Thursday, January 12, 2017

Guest Blogger Stephan Sloan: One Round with the Champ

When the results of Stage 2 were published, I was considering the probability of validating the Incentive Auction if the Forward Auction continued to fail at advancing the Auction Proceeds. The chart above indicates the outcomes of some models I was considering. The outcome of Stage 3 validated these models and increased my interest in their Stage 4 prediction. Perhaps only in a federal US government adventure can a $4 Billion spread (implied in Stage 4 data above) appear as tantalizingly close.

Throughout the Incentive Auction process, I believe reserve prices have been a moving target. For many, calculation of reserve prices rose as the prospect of being frozen in the auction became more real and proximate in their minds. For the first two Stages the perception of the expense of winding down their business or porting it to another channel grew. The measured but significant increase in Stage 3 Reverse Auction competition may have added the concept of relative reserve price to the mix. Concerns of underestimating the expense of winning (freezing) gave way to assessment of the probability of winning.

Stage 4 surely has added to the strain of reserve price discipline for station owners with the model no-longer finding any support from scarcity of participation and seeking the exit of multiple participants in many markets. It is this strain that is causing me to discount the previously reliable model charted above and consider the possibility of starting the Stage 4 Forward Auction with the Final Stage Rule met.

Reserve price discipline may be the greatest test of the Reverse Auction. Without respect to the thoughtfulness or conviction with which one may arrive at a reserve price actually sticking to it is another matter. At the peak of his career, Mike Tyson was apprised by a reporter that his next opponent had a plan to defeat the champ. Tyson’s reply echoed Joe Louis’s answer to a similar question a generation before when he quipped, “Everybody’ has a plan until they get punched in the mouth.” For many station owners, whose experience in Stages 1-3 was one of delight with the outcome, the approximation and arrival at their anticipated reserve price over the past few days has no doubt been as unpleasant as a punch in the mouth.

There is genius too in the design of the Reverse Auction as bidders are provided a Vacancy Index which is quite good for the pinning of hopes if not otherwise useless for a single station owner. The transition to 1% decrements and the option to accept a “free” VHF station further the virtual suction down the rounds. These elements introduce quicksand on what looked like firm ground from round 10 of the Stage.

This sentiment is compelling me towards expecting an end of the auction at Stage 4.

Note: I made an incorrect statement about the Final Stage Rule in an earlier version of this post. I removed the mistake from this version and am working to understand a recent FCC post.

If a silver lining can be found for the decrease in station pricing to achieve validation at Stage 4 it is a less is more argument. Lower pricing in this Stage permits the model to include more stations (by not progressing to an additional Stage). I believe a progression from Stage 4 to 5 of the Reverse Auction represents nearly a fully reserve price supported model and accordingly further reductions in clearing costs are mostly accomplished by taking fewer stations and not decrementing the prices of the stations bidding. The chart below presents data for models estimating the number of stations frozen in the auction. The number indicates the average number of stations frozen in the models I chose and the size of the bubble represents the variance among the models.

We will very shortly know exactly how many stations are frozen and the aggregate value of those stations. As always, I look forward to your comments and the opportunity to discuss these observations.

Stephan Sloan
Director, Media Services Group