Digital Squatters Won't Budge From Spectrum
By Aaron
Pressman
Issue Date:
Jun 05 2000
Broadcasters demand payment for clearing coveted airwaves for
wireless apps.
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The federal government's lucrative spectrum auctions, which have
added some $23 billion to the U.S. Treasury, are facing possible derailment.
Postponed twice by the Federal Communications Commission and now scheduled for
September, the next auction is slated to sell off a huge chunk of prime 700-MHz
airwaves - perfect for high-speed Net service or broadband mobile-phone
applications.
The only problem: Those frequencies are already used by more than
100 television stations across the country. The stations in question don't have
to vacate the spectrum until their viewers migrate from receiving current
analog television signals to new digital TV broadcasts - a process that could
take more than a decade. And the stations want to be paid to move earlier.
It's a bit like the Oklahoma Land Rush, only squatters already
occupy the homesteads and won't move until some serious money changes hands.
Now there's hope that a little old-fashioned dealmaking might save
the day. Granite Broadcasting (GBTVK), based in New York, is spearheading
an effort to raise money for digital conversion while making some spectrum
immediately available for wireless data. The plan would compensate current
spectrum owners while setting a market price for clearing the airwaves.
At least that's the wish of FCC Chairman William Kennard, whose agency has no
authority to force a resolution. "There is a marriage waiting to happen
here between the incumbent broadcasters sitting on this very valuable spectrum
and companies that want to buy it and put it to good use, much of it for
wireless data," notes Kennard.
The process of stations converting to digital broadcasting and
returning their analog channels for FCC auction was outlined by Congress in a
series of rules adopted in the 1990s. Lawmakers sought to encourage TV stations
to go digital by giving every U.S. station in every market a second channel,
free of charge. In the early digital stages, when few viewers are capable of
watching high-definition digital programming, stations air shows on both an
analog and a digital channel.
The stations have to abandon their analog channels by 2006, but
only if at least 85 percent of the people in the market can watch digital TV.
And while every commercial station must offer at least some digital
broadcasting by 2002, many stations have no idea how to raise the millions of
dollars required for digital equipment.
Granite, which operates nine stations in the Northeast, hopes to
establish a national cooperative that would lease bands of spectrum to the
highest bidder well before TV stations turn over their analog signals. The
effort already has drawn interest from more than a dozen station owners, from
big players like ABC (ABCB) and Clear Channel to some single-station owners.
"I'm looking for an elegant structure, something like the
Diamond walnut cooperative," says Granite President Stuart Beck.
"We're going to be the Diamond of digital bits."
Each participant would agree to lend the cooperative spectrum not
in use. Using compression technology, digital broadcasters need only about
one-sixth of a 6-MHz TV channel to transmit an ordinary program.
High-definition shows use more bandwidth but will likely be aired only during
prime time. The cooperative would aggregate all the unused spectrum nationwide
and lease it to communications companies.
Backers of Granite's cooperative concept met with Kennard earlier
this month and the FCC chief came away hopeful. "It was encouraging to
me," says Kennard, "because represented in that room were a number of
the major networks and broadcasters and a number of the smaller
broadcasters."
Beck says his is the only viable solution. "Otherwise, this
is the greatest boondoggle anybody's ever created."
Granite's plan could put enough money in broadcasters' pockets to
help them pay for digital equipment and wean them away from analog TV. But it
does little to give potential bidders in the FCC's 700-MHz auction more
certainty about what they're getting for their money. Trying to calculate when
TV stations will clear the spectrum is giving major wireless operators - ATT (dossier), BellSouth (BLS) and Verizon, as well
as outsiders with wireless dreams, like Motorola (MOT) and PSINet (PSIX) - fits.
"This is prime beachfront stuff," says Howard Haug,
BellSouth's associate VP for strategic management. "The problem is there
are too many people on the beach right now. We need some kind of rational
clearance process that lets us calculate how much it will take and when
broadcasters will clear the spectrum."
What would it take to convince broadcasters to surrender the
airwaves to winning bidders? Money, and plenty of it.
"Are we willing to vacate?" Bud Paxson, chairman of Paxson
Communications (PAX), asks rhetorically. His answer is yes, if the price is right.
In the recent auction of airwave licenses for broadband wireless
communications in the U.K., the government raised over $35 billion. That works
out to more than $4 per potential subscriber per megahertz. "If that is
what they're paying," Paxson allows, "what we are willing to leave
the spectrum for is around $2.50 per subscriber per megahertz."
Those calculations would leave Paxson sitting on a gold mine, with
19 stations in the affected spectrum band. Wireless companies and regulators
are privately appalled by such costly demands, but in the end, they may have to
pay up.
Investment bankers are hitting the pavement to get a sense of what
it would take to clear major markets. In addition to Paxson Communications, Barry Diller's USA Networks (USAI), with 13 stations in
play, is considered a prime target. "We haven't been approached by anyone
with a specific deal," a USA Networks spokeswoman says. "But we'd
listen if anyone had a concrete idea."
An alternative plan comes from a group of economics professors at
the University of Maryland. Their firm, Spectrum Exchange Group, is offering to
oversee a scheme to move broadcasters off the desired airwaves through a
preauction, which would let TV stations set a price for vacating their analog
spectrum early and making a quick switch to digital. The wireless operator that
won the rights to that spectrum at the FCC's auction would also agree to pay
the TV stations their "clearing price," set at the preauction.
"This way, bidders can go to the FCC auction knowing very
clearly what spectrum will be cleared and at what price," says Peter
Cramton, Spectrum Exchange chairman and Maryland economics professor.
Spectrum Exchange's auction works in reverse. The bidding starts
at the highest price any of the stations in a market would charge to surrender
the analog spectrum. The price goes down until only enough stations remain that
are needed to clear the desired bandwidth. Since this Dutch-auction scheme
would drive the clearing price down to the lowest price needed to free up the
700-MHz range, broadcasters vehemently oppose it. Everyone who participated in
the auction would get some money for taking part, but only the
"winners" would get huge payoffs.
In Chicago, for example, four stations need to be moved, but
another five UHF stations have comparable broadcasting reach. If all nine
agreed to participate in the preauction, the price would likely be lower than if
only the four stations in the desired range were involved.
There's one other problem: Turning out the lights early on analog
broadcasts would leave viewers without cable in the dark. "You are
disenfranchising viewers if you turn off the analog signal early," says a
spokesman for the National Association of Broadcasters. "We don't think
that it is in the public interest to be depriving viewers of free over-the-air
TV during the transition to digital."
Whatever scheme prevails, broadcasters have no intention of giving
up spectrum without getting paid close to market value. The price of homesteads
on the digital frontier is still going up.
"The tech guys think they own it and we don't get it,"
says Granite's Beck. "But we know what we've got and we own it."
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