This is the first part in a multi-part series about what the forthcoming incentive auction of broadcast spectrum means for broadcasters.
In one of the first major pronouncements of his Chairmanship, new FCC Chairman Tom Wheeler blogged that the incentive auction of broadcast spectrum will be delayed – from 2014 to mid-2015. Most observers commended the revised schedule, recognizing that it provides the Commission with additional time to develop the rules and procedures for one of the most complex spectrum auctions ever conducted. For broadcasters, the schedule also provides additional time to consider what the incentive auction means for them.
Broadcasters’ reactions to the FCC Incentive Auction fall across a fairly linear range.
- At one extreme, you have the Broadcast Faithful. This group includes committed broadcasters that opt not to participate in the auction. These companies are focused on the subsequent repacking of broadcast spectrum and stations’ continued ability to serve their viewers with little disruption.
- At the other extreme, you have the Interested Sellers. This group includes station owners who are strongly enticed by the prospect of obtaining an immediate payoff through the incentive auction, and who, under the right conditions and at the right price, plan to participate in the auction.
- Between those poles lie the Others, which includes: broadcasters who believe in and are committed to their mission to serve the public interest, but are evaluating different opportunities, such as channel sharing or a move to VHF; those who might be interested, but do not know if the auction will affect their markets; and those who have not yet focused on the auction and do not know if they would want to participate or not.
No matter which camp you or your employer may fall into, when it comes to the incentive auction, knowledge is power. Even the Broadcast Faithful will benefit from understanding how the auction will operate, making an educated decision about whether or not to participate, anticipating the makeup of their market(s) post- auction, and, of course, understanding the repacking and the TV Broadcaster Relocation Fund (which will reimburse broadcasters for at least some repacking-related costs). For Interested Sellers, the benefits of understanding the auction are obvious. And, if you are one of the Others, now is the time to educate yourself about the auction.
The Middle Class Tax Relief and Job Creation Act of 2012, better known for these purposes as the Spectrum Act, provides four options for broadcasters. First, broadcasters may choose to retain their full 6 MHz of spectrum. Second, television licensees may choose to relinquish their spectrum and cease broadcasting. Third, broadcasters may choose to relinquish their spectrum, but continue operating through a channel sharing arrangement with one or more other broadcasters. Finally, broadcasters may choose to exchange their 6 MHz of UHF spectrum for VHF spectrum. Only broadcasters licensed to channels in the UHF band would be compensated for relinquishing their spectrum. In its Notice of Proposed Rulemaking, however, the FCC asked whether stations licensed in the upper VHF band should be compensated for exchanging their spectrum for a channel assignment in the lower VHF band. We discuss each of these options in further detail below.
Retain All 6 MHz
The first option, and one that many broadcasters are expected to choose, is to retain a full 6 MHz channel and to continue to operate after the auction. This option is particularly attractive to affiliates of the major broadcast networks and other licensees who desire to broadcast at least one high definition stream and one or more digital multicast channels and/or Mobile DTV. Other broadcasters likely to elect this option are broadcasters operating “virtual duopolies” (single stations affiliated with more than one major broadcast network) and broadcasters enticed by the possibility of a new broadcast standard that may permit 4K broadcasts, broadcast over LTE, and leasing of excess capacity for broadband use.
Stations that remain on the air after the auction will be “repacked” – placed onto contiguous or near-contiguous channels in order that a cluster of contiguous spectrum can be repurposed for mobile use. Under the Spectrum Act, the FCC is obligated to make “all reasonable efforts” to preserve the coverage area and population served as of February 22, 2012, of any licensed full power or Class A station that remains on the air after the auction. The Commission has proposed several possible interpretations of “all reasonable efforts,” most of which could result in at least some change to a station’s existing over-the-air coverage. In addition, the Spectrum Act allocates $1.75 billion of the auction proceeds to a TV Broadcaster Relocation Fund, which will reimburse broadcasters and cable operators for at least some costs incurred as a result of the repacking. We will address repacking issues in more detail in a future post.
