Guest Blogger Stephan Sloan: Tournament Television

The Incentive Auction is looking more like a tournament than an auction to me.

In the early stages of the Incentive Auction the perception of winning this tournament, that is receiving more value for your television license than it was otherwise worth, was probable for many stations. Licensees who were allowed to participate piled in to the contest and expected a victory. This behavior can be seen as the success of the opening bid prices and the distribution accomplished by the FCC and the Greenhill Report.

Like in tournaments, participants’ assessment of victory evolves as time elapses. The huge spread between the Stage 1 Clearing Target and Net Auction Proceeds was a strong indication to competitors that multiple stage progressions would be likely to close that gap. Many models pointed towards Stage 4 as the first opportunity for validation.

For a participant, anticipation of a Stage 4 result yields a radically different expectation of winning both in terms of probability and magnitude. It can be modeled that 270+ fewer stations are frozen by Stage 4 and the amounts paid to the winning licensees is reduced by more than 70%. The tournament by Stage 4 is a different contest. Without confidence, the Incentive Auction of Stage 4 does not create hope for winning but raises the question what does loosing look like?

I believe that as the stages have progressed many television station owners have turned away from further assessment of their reserve price (a metric for winning) and have focused instead on post Incentive Auction plans. To illustrate this point, Stage 1 results promised each of two or more duopoly owners in a market a winning scenario of each of them freezing one station in the auction and receiving a generous sum of money, participation in the tournament is rational. After the auction, each of the duopoly owners could be winners and the competitive landscape in the market would remain as each duopoly would likely now be represented by a single station (and a large bag of cash).

Stage 4 likely presents asymmetric results where all of the stations offered by the duopoly operators would not be needed. Outcomes include some duopolies remaining intact while another may freeze a station. Is a definition of winning being the only duopoly to freeze and facing post Incentive Auction competition with half the bandwidth of the competition (and a smaller bag of cash)? Pricing this scenario is complicated as well where reserve prices become relative to the competition rather than a function of enterprise value.

How do you like the tournament so far?

Stephan Sloan
Director, Media Services Group
401.454.3130
ss@mediaservicesgroup.com

Guest Blogger Stephan Sloan: The Big Big Number

I tipped my hand with my LinkedIn post on June 1st "The $40 Billion Blink" as to what sort of capital I thought would be required to clear 126 MHz in the Reverse Auction.

George Box famously observed that all models are wrong but some are useful. In this spirit I accept that my models are wrong but none the less support and illustrate reality. Though many of the industry professionals I respect have opined at much lower Reverse Auction clearing costs, I expect $58 Billion or greater. The histogram below presents the data from 99 iterations modeling the Reverse Auction.

What this data means is that I can construct models that indicate a high probability that the clearing cost is more than $58 Billion and costs exceeding $60 Billion are a significant possibility. This represents a range of approximately $1.72 to $1.93 /MHz/Pop. If you accept the idea that the first round of the auction evidenced stations freezing based upon the requirement to meet the maximum possible clearing target, then we were bound from the moment the clearing target was announced, to end up here.

$58 Billion also has an additional significance to those of you following my LinkedIn postings. I’ve enjoyed very much the opportunity to post these thoughts and your responses. For my contacts who would like to take me up on it, I will wager a steak dinner– at the restaurant of your choosing- that the clearing cost will exceed $58 Billion. $57,999,999,999.99 or lower and it’s on me, just memorialize your interest in an email, tweet, LinkedIn Message or other dated communication before the FCC releases the data. I think a good reference should be the Incentive Auction dashboard.

I’ve been focused on this level of clearing cost since 126 MHZ was announced on April 29th. I look forward to discussing how this value is validated in the Forward Auction.

Stephan Sloan
Director, Media Services Group
401.454.3130
ss@mediaservicesgroup.com