It's Big TV vs. Big Telecom

The government embarks on an ambitious plan to entice flailing stations to put their spectrum up for auction

Illustrations by Shout

The government’s plan to auction off broadcast spectrum to expand wireless services has pitted Big TV against Big Telecom at the FCC and in the halls of Congress. Some say the nation is facing an apocalyptic capacity crunch due to the proliferation of mobile devices, while others insist those fears are overblown. The chaos has opened the door for profiteering by TV station owners who suddenly find themselves sitting on valuable real estate.

There’s a buying spree going on in the upper reaches of the TV dial, the largely forgotten universe of UHF stations made up of many mom-and-pop owners who long ago gave up ambition in favor of a mix of home-shopping and reruns like Matlock.

KTLN channel 47, which runs religious programming from a business park in San Rafael, Calif., sold for $8 million in 2011. In Boston, WMFP channel 18 (the call-letters stand for “We’re Media for the People”) sold in late 2010, along with another San Francisco UHF station, for a reported $20 million.

(From the pages of the March 26 issue of Variety.)

The transactions have one thing in common: The stations are being scooped up by private equity and investment firms that are widely believed to have designs not on their assets but their airspace. They are speculators in spectrum — the slice of the nation’s airwaves allocated by the federal government to individual broadcast entities in order to avoid massive signal interference for TV and radio stations, as well as emergency communications services.

 

The sales bounty is coming as the government embarks on an ambitious but untested plan to entice flailing stations to call it quits, put their spectrum up for auction and share in the proceeds from the sale to wireless firms; stations also have the option to share spectrum or move to another part of the band. Congress cleared the outline of the plan last year. An enticement is the potential for an auction to raise as much as $20 billion, with proceeds used to pay for a new wireless public safety network and for deficit reduction. That’s a politically fireproof way to raise revenue without raising taxes.

The impetus for the auctions comes in part from the fear that the U.S. is on the verge of maxing out its broadband capabilities — or the apocalyptic horror that one day our smartphones and iPads will go dark. Outgoing FCC chairman Julius Genachowski has been warning of a “looming spectrum crisis” ever since he took the job in 2009.

The incentive auctions are so complicated in design that the FCC has enlisted Nobel Prize winners to help create the models. But the complexity seems to have only added to a Washington scramble to influence how the plan is ultimately carried out, with wireless firms and many telecom companies anxious to see a quick transfer of spectrum, while broadcasters take umbrage at what they see as a land-grab that will benefit their media and entertainment competitors, being engineered by the federal government. The plan may very well jumble the channel lineup in many markets. It also marks a symbolic shift from mass communication to one-to-one digital.

“The FCC is saying, ‘We like your service. There is something novel about broadcast services with local programming that are serving a critical public interest. But people are getting your product in alternative ways, and that trend is not reversing,’ ” asserts Rick Joyce, a veteran D.C.-based communications attorney with Venable.

Joyce says the FCC is trying to get ahead of future needs. “Rather than wait for all the water to run out of the tub, (the FCC is) saying, ‘Let’s see if we can do ome thing now. … Let’s be honest about an exit strategy for some folks who have been in this industry for a while.’ ”

The fight over spectrum auctions has been heating up for the past few years, pitting the lobbying orgs of Big Media against Big Telecom in the halls of Congress. Of course, it has also opened doors for savvy entrepreneurs who find opportunities amid the upheaval. Station owners have the choice in some cases of selling off all of their spectrum allotment — which means shutting down a station entirely and selling off their airspace — or of sharing spectrum with another station. Broadcasters are worried that giving up hunks of their spectrum will hamper efforts to develop their own next-generation offerings such as mobile services and signal streaming. NAB president Gordon Smith once even called the idea a “spectrum grab.”

Says Rick Kaplan, a former chief of the FCC’s wireless bureau who is now exec VP of strategic planning for the National Assn. of Broadcasters: “We want this to be over; I think there is no win for the broadcast industry in this auction. At the same time, we know if this gets rushed, the first under the bus are the broadcasters. We want a balanced process.”

The sale of certain stations aside, broadcasters really don’t like the FCC effort and its implication that they are on the backside of old vs. new. Sure, there are stations that have suddenly seen their values escalate, like a dilapidated home in a gentrifying neighborhood, but many of those who choose to stay in the game will be forced to move. This “repacking” is needed for the FCC’s plan to work, as the UHF spectrum is much more prized for the wireless business than the lower-rung VHF channels. That may very well mean that a UHF channel from 32 to 51 will be impacted in some way, although the FCC has not finalized how it plans to configure the spectrum and which channels will have to be cleared and which stations face moving elsewhere. It’s a process that is not as simple as changing a logo; in some cases, stations would need to physically remove antennas and place them elsewhere. The FCC is still devising an auction plan, but the complexity comes from divergent demand for wireless spectrum in different markets, and disparate supply on the channel lineup based on which stations want to sell and which do not.

There’s a host of other concerns that the broadcast lobby and station groups have been vocal about, flooding the FCC with comments. They range from fears that stations along the borders of Canada and Mexico will not have the same reach, to worries that a $1.75 billion fund that Congress set up for relocation costs won’t suffice, to warnings that the “repacking” will diminish a signal or even result in interference. Even as the FCC and Congress are adamant that participation in the auction is voluntary, stations also dangle the prospect of the steps the feds might take if not enough stations agree to sell.

