FCC Auctioning of Airwaves
Half a century ago, the Federal Communications Commissions gave local TV stations airwaves enabling broadcasters the capabilities to distribute their content to cable subscribers. Now, the FCC is acting as the middlemen as it seeks to translate spectrum from broadcasters to wireless carriers such as Verizon and AT&T. This presents a great opportunity on both sides due to the changing landscape. The auction demonstrates the shift in technology taking place across the media landscape – as people continue the trend of cord cutting and position themselves to spend more time on their smartphones. The question that then comes to mind is how the auction process is structured. In actuality – this process can be segmented into a two-step approach, the first being how the FCC buys from broadcasters and the second being how the FCC sells this spectrum.
From a buyer’s perspective, the FCC auction is set up as a Dutch action. In class we learned that from a buyer’s perspective the goal is to bid a value slightly less than that of true value so that the expected payoff is always > 0. In this case, the broadcaster sells at a value that is slightly higher than that the currently value that is being derived from the spectrum as this will result in positive payoff. More importantly, a buyer’s value is derived mostly from the cable subscription as well as the ad value derived for the company. From a seller’s perspective, the FCC then sells in an ascending bid auction with a reserve value which is equivalent to the lowest price they obtained from the bidding process. Any additional incremental profit goes to the U.S. Treasury.
What is especially interesting is the way the FCC structured the auction in rounds to ensure that all airwaves are being sold. With the next wave of auctions approaching on 10/19, the FCC has agreed to cut the amount spent on auction by ~40% as demand was not high enough. If the capacity for bids is not met, the Fed would theoretically prolong the bidding process further, offering third and fourth rounds until all spectrum is sold. Clearly, this is the FCC’s strategy to obtain at least it’s reserve value in an auction.
http://www.wsj.com/articles/fcc-airwaves-auction-size-drops-nearly-40-in-second-round-1476373999
http://www.wsj.com/articles/fcc-auction-promises-bonanza-for-small-tv-broadcasters-1452046575
http://current.org/series/spectrum-auction/