The Sale of the Century? How the FCC Plans to Sell Off Part of the TV Band

In the Public Safety and Spectrum Act of 2012 (enacted as Title VI of the Middle Class Tax Relief and Job Creation Act of 2012, Public Law 112-96), Congress authorized the Federal Communications Commission to recover and auction a significant portion of the spectrum currently used by television broadcasters. This will be - by far - the most complex auction process ever undertaken anywhere, for any commodity, and poses unprecedented legal, political, engineering and technological questions. The auction is currently scheduled to take place in early 2016.

The FCC has now promulgated rules for implementing the sale, and broadcasters are beginning to consider whether they should choose to participate. In addition, the National Association of Broadcasters has appealed several key aspects of the FCC’s new rules in a case which is receiving expedited consideration by the U.S. Court of Appeals for the District of Columbia Circuit.

Interest in the forthcoming auction (actually, as explained below, there will be two related auctions) has surged in the wake of the FCC’s “AWS 3” auction, which began in November, 2014. That auction is for much less desirable mid-band spectrum than the low-band TV spectrum that will be at issue in the new auction. Even so, by the end of the year, the AWS 3 auction blew past the FCC’s $10.6 billion minimum “reserve” price, and bidding topped $44 billion after 139 bidding rounds.

Given these developments, now is a good time to explore the history of spectrum auctions and the stunningly complicated process the FCC intends to employ. Bear in mind that this discussion is necessarily oversimplified.

The Development of Spectrum Allocation

Spectrum is a public resource. Since 1934, the FCC has been charged with insuring that spectrum is utilized for the maximal benefit of the American people

Initially, all spectrum was allocated under the FCC’s generic public interest standard. If there were two or more applicants for the same spectrum, the FCC conducted a “comparative hearing” to select the best applicant. For many years, this made sense, but as technology changed and demand increased, it often became a silly exercise, especially for non-broadcast uses. The Commission found itself making multi-million dollar decisions based on testimony about minor differences in coverage area, hours of operation and other trivial considerations.

Given the increasing futility of the comparative process, in the 1980's, the FCC received authorization from Congress to award certain licenses by lottery. This proved to be an extremely misguided approach, as applicants quickly learned how to game the system by filing multiple applications, often fraudulently. The results did not benefit the public, either by promoting public interest goals or by generating revenue.

Facing these difficulties, the FCC began to ask for permission to use auctions to allocate spectrum. This was not a new idea. In 1959 Ronald Coase startled fellow economists by proposing that spectrum could be most efficiently managed through auctions. Coase ultimately received the Nobel Prize, in part because of that paper. However, it took more 40 years for the Congress to authorize spectrum auctions. Starting in 1993, cellular telephone licenses were awarded by auction.

The auctions take place online, using specially designed software. Bidders spend hundreds of thousands of dollars or more on war rooms in which engineers and economists pick particular batches of spectrum in particular markets and place anonymous bids in a process that lasts for dozens of rounds. There are complicated rules requiring that bidders participate all along the way rather than wait for the end, and specifying that bidding will continue so long as certain minimum increases are registered.

The Legal Background of Spectrum Auctions

In the Balanced Budget Act of 1997, Congress directed that most spectrum licensees be awarded by means of auctions. (The law, however, exempted non-commercial broadcasting, including low-power community FM radio stations, and spectrum used for public safety purposes from auctions.)

It bears emphasis that these auctions do not confer ownership of the spectrum; what is being sold is a license to use the spectrum for a period of years. It is also critical to stress that generating revenue for the federal treasury is not the only, or even the major, objective of spectrum auctions. Coase was undoubtedly right that auctions are a much more efficient mechanism than comparative hearings for distributing spectrum and insuring that the public reaps the financial benefits of the use of spectrum. However, auctions are not necessarily the most equitable means of allocation. From a social policy standpoint, auctions do have significant deficiencies. Most importantly, they don’t take competition into account. Incumbents not only have deeper pockets but they are also willing to pay more to foreclose the entry of a competitor. Thus, in authorizing auctions, Congress identified a number of goals, most notably including:

promoting economic opportunity and competition and ensuring that new and innovative technologies are readily accessible to the American people by avoiding excessive concentration of licenses and by disseminating licenses among a wide variety of applicants, including small businesses, rural telephone companies, and businesses owned by members of minority groups and women;... [47 USC §309(j)(3)(B)]

To carry out these requirements, the FCC has placed limits on the amount of amount of spectrum that one company can purchase and offers discounts (“bidding credits”) for minorities and small businesses. It also requires that spectrum must be put into use rather than “warehoused.”

Finding More Spectrum To Auction

All spectrum is not created equal. Lower frequency spectrum has superior propagation qualities, so it can easily penetrate buildings and travel reasonably long distances.

In the 1950's, the FCC set aside a wide swath of the very best spectrum for the killer app of the age - over-the-air television. When cellular telephony began to develop, a band of nearby spectrum was made available at first, but the capacity of this spectrum was quickly exhausted. To promote competition and respond to public demand, several bands of higher frequency spectrum were deployed within a few years. This spectrum does not have the same properties as the lower frequency offerings and is thus substantially more expensive to deploy. Among other things, to use the higher bands, more transmitter sites are needed; even so, the higher band spectrum does not provide the same quality of service.

