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Will FCC's 600 MHz Spectrum Auction be a Flop Show?

Zacks Equity Research

The ongoing 600 MHz low-band wireless spectrum auction, popularly known as – Incentive Auction – conducted by the U.S. telecom regulator, the Federal Communications Commission (FCC), has so far seen lukewarm response from bidders. 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.” At present, this optimism seems a distant dream.

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 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.

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 unanticipated and abrupt end after a single round of bidding generated only $21.5 billion.

Last Monday, 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.

Several industry watchers believe that the FCC is likely to start stage 4 by the end of Dec. 2016 and will continue it till early 2017. Notably, the freed spectrums cannot be utilized commercially before 2020. The FCC had collected a substantial amount of nearly $44.9 billion from the AWS-3 spectrum auction that was concluded in Jan 2015.

Further, some industry watchers predict that telecom operators might need around 60 MHz to 70 MHz of spectrums in 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 carries 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 16.51%. T-Mobile US surged 49.26% in the same time frame. AT&T also outperformed the benchmark index with a growth rate of 17.55%. However, Verizon lagged the index with a growth rate of 11.16%. Nevertheless, Verizon is gradually diversifying its business model into Internet TV, digital mobile platform and highly lucrative mobile advertising segments. We believe this is the primary reason that Verizon is currently carrying a Zacks Rank #3 along with AT&T and T-Mobile US.

Price Performance of Cable TV Operators Participating Incentive Auction

Year to date, the Zacks categorized U.S. Cable TV industry has also registered an impressive growth of 15.23%. While Comcast outperformed the industry mark registering a growth of 24.65%, the DISH Network generated a growth of a mere 2.55% in the same time period.

For full-year 2016, the Zacks Consensus Estimate for earnings currently indicates 20.20% and 6.96% growth, respectively, for DISH Network and Comcast. Similarly, for full-year 2016, the Zacks Consensus Estimate for revenues indicates 0.41% and 7.21% growth, respectively, for DISH Network and Comcast. We believe this is the primary reason that both DISH Network and Comcast currently carrying a Zacks Rank #3.

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