“It is not preordained by any means that this is going to be a roaring success,” Joyce says. The NAB’s Kaplan, in fact, believes that the marketplace is solving the problem, pointing to a spate of recent mergers and acquisitions among telecom players and others that give them access to caches of spectrum.

Underlying all of the wrangling over spectrum is the prospect of a shift in the balance of power among media lobbies. The NAB is one of Washington’s largest trade groups, but the tech sector’s growth is putting it in ever greater positions of influence, making a convincing case for Congress last year to approve the auction plan, even as so much other legislation was stuck in gridlock. According to the Center for Responsive Politics, the NAB spent $14.5 million on lobbying in 2012, compared with $12.4 million spent by the Cellular Telecom and Internet Assn. The issue of spectrum was undoubtedly a big part of that spending.

Going through the extensive files of comments to the FCC, it seems that everyone has an opinion on how to re-slice the spectrum pie. Performers, represented by SAG-AFTRA, argued for the continued dedication of two channels in major markets for the use of wireless microphones; Google, on the other hand, is seemingly in conflict, asking that such channels be unlicensed, and therefore available for such services as Wi-Fi. A side issue is over the size of “guard bands,” the spectrum allocated to prevent interference between the station spectrum and the new space for wireless services. Genachowski is big on the idea of finding more airwaves that can be dedicated to Wi-Fi, the unlicensed parts of the spectrum that are used for all sorts of devices. But dedicating too much to guard bands, some orgs argue, will be a giveaway that can otherwise be auctioned off.

At the center of all of this is Genachowski, who from the start has made broadband, and wireless in particular, his top agenda item — which naturally put him at odds with broadcasters and certain other “old” media lobbies.

Genachowski recently announced plans to step down, but is leaving little doubt as to his legacy. Throughout his tenure, he has tirelessly promoted the idea of wireless as a centerpiece of the country’s communications future. This was apparent in one of his initial moves, to create a National Broadband Plan.

Released in 2010, the plan envisioned a connected future, but also a spectrum crunch, a sense of urgency in finding space if the country is to stay competitive and meet the demand for mobile. The plan called for reallocating some 120 MHz of broadcast spectrum space, and proposed the idea of incentive auctions, rooted in market forces. The framework almost immediately met with skepticism from broadcasters. After howls from the NAB and others, that plan was never pursued.

What gained traction in Congress was the idea that proceeds from the auction would be used to create a broadband public safety network, unprecedented in scope. But the broadcast lobby, as if to show its relevance as well as its efficiency, frequently reminds journalists of the role of stations in covering and alerting the public of natural disasters. NAB noted that during Hurricane Sandy, some mobile networks went dark, but broadcasters were uninterrupted.

Genachowski says the FCC’s role is to ensure the infrastructure to support a new economy. “There was a time when people thought that spectrum wasn’t scarce, and we would have all we ever need,” he said at a recent congressional hearing. “Now we know that the opposite is the case, and we have some real challenges.”

The plan is to proceed with the auctions next year, even as broadcasters warn that the timetable is too ambitious.

But many are betting that the auctions will happen, which is why investors like computer mogul Michael Dell are believed to be taking a sudden interest in stations. He backs a group called OTA Broadcasting that has been snatching up channels.

LocusPoint Networks, backed by telecom pros, also is seeking stations, broker Patrick says, and recently put in a bid for a San Mateo, Calif., public TV station. Preston Padden, former chief lobbyist for Disney-ABC and News Corp., is leading a coalition of owners interested in selling — dubbed “the coalition of the willing” — but he declines to identify who they are, except to say they have more than 40 stations in major markets.

“The goal, ultimately, is to surrender (the station) for a lot more than you paid for it,” Patrick says, adding there’s hope of selling for two or three times the purchase price. For some stations, the offer for money right now is too attractive to pass up.

Others are willing to cash in later. Patrick mentions a station (which he won’t identify) in one of the top three markets that doesn’t even get a half million dollars in revenue, which is “turning down offers of 50 to 60 million. … They want to play the auction. They know what it is worth.” The owners believe they can get well over $100 million, he adds.

“It is like a gold fever and it is like a huge rush, and it will probably end later this year,” he says.

No one is exactly sure how many stations will choose to go dark, but many predict that few if any will be major network affiliates. Moreover, the demand for the airwaves is not monolithic: A station giving up spectrum in a rural area is not as prized as one in a major market, where the growth in wireless demand is much greater.

Given the political will on both sides of the aisle to implement big changes in regards to spectrum, there’s little doubt such changes are on the horizon for the TV dial as more consumers embrace broadband options.

“The broader concept here is that without this, consumers are making decisions on their own to get their broadcast product through alternative means rather than through over-the air,” Joyce says. “There is a march of technology that is hard to ignore.”

Spectrum Crisis: Real or exaggerated?

Depending on who you ask, there’s either a looming spectrum shortage or more than enough airspace to meet the demand

Sounding the Alarm

› FCC chief Julius
Genachowski
› Wireless trade
org CTIA
Cisco Systems

Skeptics
› National Assn.
of Broadcasters
› Microsoft Spectrum
Observatory

Studying the Issue
› Rutgers U.
› MIT
› Virginia Tech

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