Auction 101: Setting Prices in the Reverse Auction

On Wednesday, bidding in the reverse component of the first stage of the broadcast spectrum incentive auction came to a close. As promised, the Federal Communications Commission (FCC) promptly released the total clearing costs needed to close the auction at the initial clearing target. While we wait for the beginning of the forward auction, we thought this might be a good time for a refresher on how the FCC is conducting the auction and what role broadcasters play.

The FCC enthusiastically marketed the auction to broadcasters throughout the country. It made the application process as straightforward as reasonably possible for interested stations. And it set opening bid prices – the maximum amount stations could ever get for participating in the auction – at very attractive levels to encourage broadcasters to enter the auction. As the FCC has acknowledged, robust broadcaster participation in the auction allowed the FCC to set a high spectrum clearing target of 126 MHz.

Broadcasters currently operate on ultra-high frequency (UHF) channels 14-51. Clearing 126 MHz will require the FCC to buy enough stations to fit remaining UHF broadcasters in channels 14-29.[1] During the reverse auction, prices offered to broadcasters dropped each round by a predetermined percentage set by the FCC. Stations merely decided whether they were still interested in the auction at the new – lower – price the FCC presented to them, or if they wished to drop out of the auction entirely. At no point could broadcasters manipulate the price they were offered or control which stations the FCC would select as winners.

Prior to each new round, the FCC ran a simulation to see if they could repack those broadcasters remaining in the auction to new channels in the reduced television band. If a station could be repacked to a new channel, its price continued to drop. If a station could not be repacked – there was nowhere to put it while still clearing 126 MHz – then the FCC froze that station at its current price. Prices for other stations continued to drop until those stations too were needed by the FCC, the stations dropped out of the auction or prices reached zero in the final round of the auction.

To be clear, then, if a station dropped out of the auction, it received no money. And that station can’t come back and try again. It will not be eligible to participate in a subsequent stage of the auction, if one is needed. Meanwhile, a station that was frozen and is a provisional winner didn’t set its price, it’s simply in line to receive what the FCC was offering when the FCC determined that it didn’t have anywhere left to put the station in the new television band. Broadcasters didn’t have price leverage; they couldn’t “demand” a certain price or “hold out” for a certain price. Nor did they set the opening price, as noted above. Rather, the price they were offered dropped every round unless the FCC needed them to achieve the 126 MHz band plan. In short, the FCC set opening prices, set the level by which those prices would drop and selected which stations would be winners.

Because there seems to be some confusion on this point, we’ll repeat it. Broadcasters had no levers to drive up prices in the auction. They could not “hold out.” They had no ability to force the FCC to pay a higher price than the FCC was offering. The only options available were stay in or drop out, and the only way a station could win (provisionally) is if the FCC determined it needed that station to meet its current clearing target. At that point the station’s price was frozen.

We understand the incentive auction is quite complex given all of the moving pieces. That is hardly an excuse, however, for parties to be so far off the mark as to claim that broadcasters somehow held out or drove up the price of spectrum. That view represents a fundamental misunderstanding of the auction and maligns the work of the Commission staff as well as the positive role broadcasters have played in this process.

Now the wireless industry is on the clock and we’ll see what kind of demand they truly have for spectrum.

[1] This is an oversimplification, as the FCC can put a limited number of stations in the new wireless portion of the band, from channels 30-51.