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FCC to Initiate Stage 3 of the 600 MHz Spectrum Auction

Zacks Equity Research

The Federal Communications Commission (FCC) is likely to commence the stage 3 of the second part (forward auction) of the ongoing 600 MHz low-band wireless spectrum auction, popularly known as the Incentive Auction.

The Incentive Auction, which was initiated by the FCC on Mar 29, 2016, completed its first part in Jul 2016. In this part, which was essentially a reverse auction, the airwaves were freed by TV broadcasters who no longer had any productive use of the same. The TV broadcasters had agreed to free a substantial 126 MHz of spectrums for a massive $86.4 billion.

As per the Final Stage Rule of the FCC, the proceeds from the forward auction (net of bidding credits and impairment discounts) must be sufficient to cover Incentive Auction costs. These costs include the aggregate of broadcaster clearing costs, approximately $226 million to cover the FCC’s costs for conducting the auction and $1.75 billion for the TV Broadcaster Repacking Fund.  Accordingly, the forward phase of the Incentive Auction must generate $88.4 billion for the whole process to be successful.

Stage 1 of the Incentive Auction witnessed total bids worth $23 billion after the twenty-seventh round of bidding. Notably, the FCC’s first Final Stage Rule was that the minimum bid total should reach $15.9 billion for the spectrum auction to continue.

In stage 2 of the auction procedure, the FCC reduced the event clearing spectrum size to 114 MHz instead of 126 MHz decided previously. However, the FCC further reduced the option clearing spectrum size to 90 MHz for a clearing price of $54.6 billion later. Nonetheless, stage 2 of the Incentive Auction came to an unanticipated and abrupt end after a single round of bidding generated only $21.5 billion.

For the stage 3 of the auction process, the FCC has set a target price of $40.3 billion for 108 MHz of broadcasters’ spectrum that would free up 80 MHz for wireless use. Nevertheless, several industry watchers have opined that even the stage 3 may not be able to cross the auction clearing mark. Consequently, the FCC is likely to start stage 4 by the end of Dec. 2016 which will continue till early 2017. Notably, the freed spectrums cannot be utilized commercially before 2020.

Further, some industry watchers have predicted that telecom operators might need around 60 MHz to 70 MHz of spectrums in the 600 MHz bands for a clearing price of around $30 billion. Low-band spectrum is essential for wireless operators as the signals can be transmitted over longer distances and through brick-and-mortar walls in cities. However, several industry experts believe that telecom operators may be unwilling to shell out such a hefty sum for low-band airwaves.

The FCC has received as many as 62 applications for the second part of the Incentive Auction. All 62 bidders have made upfront payments. Important bidders include national telecom giants Verizon Communications Inc. VZ, AT&T Inc. T, and T-Mobile US Inc. TMUS, satellite TV operator DISH Network Corp. DISH and cable MSOs (multi service operators) Comcast Corp. CMCSA. Each of these stocks currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price Performance of Wireless Carriers Participating Incentive Auction

Year-to-date, the Zacks categorized U.S. wireless industry has registered an impressive growth of 14.56%. However, the stock prices of two relatively large telecom operators, namely, Verizon and AT&T have underperformed the industry mark. While AT&T has registered a growth of 12.21%, Verizon witnessed just 7.77% growth in the same time period. On the other hand, T-Mobile US surged 39.16% in the same time frame.

Price Performance of Cable TV Operators Participating Incentive Auction

Year-to-date, the Zacks-categorized U.S. cable TV market has also registered impressive growth of 14.54%. While Comcast outperformed the industry mark registering a growth of 21.89%, the DISH Network fumbled with a negative growth of 2.85% in the same time period. However, DISH Network has a strong portfolio of lucrative wireless spectrum which can be utilized to offer wireless service or can be monetized in future. We believe is this the primary reason that DISH Network is carrying a Zacks Rank #3 along with Comcast.

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AT&T INC (T): Free Stock Analysis Report
 
VERIZON COMM (VZ): Free Stock Analysis Report
 
DISH NETWORK CP (DISH): Free Stock Analysis Report
 
COMCAST CORP A (CMCSA): Free Stock Analysis Report
 
T-MOBILE US INC (TMUS): Free Stock Analysis Report
 
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