Empower's Shannon Constable and Ann Caskey explain the auction, including whether advertisers need to pay attention.
Spectrum is the range of frequencies used to transmit sound, data and video. Everything from TVs, radios, cellphones, computers and even garage door openers use spectrum. The TV spectrum is most valuable because it can penetrate building walls and reach a greater distance than existing spectrum.
In order to satisfy America’s growing demand for wireless broadband, the FCC created a broadband plan to free up more spectrum. In February of 2012, Congress authorized the FCC’s plan to hold the first ever nationwide incentive auction of TV station spectrum.
In simple terms, TV stations will sell back their broadcast airwaves to the government.
On March 29, 2016, the FCC is going to begin its first rounds of auction, where wireless carriers bid on spectrum owned by TV broadcasting stations. The FCC is offering TV station owners huge sums of money to sell some of their station’s spectrum. The FCC resells those frequencies to wireless companies like Verizon and AT&T or technology companies like Google.
How does it work?
The auction will be comprised of three parts – a reverse auction, where broadcasters will voluntarily decide whether or not to sell their spectrum rights to the FCC; a forward auction, where wireless broadband providers will bid to buy spectrum; and finally, repacking – a mandatory nationwide process where all broadcasters that stay on the air may be required to move to new channels, regardless of whether they participated in the auction.
TV stations have a number of options by which they can participate: they can choose to go off the air, share a channel with another station, or move from their current channel to a channel in a different band. Participation is entirely voluntary. Stations that are not interested in relinquishing spectrum usage rights in exchange for payment of auction proceeds do not need to do anything.
After the auction, there will be fewer available channels for TV, but Congress has mandated that the FCC make all reasonable efforts to preserve the geographic footprint and population served by each station that participated.
When will the auction take place?
The auction is scheduled to begin on March 29th, 2016. It will take somewhere between a few weeks to a few months. After the auction is completed, the FCC will announce results and new channel assignments. There will be a 39 month post-auction transition period. The transition will vary by market depending upon which stations participated in the incentive auction. If a station receives a new channel assignment, viewers will need to scan for the new channel assignment. However, cable and satellite subscribers should not need to do anything.
Who is likely to participate?
Low-powered stations within a market are more likely to participate than those with a major network affiliation. We are likely to see foreign-language stations, religious broadcasters, affiliates of nostalgia TV networks, Public Broadcasting stations and those operated by nonprofit schools or organizations. Major media companies could sell back some of its spectrum in markets where they own more than one station but their participation is likely to be on a smaller level.
Why would a station participate?
The FCC is willing to pay station owners millions of dollars for their spectrum. This may be a once-in-a-lifetime opportunity for these broadcasters and they may not want to miss out on the chance to cash in on these payouts. An example of some potential valuations the FCC has placed on stations: $110 million for the most-watched station in Lima (#188 ranked Nielsen market), $187 million for a Memphis station (#50 ranked Nielsen market) and $900 million for the CBS affiliate in New York City (#1 ranked Nielsen market). Even if stations are sold below the valuation price, owners still have the potential to make a lot of money.
The other reason owners are considering participating is the downward outlook for local TV advertising. Revenue has been on the decline as advertisers shift their dollars to other mediums.
What is the impact?
The impact on the advertising industry is still unknown and dependent upon the number of stations that enter the auction. There are a few scenarios that could play out:
- If only a few stations enter the auction, the impact will be minimal. Over-the-air viewership may decline as some channels go away but it won’t be enough to have a major impact on the markets. CPMs should remain the same.
- If several stations enter the auction, there will be a dramatic impact. Broadcast viewership will fall due to the loss of stations. Stations would close across the country, leaving some markets with just one left. Cable and satellite penetration could increase with people shifting to those outlets due to the loss of over-the-air viewing and/or station assignments moving to cable outlets. Broadcast CPMs will increase due to the scarcity of options.
No matter the number of stations that enter the auction, viewers who watch free, over-the-air TV will end up with fewer channel options. Those people will either be content with fewer stations to tune into or find alternative methods for viewing (i.e. subscribe to cable or satellite, mobile or tablet).