Will 600-MHz Auctions Flop?

Is it possible the upcoming 600-MHz auctions of U.S. TV broadcast spectrum will flop? And is that possibility more or less likely than huge demand for spectrum that leads bidders to overpay?

Right now, it is hard to say which outcome is more likely.

Some might argue the prospect is for overpayment, as bidders compete for high-quality spectrum. The precedent is surprising high prices paid in the 700-MHz AWS-3 spectrum.

In fact, some might say, the results of that precedent already are being seen in reverse auction prices for 600-MHz spectrum auctions.

In some cases, initial prices have been reset at an order of magnitude higher ranges. In New York City, the median bid for a full power station rose to $660 million from $410 million.

In Los Angeles, initial prices  jumped to $560 million from $340 million.

In Portland, Ore., the initial price  rose to a median of $170 million from just $18 million. In Nashville, Tenn., prices climbed to $220 million from $20 million.

On the other hand, some might argue the pressure will run in the other direction: namely less demand for the 600-MHz spectrum.

For starters, there are multiple ways mobile service providers can create more effective capacity. Spectrum resources matter. But so do network architectures, air interfaces and other signal processing techniques.

Bidders will have to decide how much emphasis to place on acquiring new spectrum, compared to other techniques.

Also, other spectrum options exist, and are developing. That means “scarcity” might be a relative concept. Longer term, there is lots of attention being paid to huge new blocks of spectrum in the millimeter range that previously have been unusable for communications purposes.

Nearer term is the possibility of spectrum sharing between current non-profit and government licensees and new commercial users.

An immediate possibility is use of spectrum not yet commercially deployed, especially the LTE spectrum amassed by Dish Network.

Dish Network has amassed a significant collection of spectrum assets to enable it to launch a new Long Term Evolution mobile network.

Whether Dish Network ultimately will do so is not clear, though. Some think Dish Network might ultimately simply sell the spectrum to another firm, or might create a national wholesale business, or sell all of Dish Network--video business and spectrum--entirely.

Any of those moves would affect demand for 600-MHz spectrum by reducing demand. Less demand would first mean less spectrum is made available, and then lead to lower prices for available assets.

In other words, one might argue there is as much likelihood of a relatively unsuccessful auction as of an auction that draws huge bids.

One might argue that “overbidding” is a danger to be avoided.

Mobile service providers have in the past misjudged the value of spectrum and nearly bankrupted themselves.

When auctions for third generation network spectrum were held in Europe, carriers overbid, creating financial pressures that nearly bankrupted a number of tier one service providers. (“Shocking,” some sarcastically will note).

And every cost anywhere in the delivery ecosystem ultimately is paid for by end users. So higher spectrum prices will mean higher retail prices, one way or the other.

Concern about excessive prices already has arisen in some 4G auctions. On the other hand, there has been some speculation that 700-MHz AWS-3 prices were bid up so much because carriers think the 600-MHz auctions might not provide as much value.

Indeed, the very structure of the 600-MHz reverse auction process encourages “high prices.”

In a two-step process, the auction has to encourage TV broadcasters to part with spectrum by offering large payments. Only then will spectrum be made available for mobile service providers to buy.

So high initial prices are not necessarily the ultimate prices buyers might pay. Also, the voluntary clearing process also means it might be hard to assemble uniform national footprints of new spectrum. That might lead to lower prices in secondary and tertiary markets.

So despite speculation that demand for AWS-3 spectrum was unexpectedly robust, demand for 600-MHz spectrum is less clear. Other spectrum alternatives are coming, longer term.

But some think the precedent of the AWS-3 auctions suggests higher prices for 600-MHz assets.

The impact of broader service provider debt loads is not to be discounted, either. Leading service providers face revenue pressure at the same time they face demands to invest in the next generation of services, plus pay for additional spectrum.

How much operators should--or can--pay is a growing issue.