The Spectrum Act also includes a provision commonly known as the “Sinclair Option” (because it was included after a strong lobbying effort by Sinclair) that authorizes the FCC to permit television stations to forego reimbursement for repacking costs in exchange for the ability “to make flexible use of the spectrum assigned to the licensee to provide services other than broadcast television services.” Broadcasters electing this option would be required to continue providing at least one free broadcast television program stream, but they potentially could monetize their excess spectrum. This could be particularly attractive after the transition to the next-generation ATSC 3.0 standard, which will increase the number of bits in a single 6 MHz channel, allowing services such as targeted advertising, delivery to mobile devices, and even off-loading from wireless networks. The Advanced Television Systems Committee currently is developing the ATSC 3.0 standard.
Sell and Cease Operations
Perhaps the least complicated option for broadcasters interested in participating in the auction is to sell their 6 MHz of spectrum and, if their bid is accepted, to cease operations. While one of the FCC’s auction design goals is to make participation by broadcasters as easy as possible, broadcasters interested in this option will need to think about the value of their spectrum and develop a strategy for how to participate in the auction. Chairman Wheeler recently indicated that the initial offer to stations participating in the auction will be very high. But, under the descending clock auction contemplated by the FCC, these offers will continue to drop in subsequent rounds until the Commission has determined an aggregate price for clearing the targeted amount of spectrum. While many station offers may be “frozen” (i.e., fixed during the auction and no longer subject to the descending clock) at prices well above the station owner’s reservation price, stations should nonetheless do their homework in advance of the auction and understand at what price they would no longer be interested in selling. This question becomes more complicated for broadcasters who own multiple stations and for whom the value of each station may depend on which other stations they will continue to own post-auction.
Channel sharing may be an attractive option for broadcasters enticed by the prospect of a short-term infusion of revenue but who do not want to cease operations entirely. We believe that this option might be particularly attractive for non-commercial educational broadcasters. Under a simple channel sharing arrangement, two stations would enter into an agreement whereby one of the stations would participate in the auction and, if its offer was accepted, the two stations would then share a single 6 MHz channel after the auction. The FCC’s Notice of Proposed Rulemaking proposes requiring the sharing station to place a signal over both stations’ entire communities of license; however, several television station owners, led by the Expanding Opportunities for Broadcasters Coalition, have urged the Commission to adopt a more flexible approach. Meanwhile, the FCC’s Channel Sharing order would provide each sharing station with the same must carry rights that it had before the auction, but based on the coverage from the shared location.
Developing a channel sharing arrangement between arms-length parties can be extremely complicated and require great foresight. A non-exhaustive, and high-level list of the issues to be resolved include: how to share auction proceeds, how to divide the bandwidth between the stations post-auction, who will decide how to invest in the facilities, how the agreement will be structured, and under what circumstances the agreement may be terminated. If you are interested in channel sharing, Wiley Rein has extensive experience in this area, including having participated in the FCC’s Channel Sharing workshop, having prepared a template of channel sharing agreement issues/provisions, and involvement in structuring a real world channel sharing trial.
Exchange UHF Spectrum for VHF Spectrum
This option seems to have spurred the least interest from broadcasters with whom we have discussed participation in the incentive auction. Under this option, a broadcaster would trade a 6 MHz channel in the UHF band for a 6 MHz channel in the upper VHF band. Broadcasters’ disinterest almost certainly stems from the superiority of spectrum in the UHF band for transmission of digital broadcast signals. Still, this option might be attractive for broadcasters who want to retain the ability to broadcast multiple, high-quality program streams, but who are willing to trade some over-the-air penetration for auction revenue. The Commission has not provided much information about how it will compensate broadcasters electing this option, and that may go a long way toward determining whether this is a desirable option for many broadcasters.
Exchange Upper VHF Spectrum for Lower VHF Spectrum
As with the prior option, a broadcaster electing this option would retain a full 6 MHz channel, but be relocated to technically inferior spectrum. Very few full power television stations retain low-VHF channel assignments, and for good reason, as lower VHF channels can be very difficult to receive, creating both over-the-air and even cable reception issues (if the broadcaster cannot deliver a quality signal to cable head-ends). The record does not contain much support for this option, and the FCC is likely to forego it in the interest of simplicity.
* * *
This overview only begins to scratch the surface of the issues that broadcasters must consider with regard to the incentive auction. And, of course, the FCC has yet to issue its Report and Order in the incentive auction proceeding. In future posts, we will explain the auction mechanics in more detail, describe some factors that may determine a station’s value in the auction, identify important issues still to be resolved, and discuss how repacking will affect broadcasters post-auction. For specific questions about how the auction will affect your station(s), please do not hesitate to contact us.