Overlooked Broadcasters May Have Reasons to Participate in Spectrum Auction

To be sure, several station groups and networks have said publicly that they do not plan to participate in the auction. None of the major four broadcast networks agreed to discuss the issue for this story. Even in private conversations, their executives and lawyers stick to those assertions, an FCC official said. Though the NAB believes some stations will explore the opportunities presented by the auction, “if there is a coming stampede, we've not heard the hooves,” a spokesman for the association said. “The idea of the broadcast networks and their owned TV stations simply abandoning OTA [over-the-air] has been forecast since Mark Fowler was FCC chairman” in the Reagan administration, he said. “It’s not happened yet, and with OTA viewership on the rise again ... count me as skeptical,” he said. “There’s something to be said for having the ability to serve 100 percent of a community and the nation, and only broadcasting can do that."

But stations might be enticed to sell their FCC licenses, or at least consider taking bids on them, if they can largely retain their operations as if the auction had never occurred, some industry officials said when we asked them about such a scenario. For instance, a station group that owns or operates multiple stations in a single market could keep one of the two licenses and continue broadcasting both programming services -- one on a digital subchannel of the stronger stations’ channel while securing pay-TV distribution through retransmission consent. “A duopoly operator might be willing to entertain the sale of their weaker, duopolized partner, with the assumption that the programming, particularly if it’s a significant national network, can migrate over to a digital subchannel on the remaining prime station,” said station appraiser David Schutz of Hoffman-Schutz Media Capital.

A station’s confidence level in its ability to ensure continued distribution of its HD content in a market will probably be a factor station owners weigh as they consider participating in the auction, said TV station consultant John Lawson, principal at Convergent Services. “That could work for a network O&O or a duopoly situation,” he said. “I also think there will be a broader context for the decision making around the auction and that could involve private negotiations between a network, or another broadcast owner, and the cellular carriers.” Decisions about participating may be based on more than “the dollars and cents from the auction only,” he said.

In large East Coast markets, pay-TV penetration is especially high. According to the TV Ad Bureau, only 3.8 percent of households in the New York designated market area (DMA) watch over-the-air signals. In the Philadelphia DMA, it’s 5.6 percent, 2.8 percent in Boston and 3.7 percent in Washington (http://xrl.us/bnrddd). Over-the-air viewership is higher in Western markets, and exceeds 18 percent in Houston, the 10th-largest DMA. Moreover, major cable and satellite operators typically receive broadcast programming via a fiber link from the station, rather than over the air. “The fact that you might have restricted bandwidth on a digital subchannel is relatively unimportant to a network today,” because the station can still deliver a higher-quality signal over fiber to distributors, Schutz said. “The only people who might be impacted are the 5 percent or so of households that are still over the air. Their HD signal might have a slightly greater tendency toward pixilation."

The idea is interesting, but not being actively pursued yet, said a broadcast industry executive. “That is something that is in the back of my mind, and we will likely look at [it] once the rules come out and there is a way to better value what it means to the enterprise,” the executive said. “It is not a strategy we are pursuing now,” and that’s probably true across the industry, the executive said. “I really don’t think anyone in the industry is pursuing a speculation strategy where they are gobbling up spectrum and they are going to collapse duopolies."

Carriage agreements with pay-TV distributors could stand in the way of such plans, a cable industry attorney said. “A lot of existing retrans agreements don’t provide for multicast carriage.” But accommodations could be reached, particularly if there is an extended amount of time between now and when a station that participates in the auction might have to surrender its license, the attorney said.

The current uptick in the TV station industry, fueled in part by political ad sales, isn’t helpful to the FCC’s auction goals, said Paul Gallant, an analyst with Guggenheim Partners. “But I do expect some of the well duopolized station groups will take a close look at selling the weaker station.” Station owners who don’t see a bright future for mobile DTV or multicasting may also be interested in selling some, if not all of their 6 MHz allotments, he said.

The stations owned by the four major broadcast networks -- Disney’s ABC, News Corp.’s Fox, CBS and Comcast’s NBC -- could also be candidates to participate in the auction, though they've indicated otherwise. Those companies typically own stations in the largest markets, where the spectrum is the most valuable. Furthermore, they have the most leverage with distributors to assure the widest possible carriage of their programming should they sell their FCC licenses at auction and continue operating their stations as local cable channels.

"If you're being purely rational about the business incentives, they have a lot to gain financially and not a whole lot to lose,” a cable industry attorney said. Already the networks behave more and more like cable channels in retrans negotiations, seeking carriage fees for the content they provide, rather than the signal they broadcast, the lawyer said. “Their value doesn’t derive from the spectrum at all,” the attorney said. “It’s hard to see what the downside would be, other than that there is a whole lot of emotion tied up in that business."

For now, without clear auction rules, it’s too difficult for station owners to analyze the costs and benefits of selling an FCC license, a broadcast industry executive said. “Even when you say, ‘I know the going rate for a MHz/Pop, there are just so many other things about the auction where nobody at the FCC has made clear what they're thinking.” After rules are available, “everyone is going to sit down and try to figure out what the best value creation is for shareholders,” the executive said. Meanwhile, station owners are more focused on making sure those who don’t participate in the auction will be protected in whatever repacking plan the FCC approves, another broadcast executive said.