FCC Auction Process - "Lower 700" Case

T
he FCC periodically conducts public auctions of a very special sort of property - radio frequency spectrum licenses. Today, RF spectrum is becoming a critical ingredient across the business and consumer economy.  What is interesting about the Lower 700 spectrum auctions described below is that they offer insight into spectrum opportunities created when long-existing TV channels are gradually migrated to new services. Also, about 240 spectrum properties that went unsold in Auction 44 were sold in Auction 49, providing two data points per property as to bidder willingness to pay for leases of Lower 700 spectrum licenses.

Auction 44 - Lower 700 MHz Auction

The licenses auctioned were in the 710-716 MHZ and 740-746 MHZ spectrum segments, more familiarly known as broadcast TV Channels 54 and Channel 59. As digital television replaces analog, new services will replace "legacy" uses of radio spectrum, and this auction was part of this forward-looking process.

The FCC's catalog for Auction 44 included 740 "Lower 700" spectrum properties. These ranged from licenses covering regions with populations of more than 40,000,000 down to rural locales with populations of less than 20,000.  The eventual selling prices ranged from about $9,000,000 for the license covering metroplitan Los Angeles down to $3,900 for White Pine, Nevada, population 13,039. Note that qualified small buyers get discounts off these selling prices, so even those with low budgets could participate.

The winning bidder obtained licenses for 12 MHZ of spectrum (6 MHZ for regional licenses), in two paired 6 MHZ segments. Note that the unit prices for "Lower 700" spectrum are much lower than prices in what the FCC refers to as Broadband Personal Communications Service (next generation cellular) spectrum, in a spectrum region that has better propgation characteristics.  For buyers who can define useful, profitable servicesbased on "Lower 700" spectrum  and who are not unduly held up by incumbent TV stations, these prices may be "deals of the century" or at least of the decade.

Within Auction 44. the number of bids and  the eventual selling price per property varied considerably, even after one normalizes to account for differences in license area population and, if applicable, differences in spectrum size (in megahertz). For example, the Chicago metro area "Lower 700" license attracted only one bid in Auction 44, and therefore sold for its reserve price of about $2.4 million. In contrast, the Tacoma, Washington metro area license attracted heavy bidding and sold for about $1.7 million, not that much less than Chicago and far higher than, for example, Raleigh-Durham, which is about the same size as Tacoma, but sold for only $210,000.

Overall, about 250 properties did not attract a minimum bid and therefore went back into the FCC's unsold inventory. These included many midsized metropolitan areas, such as Harrisburg, Pennsylvania, which did not attract the minimum bid of $142,000 even though, as noted earlier, Tacoma, Washington, of comparable size, sold for $1,718,000. These unsold properties from Auction 44 became the core offering for Auction 49.

Auction 49 - The Auction 44 Follow-On


Spectrum properties that went unsold in Auction 44 were again offered in Auction 49, at reduced reserve prices. However, as the Auction 49 results demonstrate,  the buyers would in a majority of cases been better off bidding at least the reserve price in Auction 44.

For each license that went
unsold in Auction 44, but
was sold in Auction 49, the
adjacent chart plots their
respective selling prices as
a percentage above or
below Auction 44 reserve
prices. As an example, in
Auction 44, the license for
Albany-Schenectady did
not sell at its reserve price
$249,000. In Auction 49,
the Albany-Schenectady
license sold for $1,099,000,
or more than 300% higher
than its reserve price in
Auction 44.  Of course,  there were also more than sixty properties that sold for less than the Auction 44 minimum, such as the Henderson, NC license which sold for $47,000 as compared to its Auction 44 reserve price of $93,000, or about 50% less.

The net outcome was that the 240 licenses that did not attract  initial bids in Auction 44  were sold in Auction 49 for almost $10,000,000 million higher than their aggregate Auction 44 minimum bids.

Market Efficiency and Liquidity

The differing results of Auction 44 and Auction 49  indicate that there are differences in willingness to pay and auction liquidity that depend more on  who participates and their level of knowledge rather than with the economic  fundamentals. The passed-over properties gtom Auction 44 did not suddenly gain intrinsic value between late 2002 and mid 2003. Instead, additional information and  liquidity were brought to bear at the second auction.

There is nothing secret about these auctions. The FCC conducts them transparently, from pre-auction notifications to closeout. Also, the FCC offers "outreach" programs, a very rich web site, public notices, etc. all intended to build participation.

Of course, "transparent" is not necessarily equivalent to understandable. The subject matter is itself somewhat esoteric and complex, while certain aspects of the auction process itself are somewhat more complicated than, say, eBay. People that have spectrum acquisition as a core competency are not likely to be deterred by these complexities. On the other hand,  today there are new players and potential players to whom spectrum management  is a sideline to their main business or even a total mystery.


Looking Ahead


Whether you are a potential buyer or a consumer of radio spectrum, the supply chain in the U.S. starts with the FCC's band plans and subsequent auctions and other processes used to translate band plans into action.The results of previous auctions have put new spectrum licenses into the hands of buyers who will need suppliers, partners and customers to translate their investments into profits. Additionally, there are more such auctions in the works, so it can pay to stay informed about the FFC's activities and, as appropriate, to participate in them.
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