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FCC to Close Incentive Auction, Benchmark Meets at Stage 4

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The U.S. telecom regulator, Federal Communications Commission’s (FCC) ongoing 600 MHz low-band wireless spectrum auction, popularly known as Incentive Auction, finally cleared all criteria at the Stage 4 of the forward bidding process.

The Incentive Auction, which commenced 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 that 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 second part (forward auction) 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 should reach $15.9 billion for the spectrum auction to continue.

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 - Free Report) , AT&T Inc. (T - Free Report) and T-Mobile US Inc. (TMUS - Free Report) , satellite TV operator DISH Network Corp. (DISH - Free Report) and cable MSOs (multi service operators) Comcast Corp. (CMCSA - Free Report) . 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.

In stage 2, 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. Nonetheless, stage 2 of the Incentive Auction came to an abrupt end after a single round of bidding generated only $21.5 billion.

In Dec 2016, the FCC commenced stage 3 of the auction process. The regulatory body had set a target price of $40.3 billion for 108 MHz of broadcasters’ spectrum that would free up 80 MHz for wireless use. Surprisingly, stage 3 also ended just after one round of bidding with a total bid size of just $19.7 billion, far below the FCC’s target clearing price.

Recently, the FCC has initiated the stage 4 of the auction with a target price of a little more than $10 billion for 84 MHz of broadcasters’ spectrum. This was in sharp contrast to the FCC’s initial expectation of collecting at least $60 billion from Incentive Auction. The auction finally generated $18.2 billion as total bid. With this, the FCC will complete the whole Incentive Auction process after declaring the name of the spectrum winners.

The much hyped incentive Auction has turned out to be a massive disappointment to the FCC. In Jan 2016, the FCC Chairman Tom Wheeler had asserted that Incentive Auction will be the “world's largest spectrum auction that has ever taken place.” However, the optimism finally has become a distant dream. Notably, the regulator had collected a substantial amount of nearly $44.9 billion from the AWS-3 spectrum auction that was concluded in Jan 2015.

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.

Further, wireless operators are of the opinion that high-band spectrums can also boost capacity. The U.S. wireless industry is currently suffering from cut-throat pricing competition. Two large national carriers, namely, Verizon and AT&T are facing significant competitive threat from low-cost pricing plan of T-Mobile US and Sprint Corp. (S - Free Report) .

In addition, leading cable MSOs, Comcast and Charter Communications Inc. (CHTR - Free Report) are likely to enter the field in 2017. Consequently, it will be easier for incumbent operators to merge with a suitable company to enhance spectrum portfolio rather than spending huge sum on new spectrum buying.

However, during the previous Obama regime, the FCC was very strict regarding consolidation in the wireless industry. Nevertheless, general consensus so far is that the new Trump administration may be more liberal about merger and acquisition proposals in the U.S. wireless market. Thus, the incumbent wireless operators may not be interested to spend huge sums of money on FCC conducted Incentive Auction.

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