With Next Stage of Incentive Auction Nov. 1, Some Wonder About AT&T/Time Warner Effect

The quick end to Phase 2 of the forward auction last week wasn't that big a surprise and could reflect the actual number of carriers and other bidders likely to bid in the auction, industry lawyers and analysts said Tuesday. Under the auction rules, a round ends when supply and demand hit an equilibrium in the top 40 partial economic areas (see 1608300064).

Any bidder with one or more stations with the status “Frozen -- Provisionally Winning” at the end of Stage 2 will be able to log in to the Reverse Auction Bidding System for Stage 3 starting at 10 a.m. EDT Wednesday, a public notice said. The system will offer an update on bidding status and, “where applicable,” the initial bid option, available bid options, vacancy ranges and clock price offers, the PN said. The FCC will hold one bidding round Nov. 1, two rounds Nov. 2-Nov. 4 and three rounds starting Nov. 7, the notice said. There will be no bidding on Nov. 11, a federal holiday.

“The [Wireless] Bureau may adjust the number and length of bidding rounds based upon its monitoring of the bidding and assessment of the reverse auction’s progress,” the FCC said. “We will provide notice of any adjustment by announcement in the Reverse Auction Bidding System during the course of the auction.”

Industry officials told us the fast conclusion to Stage 2 could reflect that the round offered nine 10 MHz licenses in most of the larger markets and not enough bidders were in any of the markets to push the stage into a second round. The commission didn’t comment.

Three major carriers, AT&T, Verizon and T-Mobile, indicated they will bid in the auction. Sprint said a year ago it wouldn't bid (see 1509280059). Industry officials said there are new questions about AT&T in the light of its bid for Time Warner and the effect of that bid on available cash for the auction. Verizon was always a question mark because it already has significant amounts of 700 MHz spectrum and is expected to buy Yahoo for $4.8 billion (see 1606070054). T-Mobile officials said they will execute a disciplined bidding strategy (See 1601060059).

If each of the three were bidding for two 10 MHz licenses nationwide, that would bring the total to only six licenses in each market. How big a play Dish Network, Comcast and other potential bidders might make in the auction has always been a question, industry officials said. As a result, there just weren't enough bidders for there to be more demand than supply in any of the major markets, industry officials said.

“Auction dynamics are always tough to predict because you never know what will happen in the marketplace,” said a former FCC spectrum official. “Other than T-Mobile, the major wireless carriers are involved in large acquisitions and heading in different directions. It’s definitely a major concern.”

New Street Research is still assuming AT&T stays in and the auction clears 60-70 MHz at $1.25-$1.50 per MHz/POP, analyst Jonathan Chaplin told us.

“Buying [Time Warner] consumes resources, but it doesn't impact the magnitude of spectrum that their wireless business needs,” Chaplin said. “In fact, if the rationale for this deal is that ‘the future of mobile is video,’ they may need spectrum more than ever. Their leverage commentary doesn't assume any auction spend, but it can't. If it did, we could all back into what they were planning to spend in the auction.” If AT&T drops out, the auction may clear only 40 MHz, he said.

One big question is why there were so many more bidders early on in Stage 1 than in Stage 2. Stage 1 lasted 27 rounds before supply and demand hit an equilibrium.

“Early bidding in the largest markets could be a function of maintaining eligibility rather than ultimate demand in those markets or overall, especially based on the complex structure of this auction,” BTIG analyst Walter Piecyk said.

Tim Farrar, a satellite consultant, said something had to have happened to account for the lower demand levels in Stage 2 than in Stage 1. One possibility is that Verizon “didn’t make a large enough auction deposit to show up in their Q3 balance sheet," he said, "so they likely aren’t bidding for much spectrum at all. They couldn’t have dropped 10 MHz in the top 40 markets because they didn’t have that much eligibility to start with.” Another possibility is that between Stage 1 and Stage 2, Comcast dropped out and decided to instead offer service using a mobile virtual network operator agreement with Verizon, he said. Comcast is the “most likely bidder to have reduced exposure in my view,” Farrar said.

Another possibility is that T-Mobile dialed down the amount of spectrum it's seeking from as much as 40 MHz to 20-30 MHz, Farrar said. Dish also may have come in strong in Stage 1, bidding in the very biggest markets, but probably exiting while the first stage was in progress, he said.

“Estimates of incentive auction revenue above $50 billion were always just a bunch of hype,” said Michael Calabrese, director of the Wireless Future Program at New America. “T-Mobile is the only major carrier with both a great need and substantial wallet for coverage spectrum. AT&T and Verizon already have substantial low-band spectrum. Their need for spectrum is to enhance capacity and there are far less expensive sources of spectrum to meet that need, such as the 3.5 GHz band and massive amounts of millimeter wave spectrum. If this auction sucks less capital out of the telecom sector -- and if competitive carriers like T-Mobile can buy more TV spectrum at a lower price -- the public interest will be well served.”

“Demand for incentive auction spectrum is just strong enough for it to be judged a technical success, but it could have been stronger,” said Richard Bennett, network architect and free-market blogger. The FCC decision to reclassify broadband as a common-carrier service “eroded the economic value of spectrum and sent carriers into acquisition sprees outside the communications business,” Bennett said.