As demand for wireless service burgeoned, Congress and the FCC faced a difficult political obstacle. While earlier allocations for wireless largely employed previously unused or underutilized spectrum, the ideal spectrum for additional wireless use was already occupied by one of the most important - and politically powerful - industries, the broadcasters. Eager to balance the budget, in 1995 Congress enacted a plan to auction off part of the broadcasters’ spectrum and relocate the broadcasters into a smaller portion of the band. To do this, Congress “loaned” broadcasters an equivalent amount of new spectrum to which they could transition to much more efficient digital transmission. The broadcasters managed to delay this process for several years, thereby sitting on twice as much spectrum as they really needed, but ultimately the digital TV transition took place in 2009, and the FCC was able to redeploy the old TV spectrum. (The auction for this spectrum generated almost $19 billion.)

While the newly available spectrum enabled carriers to implement 4G broadband services, it was far from enough to satisfy the wireless industry or the many millions of smartphone users who have signed up in recent years. In addition, to address the deficiencies in public safety wireless systems which became apparent in the wake of 9/11, several powerful members of Congress wanted to create and fund what has come to be known as the First Responder Network Authority (FirstNet). FirstNet is designed to provide spectrum and equipment for an interoperable network that will enable public safety organizations to communicate effectively on the same frequencies.

However much Congress and wireless companies coveted the broadcasters’ spectrum in 1995, their desire to occupy the TV band had become overwhelming. But while it was, relatively speaking, fairly easy to obtain spectrum by transitioning TV to the more efficient digital technology, it was no longer possible to obtain more spectrum for wireless broadband without getting some broadcasters to give up their spectrum or to agree to reduce their needs by eliminating some of their multicast channels and sharing transmissions with other broadcasters.
Needless to say, broadcasters were not eager to cooperate.

To address this stalemate, Congress developed the “incentive auction” scheme which was adopted as part of the Middle Class Tax Relief and Job Creation Act. TV broadcasters, which had received their spectrum for free, would be asked to volunteer to sell all or part of their spectrum in exchange for receiving some of the proceeds of the resulting auction. Remaining broadcasters would be relocated to free up as much contiguous spectrum for sale. In addition to paying off the broadcasters and reimburse remaining broadcasters for the costs of changing frequencies and relocating transmitters, proceeds would also be used to fund FirstNet. Whatever is left (which may or may not be a lot of money) would be designated to pay down the federal deficit.

The Forward and Reverse Auctions

To recap, an unknown number of TV stations may, or may not, agree to relinquish some or all of their spectrum to an unknown number of bidders, with some of the money to be used for other purposes. Broadcasters not participating would have to be relocated, and the FCC would have to determine which spectrum would be needed for that process. No one has ever before tried to conduct an auction with so many variables.

The mechanism the FCC intends to employ involves two auctions. What follows is a very simplified explanation; a more detailed discussion can be found in this FCC report. First, in a “reverse auction,” broadcasters will identify the amount of spectrum in which geographic locations they might make available, and specify the minimum price at which they would be willing to sell. The FCC must evaluate these offers on a market by market basis, using complicated software which is already the subject of court challenge. Then, in a “forward auction,” wireless companies would identify the amount of spectrum they would be interested in buying in particular geographic locations, and specify the maximum price they would be willing to pay. Before the FCC can attempt to match buyers and sellers, it must undertake the daunting task of figuring out how to accommodate the remaining broadcasters’ right to have the same amount of spectrum and the same coverage area as before. This requires calculating how much spectrum will be needed in each market for this purpose and reorganizing (“repacking”) the spectrum as efficiently as possible into the smallest possible amount of bandwidth. The FCC must also determine how much to compensate those broadcasters for the costs incurred in the repacking. If the process doesn’t yield enough spectrum to make the sales worthwhile, the entire proceeding might be called off. However, if there is enough mutual interest, a complicated series of matches would be made, and the FCC will determine the amount of spectrum for which there is a buyer and a seller.

Policy Considerations

The new auction will have numerous implications for communications policy. To list just a few:

  • While the Communications Act specifies that licensees can be displaced at any time if the public interest so requires, the precedent of paying off licensees to vacate spectrum will make it very difficult to recapture spectrum in the future without doing this.
  • The spectrum legislation does not protect low power TV stations and translators that many minority and rural viewers rely upon. But this does not relieve the FCC of the obligation to try to insure those needs are met.
  • The stations most likely to be offered in the auction are smaller, independent stations that typically serve niche, minority audiences. The FCC will have to insure that remaining stations will serve those audiences.
  • The spectrum being auctioned is also used by churches, theaters and concert arenas for wireless microphones, and the FCC must take steps to protect those uses.
  • The auction is at cross-purposes with the FCC’s effort to open more spectrum for wi-fi and other unlicensed uses. The FCC must consider how its repacking and other decisions will affect the ability to expand access to technology using unlicensed spectrum.

In light of the uncertainties that permeate this endeavor, it will be years before it will be possible to assess the long term value of this unprecedented process.

By Andrew Jay Schwartzman.