The final tally of the first stage of the reverse component of FCC Auction 1000 was a breathtaking $86.4 billion. This was to relinquish 126 MHz (21 TV channels) of spectrum. The subsequent forward auction for the resulting 100 MHz of spectrum didn’t come anywhere close to paying for this spectrum plus certain other costs like repacking, so the first stage failed. On Tuesday we move on to the second stage with a reduced buying target of 114 MHz (19 channels) and selling target of 90 MHz.
What might we expect in stage 2? To approach an answer, let’s consider what happened in stage 1.
A look at simulations (UHF only) run on the FCC’s publicly available auction software, reveals a large number of bidders that were frozen (bids provisionally accepted) in the first round at the opening clock price (red line below). With participation levels consistent with the FCC’s “high participation” scenario (below), a simulation run at 126 MHz of spectrum saw 51% of the aggregate amount raised provisionally awarded to stations frozen in round 1 and another 23% to stations frozen in rounds 2-10. Holding everything else constant but increasing assumed participation greatly lowered the number of “super-comps” and their share of the total in each run.
So, conversely, the fact that the reverse auction aggregate was so large seems to indicate, through these simulations, that the “high participation” scenario was too high compared to actual participation (assumed non-participants being major network stations in the top 25 DMAs, the three largest major network stations in DMAs 26-100, the two largest major network stations in DMAs 100+, and the largest PBS station in each DMA). Indeed, simulations run for the 114 and 108 MHz clearance targets at the smaller “more robust” participation scenario produced even greater proportions of the aggregate reverse auction totals being awarded to “super-comps.” Totals are impacted by both participation and clearance target, so by the time you get to 84 MHz, even at the so-called “modest participation” scenario, there are no stations in the simulation frozen in round 1.
With forward auction spectrum totals decreasing by 10 MHz for each subsequent stage, its bidders don’t have a lot of incentive to substantially increase their bids. And with the opening clock price set at a high $900 and rules limiting participation in stage 2 to reverse auction bidders that were still in the game at the end of stage 1, the early-round freezes that characterized stage 1 seem to still be likely. This seems to argue, therefore, that stages 2 and 3 will also end up with high reverse auction provisional compensation totals, leaving 84 MHz a better candidate for meeting the final stage rule. By the way, that’s pretty consistent with what the investment bank consensus has been throughout this process based only on what they think the wireless carriers will be willing to pay.