Huge $86B clearing cost could lead to extended incentive auction

The FCC will truly need to see a "spectrum extravaganza" during the forward auction of 600 MHz airwaves if the event is going to be completed anytime soon.

The commission today announced the conclusion of the first stage of the incentive auction, setting the clearing cost for TV broadcasters' airwaves at a staggering $86.4 billion. That price must be met by carriers and would-be wireless service providers must pay in aggregate to acquire spectrum licenses during the forward auction, which will start in a few days.

If that figure isn't met, the FCC must reduce the amount of spectrum it will free up for wireless use, resuming bidding with TV broadcasters in the reverse auction where it ended during the previous stage. While analysts' estimates of the clearing cost had varied wildly, many had been in the range of $30 billion to $40 billion.

"Today, bidding concluded in the reverse auction, establishing the cost for clearing 126 MHz in the TV band for wireless use," said Gary Epstein, chair of the FCC's Incentive Auction Task Force, in a prepared statement. "Strong participation from broadcast stations made this initial clearing target possible. Now the action shifts to the forward auction, which will give wireless bidders the opportunity to compete for this beachfront spectrum to meet America's growing mobile data needs."

Three of the four major U.S. carriers are expected to bid aggressively during the forward auction, while Sprint – which is struggling to regain its financial footing – will sit out. Analysts at Wells Fargo Securities have predicted that AT&T will spend as much as $10 billion, T-Mobile will bid roughly $8 billion and Verizon will limit its bids to $5 billion.

Carriers' war chests have become limited, though, as competition in the wireless market has increased and as they prepare to invest heavily in 5G deployments. So it may be up to newcomers such as Comcast to open their wallets to generate the "spectrum extravaganza" FCC Chairman Tom Wheeler has predicted the auction will become if the event is to end in the very near future.

"The completion of the first stage of the reverse auction marks an important milestone for the FCC's first-ever incentive auction," said Dan Hays, a principal with PwC, which provides consulting and tax services. "Most importantly, it reveals for the first time just how expensive it could be for mobile service providers to get their hands on the most lucrative tranche of spectrum to hit the block in nearly a decade. At a clearing cost of more than $86 billion, the bar has been set high for the wireless industry. Given the current financial profile of the industry, this number may have to move significantly lower. A second stage of the reverse auction later this year is likely."

Indeed, while the auction may still end as early as August, the unexpectedly high clearing cost may push the event back months, perhaps even dragging into 2017. And that isn't good news for carriers itching to put those low-band airwaves to use.

"At that $86B level, this FCC auction could take a while and 100 MHz will be hard to clear," Walter Piecyk of BTIG Research tweeted.

For more:
- check the FCC's incentive auction dashboard

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