Sale of the Century

The question of whether the FCC’s spectrum sale sounds a death knell or a loud “ka-ching” may depend on what kind of broadcaster you are

By John Eggerton -- Broadcasting & Cable, 7/12/2010 12:01:00 AM

There has been much talk— brash and angry in some circles, conciliatory and defensive in others—about the FCC’s coming spectrum payout plans. But the time to plan a strategy for action, as they say in battle anthems, is nigh.

Not long ago, one broadcast lobbyist said the FCC’s proposal to pay some broadcasters to turn over all or part of their spectrum to wireless broadband was reminiscent of the Bataan Death March. The rhetoric has softened in the past couple of months, but when voluntary push comes to shove, will this be a tug of war or a welcome relief? The answer is undoubtedly a bit of both, and will depend upon who makes the decisions for each bit of spectrum and whether those parties are interested in shortterm gains or longer-term profits. Either way, the action will remake the way broadcast signals are delivered throughout the country.

“The basic rule in Washington is that everyone must be allowed to keep what they have,” says Blair Levin, the former FCC broadband czar, about the challenge of getting spectrum back from broadcasters and others.

But broadcasters likely won’t be able to keep it all. There has even been renewed pressure from the White House, which signaled two weeks ago that the Department of Defense and other agencies will need to look in earnest for precious MHz to give up in the effort to meet the coming wireless broadband demand.

Meanwhile, the National Association of Broadcasters continues to make a case for why broadcasters need spectrum to maintain current picture quality and for mobile DTV in the nottoo- distant future. Broadcasters already turned over more than a quarter of their allocation as part of the digital transition, they point out, and would have to give up more than a third of what is left (120 of 294 MHz), according to the NAB.

The FCC and the White House have said that participation in the spectrum auction will remain voluntary. There would, however, be mandatory moves of broadcasters as the FCC frees up swaths of spectrum. But it will stay voluntary—provided the FCC gets the total it feels it needs.

Cash boost for some?
Broadcasters with the right vested interest could benefit from the FCC’s payout, as long as the price is right. And since the government will potentially pay out billions of dollars to an industry in which many are still struggling, there is some upside, according to Levin.

“Right now, there are some broadcast stations that, as an ongoing matter, are worth less than the value of their spectrum,” he says. “What if there are developments that devalue some broadcast licensees even more, such as multichannel video providers developing ways of having more effective, targeted ads; a court overturning must-carry; or a new set-top box that makes the multi-channel video offering even more attractive?”

The Supreme Court chose not to hear the latest must-carry challenge, and broadcasters argue that they have ways of making their service more attractive. But those are generally the ones that require using the spectrum the FCC wants back.

The commission, however, is not targeting stronger, long-term players in major markets. Instead, it will be looking at lower-ranked stations or struggling independents. For those, the offer may be worth it.

“For a broadcaster in a larger market that has a station that is not profitable and wants to exit the business, [the FCC proposal] could be very interesting,” says Robin Flynn, a senior analyst with SNL Kagan. “The FCC has been pretty clear that it won’t be [getting spectrum from] a major network with a profitable station. So, an independent or a religious broadcaster might be one that is interested in the plan.”

Nexstar President Perry Sook says he doesn’t think it is a “compelling value proposition” for most commercial broadcasters, but that “there may be other folks with licenses and spectrum for whom it would make sense.” Sook says he has run the numbers on his stations and figures that if each of his 34 stations were to turn in half of its spectrum (3MHz), he would get about $30 million. “That is less than 10% of our revenue. It is a one-time shot, and then you have lost all the option value of potential commercial development.” He likens it to getting enough to pay off only a fraction of debt, “and you have basically given someone else the right to drill on your land.”

Flynn says that from an industry perspective, it makes sense to push back against giving up spectrum, particularly if the proposal is a reflection of the government’s long-term view of the future of broadcasting. But from an “individual perspective,” she points out, the struggling, “debtor-in-possession” stations will be looking at it from a different perspective, which is whether the FCC’s price makes sense. “For a financial player, that is really what they are in the business of doing, monetizing assets.”

While there would be benefit for struggling stations looking to cash out, might not there also be a value to stations faced with less inmarket competition? “You could say to the extent that there is less spectrum, what there is becomes more valuable,” Flynn says. “And to the extent that there are any fewer ad avails that are sold in larger markets, maybe the ones that are left are in more demand.”

“That is the way the FCC still looks at the world,” Sook adds, “that our only competitors are the other over-the-air commercial TV stations. We all compete with the same satellite choices, cable choices and Internet choices. On the margin it could be slightly beneficial, but I don’t think it changes the competitive equation.”

Lynn Claudy, the NAB’s senior VP of science and technology, recognizes the lure of the money. “For those that voluntarily want to get out of the broadcasting business, receiving a payout as a result of spectrum auctions doesn’t seem inherently a bad thing, as long as it’s voluntary,” he says. “But we just don’t have a lot of evidence that a lot of broadcasters want to stop being broadcasters.”

And to Sook’s point of mining the potential value of broadcasting, Claudy suggests broadcasting still has a lot of value beyond what it can fetch at auction: “It is a viable standalone service with universal reach, and the only media service that isn’t subscription-based.”

Claudy also says that if a large number of broadcasters took the buyout, or had to share channels, “the diversity and strength of the overall broadcast service will be weakened. Broadcasting will not be as compelling an overall standalone service offering if there are fewer services available to viewers…That would truly be a value gap.”

Lonna Thompson, interim CEO of the Association of Public Television Stations, is not looking to give up any spectrum. “There are just not enough concrete details about where that [spectrum reclamation plan] is going,” she says. “Our stations are using their spectrum and using it well for a lot of services.” While Thompson says she is open to talking and to innovation, “It can’t be at the expense of the public services we provide.” She made that point in meetings with FCC staffers last week.

Minority rules
There would be some irony if the groups that would most benefit from getting cash out of their stations by reducing or eliminating their current or potential future service are religious or minority broadcasters whose diverse voices the FCC wants to promote. Ruth Milkman, chief of the FCC’s Wireless Telecommunications Bureau, says the hope is that “with the channelsharing paradigm, it might be a way for smaller stations to get an infusion of money that would allow them to continue to operate if that is what they want to do.”

David Honig, executive director of the Minority Media and Telecommunications Council, doesn’t quite see it that way. “A good case can be made that this voluntary option helps provide a way for small broadcasters, including minority broadcasters,” he says, “to have access to capital, monetize an asset that they may not have a good use for, and be able to afford to use those resources to provide better service with the assets that they retain, and at the same time providing spectrum that is going to be needed in enormous quantities.”

Broadcasters will still have some time to figure out whether they want to participate. The FCC will need authority from Congress if it wants to share auction proceeds with broadcasters. Chances for getting that through the legislature this year are slim, which would push any rulemaking on an auction into next year at the earliest. But as broadcasters know, “nigh” becomes “now” in the blink of an electronic eye.