 MHz, or if not, how close they will come. Even if we assume that revenues in the initial stage of the forward auction fall short and that a second auction stage is needed, the second stage of the auction will take less time than the first stage, for two reasons: (1) the reverse and forward auctions will ‘pick up where they left off’ in the prior stage; and (2) there will be no six-week hiatus between the reverse and forward auctions, as has been the case in the initial stage.”

While $86.4 billion seems unobtainable, the FCC’s recent AWS-3 auction ended north of $40 billion, and that amount was far beyond any analyst’s expectation.

As Walter Piecyk of BTIG Research explained earlier this year, the FCC will provide much more information during the forward auction than it released during the reverse auction. While bidders will remain anonymous, the Commission will provide market-by-market data on bids as well as progress toward the triggering of reserve blocks that are designed to prevent dominant carriers from compiling huge amounts of spectrum in large markets.

That data will provide clues as to how much progress the FCC is making to reaching the sky-high clearing cost it unveiled in June. But just how much longer the auction will take – and how quickly carriers will be able to put their new airwaves to use – is still far from clear. --Colin