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Analyst: broadcast incentive auction $ not a slam dunk [updated]

By Nfrastructure CC BY 2.0 via Wikimedia Commons

Standing before broadcasters last week, FCC chairman Wheeler pointed to the recently concluded financial windfall of the AWS-3 auction as a harbinger of another round of record prices in the upcoming broadcast incentive auction. A good reason for broadcasters to put up the for sale sign? He may have spoken too soon.

It’s easy to see the reason for the optimism. The AWS-3 auction surprised just about everyone, bringing in $41 billion. And, since the broadcast spectrum is “beachfront spectrum” and more valuable than the AWS spectrum because of its suitability for wireless phones, it isn’t out of line to think that the sky is practically the limit for the incentive broadcast auction.

But Craig Moffett, an analyst with MoffettNathanson said that this optimism could be very misplaced since it is premised on a belief that the wireless business is healthy enough to do this all again.

“The reality is the companies are not generating enough cash to be able to sustain the kinds of purchases that they made in the AWS-3 auction and to try to do it again,” said Moffett at the State of the Net Wireless Conference on Monday in Washington.

Moffett points to a change in the way wireless firms account for the cost of phones and the revenue they get from customers. The industry is moving away from subsidizing the price of the phone in the customers contract to a business model where more of their customers are buying the phone outright.

When that happens, how the dollars show up on the wireless company financial statements changes and the change makes the profit picture look better.

“In reality, we are looking at an industry that’s been going through a horrific price war, and its only the accounting that is papering over the pain,” said Moffett.

Moffett argues that the ability of the telecom companies to generate free cash flow is declining more markedly than it appears from their financial statements. If companies feel cash strapped and sit out the incentive auction, prices could suffer dramatically.

“Spectrum value is much more driven by the number of bidders in the auction,” said Moffett. “At any given time, one more bidder in the auction can double or triple spectrum values, one less bidder and suddenly values collapse. Without a potential dark horse bidder like we had with Dish in the last auction, we could end up with very, very different outcomes.”

Moffett’s analysis got a rise out of the Expanding Opportunities for Broadcasters Coalition representing about 80 would-be TV station sellers. An SNL Kagan study cited by the coalition estimated the broadcast incentive auction proceeds at $84 billion. In a statement, the coalition said the analyst community has been wrong before and will be wrong again.

“The same analyst community that badly underestimated the revenue potential of the AWS-3 auction is now badly underestimating the potential of the incentive auction,” said Preston Padden, the coalition’s executive director. “Contrary to negative comments, the report prepared for our coalition by SNL Kagan demonstrated that all four major carriers will have the incentive and the financial capacity to bid aggressively in early 2016. And, as chairman Wheeler stated last week, there is every reason to anticipate additional bidders.”