FCC sets ambitious $10.5 billion reserve price.

Hot on the heels of its March 31, 2014 adoption service rules for the long awaited AWS-3 service, the FCC wasted no time issuing a public notice and request for comments in which it set a date – November 13, 2014 – for the auction of the new spectrum and proposed rules to govern the auction. (Last April we reported on the structure of the newly-authorized service and the license blocks that will be up for sale.)

If everything on the AWS-3 front looks like it’s moving fast, that’s because it is. The haste is necessitated by the looming statutory date of February, 2015 by which the Commission must have not only completed the auction but also actually issued the licenses to the winning bidders. The auction notice is designed to set the stage for the auction itself.

The auction will follow the typical FCC auction format, including the now-customary anonymous bidding feature. This relatively recent wrinkle to the auction process prevents bidders from knowing who is bidding on what until after the auction is over. A few features are of particular note:

  • The “reserve prices” for the auction were tentatively set at $10,066,326,600 for the paired 1755-1780/2155-2180 MHz licenses and $579,775,900 for the licenses in the 1695-1710 MHz band. (A “reserve price” is the minimum the FCC must take in for the auction to be declared valid. If that price is not met, the auction results are invalidated and the Commission has to start all over again.) While the $10 billion reserve is certainly achievable, it seems high to us as a floor for auction receipts.

To determine the respective reserve prices, the FCC (as required by the governing Commercial Spectrum Enhancement Act (CSEA)) had to begin with the NTIA’s estimate of the cost of relocating existing Federal users out of the band, and then take 110% of that amount as the floor which must be recovered for that band. The unpaired band relocation costs were estimated at $527,069,000, so a simple arithmetic operation yielded the $579,755,900 reserve price.

The calculation for the other band was more problematic, and perhaps more controversial. Only the lower half of the paired channels in the 1755-1780/2155-2180 MHz bands are subject to the cost recovery requirement set by the CSEA, so the FCC theoretically needs to recover only the costs of relocating Federal users from that portion of the spectrum being auctioned. NTIA estimated that cost as $4,575,603,000, 110% of which would be $5,033,163,300. However, the FCC decided that because this lower band comprises only half of the entire licenses being auctioned, they needed to double the recovery figure for the entire licenses, apparently to ensure that half of the minimum recovered from the sale of these licenses would be sufficient to cover the statutory minimum for the lower band alone. That’s how the reserve price for this band reached a whopping $10.66 billion.

While we can appreciate the Commission’s punctiliousness about ensuring that it meets the statutory requirement, its interpretation here seems questionable. Surely Congress was chiefly concerned that it recover a certain amount for this band and was not worried at all about what it took in for other bands not identified in the statute. The FCC could presumably have met the statutory mandate by assigning a reserve price of $5.033 billion to the 1755-1780 band alone and declaring that the paired band was thrown in for a nominal additional amount. The prices bid in the auction would, of course, reflect the full market value of both paired bands, but the bidders (and the Commission) wouldn’t be saddled with what seems to us to be a dauntingly high reserve. No one can forget the failure of the 700 MHz D Block auction a few years ago where the auction failed to reach a hefty reserve price level, thus throwing the subject band back to square one. 

We do expect a healthy amount of interest in this spectrum, but the prospect of a significant amount of 600 MHz spectrum coming on the market later next year may dampen prices at least a bit. It would be a shame if, in its zeal to rake in a king’s ransom in bids, the FCC were to fail to achieve the reserve and gets nothing. This prospect is especially scary given the statutory deadline for assigning the licenses. What happens if the reserve is not reached, the auction fails, and only a month is left before the February deadline mandated by Congress?

  • A major question mark for prospective bidders is the degree to which the spectrum will be encumbered either permanently or temporarily by existing federal users. NTIA is supposed to provide this information well before the auction begins so that bidders can know what they are bidding on, but the Federal government is not known for acting with alacrity, and here numerous Federal agencies with nothing to gain must hop to it in the very near future.
  • In its Report and Order on the new “spectrum screen” rules, the Commission declared that AWS-3 auction bidders will be free from any spectrum acquisition constraints imposed by the new screen levels. In other words, bidders get a freebie to acquire as much as they want in this auction without worrying about spectrum aggregation constraints. It is difficult to see how this curious one-time act of largesse squares with any reasoned policy of limiting spectrum concentration, but that appears to be what they have decided. The main beneficiary of this gift would appear to be Sprint, which already approaches the spectrum screen threshold in many markets by virtue of its Broadband Radio Service and Educational Broadband Service holdings. Its long-standing passion to acquire T-Mobile would confuse the situation further if that transaction is applied for and is pending while the auction is conducted.
  • Finally, we would be remiss if we failed to note that AWS-3 is being rolled out after AWS-4, which followed AWS-1. AWS-2 will presumably arrive sometime after AWS-3. Got it?

Comments on the FCC’s proposed Auction 97 rules are due by June 9, 2014, with replies due no later than June 23. They may be uploaded at the FCC’s online ECFS filing site; use Proceeding No. 14-78.