The Broadcast Incentive Auction: An Overview of the Process

Deadlines, opening bids, other procedures are now set.

The FCC's preparations for the long-in-the-works Broadcast Incentive Auction have taken the final turn and are now barreling down the stretch. With a 300+ page Public Notice (including two appendices and an attachment) setting out the auction procedures and other important details, the Commission has filled in many of the blanks relative to when and how the elaborate auction process will work. Perhaps of more interest to many, in a separate notice it has also disclosed the opening prices which it will offer to all full-power and Class A TV stations eligible for the auction. Here are links to:

the Public Notice;

two appendices released separately (only one of which is directly relevant to the reverse component of the auction - it lists baseline coverage (areas/pops) for DTV stations; the other appendix lists information relevant primarily to the forward auction - but note that this post is limited to matters relating to the reverse auction); and

a public notice accompanying a separate listing of the reverse auction opening bids for all eligible TV (full-power and Class A) stations. In addition, here's a link to a separate, possibly more useful, version of that list, set up in spreadsheet form prepared by our friends at Cavell, Mertz & Associates. (Their version is fully searchable and includes links to a database providing specifics about each station's facilities.)

The auction is technically set to begin in late March, 2016, BUT these latest releases make clear that broadcasters considering participation in the reverse auction must begin to plan NOW, as the filing Form 177 - that's the application to participate in the reverse auction - must be filed no later than 6:00 p.m. (ET) on December 18, 2015.

The materials linked above are chock-a-block full of detailed information. We recommend that anyone considering participation in the reverse auction review them all carefully. For now, here are just a few of the highlights:

• The ticket into the auction is FCC Form 177. The window for filing these forms will run from 12 Noon (ET) on December 1, 2015 through (as noted above) 6:00 p.m. (ET) on December 18. The form requires disclosure of: the licensee's name; the owners of 10% or more of the licensee; the names of up to three people authorized to bid on the licensee's behalf; and certification that the licensee understands and will comply with the auction rules. The applicant must also identify all of the bidding options (see below) it wishes to be considered for once the reverse auction starts, and channel sharing agreements (CSAs) (or intent to enter into a CSA) must be disclosed. Class A TV licensees are also required to certify continued compliance with the statutory eligibility requirements for Class A status. Noncommercial educational stations must also indicate whether they operate on a reserved or non-reserved channel. NOTE: A licensee holding licenses for multiple eligible stations may include all of its stations in a single application.
• The bidding options available to eligible licensees are: (1) go off-air (an option available to all stations); or (2) move to a Low-VHF channel (available to UHF or High-VHF stations); or (3) move to a High-VHF channel (available only to UHF stations). An applicant will not be obligated to bid for all of the options selected in its December Form 177 filing once the auction cranks up, BUT buy-out options not listed on the December filing will be off the table.
• Applicants will have until 6 p.m. (ET) on March 29, 2016 to make their final commitment relative to which option they will take in the first round. This deadline is crucial. In the Commission's words, this commitment "will constitute an irrevocable offer by the applicant to relinquish the relevant spectrum usage rights in exchange for the opening price offer for that bid option." (We added the emphasis on "irrevocable" there because it deserves your attention.) In other words, as of the March 29 deadline, broadcasters participating in the auction MUST designate the option that they will take in the first round. If the broadcasters elects to go off the air at the opening bid price, that will be its initial bid; the bid can change in subsequent rounds based on the different options the broadcaster elected on the initial form, but the first round will be limited to only one bid option.
• Where a CSA has already been reached, it must be submitted along with the Form 177, in full and with no redactions. Any applicant intending to enter into such agreements after the auction must do so before the date it is required to relinquish its license. Parties entering into CSAs are also required to certify that, among other things, the resulting arrangement will comply with multiple ownership rules, will not result in a change to the Designated Market Area, and will satisfy community of license coverage requirements.
• After the initial Form 177 filing deadline, only minor amendments will be permitted. In this context, "minor" changes include things like deletion or addition of authorized bidders, revision of addresses and telephone numbers of the applicant, its responsible party, and its contact person. Such amendments to update information in the application must be made promptly (i.e., within five days) after the applicants learns of the need to file the amendment.
• "Major" amendments will not be permitted after the Form 177 deadline. Such verboten amendments include: adding or removing a license identified for relinquishment; changing the relinquishment option for a particular license; certain changes in ownership that would constitute an assignment or transfer of control of the applicant; changing any of the required certifications or the certifying official; adding a new CSA or changing a party to a CSA; or a change in the applicant's legal classification that results in a change in control.
• The FCC is waiving its "Red Light Rule", meaning that applicants indebted to the FCC will be allowed to participate in the auction. The hitch: an applicant already subject to a "Red Light" restriction must acknowledge its obligation to pay past and future debts along with accrued interest, penalties, and costs, and must further agree to permit the FCC to deduct such amounts from their share of auction proceeds.
• After the December 18 Form 177 deadline comes and goes, FCC staff will send a confidential letter to the contact person listed on each applicant's Form 177. The letter will identify - with respect to each station included in the application - whether the application (1) is complete, (2) has been rejected, or (3) is incomplete or deficient because of minor defects that may be corrected. The letter will include the deadline for resubmitting corrected applications; applications not corrected by that deadline will be dismissed with no opportunity for resubmission. The FCC's letter will also inform the applicant of any potential FCC liabilities with respect to a particular station that cannot be resolved before the reverse auction.
• Once all the final option commitments are filed (no later than March 29, 2016), the Commission will run all the information through its computers and calculate what its "initial clearing target" is going to be. The "clearing target" is the amount of TV spectrum to be freed up through the reverse auction. The clearing target will determine which broadcasters' commitments will be accepted and which won't. In other words, it's at least possible that some, perhaps many, broadcasters will be advised that they will not be able to participate further in the auction process. (That could occur if, for example: (1) a broadcaster's commitment option could not be accommodated as a result of the clearing target, or (2) the FCC determines that a particular TV station's spectrum isn't needed to meet the clearing target.)
• Of course, the Commission expects that all applicants will perform due diligence research and analysis before applying to participate in the auction.

Anyone contemplating participation in the reverse auction should be especially aware that the opening bids listed by the Commission are just that, opening bids. Many observers anticipate that the bids will shrink, perhaps dramatically (i.e., by half, or even more), before the bidding ends. While some stations on some channels in some markets may not encounter such shrinkage, they will likely be in a slim minority. In other words, would-be participants should be prepared to deal with eventual bids well below the tempting numbers dangled by the Commission to encourage participation.

One more note: The Commission will be conducting mock auctions to permit reverse auction participants to get an idea of what the process entails. Those auctions have not yet been scheduled. Applicants who qualify to participate in the reverse auction will be advised (by confidential letter) of the date of the mock auction to which they have been assigned once the FCC has established the initial clearing target has been announced. That announcement is expected to happen sometime in late April, 2016. Because the reverse auction process is going to be something outside of everybody's experience, we strongly recommend that anyone assigned to a mock auction take advantage of that opportunity. We cannot emphasize enough that the auction design is brand new and, as yet, untried by anybody. While the FCC has reportedly made extensive efforts to simplify the auction mechanics, whether or not those efforts have been successful remains to be seen. The best way - and, perhaps, the only way - to check that out will be to participate in the mock auction.

To re-state the obvious, we are highlighting only a small portion of the extensive content of the materials released by the Commission. Broadcasters interested in participating in the auction are advised to carefully review the Public Notice and accompanying documents to ensure sufficient preparation for the upcoming deadline.