'Due Diligence' Urged in FM Auction

Nearly 300 Construction Permits Up for Grabs in Bidding War
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Nearly 300 Construction Permits Up for Grabs in Bidding War

Nearly 300 Construction Permits Up for Grabs in Bidding War

WASHINGTON This has been more than three years in the making, amid court challenges and appeals; but now it actually looks likes it will happen: Construction permits for 290 vacant FM commercial channels are slated to go on the FCC auction block on Nov. 3.

The commission and broadcast engineers contacted for this story are urging potential bidders to use "due diligence" in their transactions, in what they say will mark a big step in fundamentally altering and accelerating the procedure by which broadcasters had typically attained spectrum since FM's inception several decades ago.

Auction No. 37, as it is known, will entail CPs in mostly small and rural markets in more than 40 states, in communities such as Bethel, Alaska, and Thayne, Wyo. The November date marks the third instance that a specific timeframe has been announced for the auction.

For the most part, new FM allocations have been frozen since 1997, when Congress passed the Balanced Budget Act. A year earlier, the D.C. Circuit Court had invalidated the FCC's main method for deciding licensing cases - primarily through comparative hearings - in Bechtel v. FCC.

(click thumbnail)This map, prepared by Mullaney Engineering Inc., shows the FCC predictions of 60 dB contours, using normal terrain averages for each of the 290 sites.
Another dispute arose in 2000 when National Public Radio took the FCC to court over bidding procedures envisioned by the commission between commercial and non-commercial parties. In 2001, a federal appeals court ruled in NPR's favor, thus delaying matters once more.

The original date for Auction No. 37 had been May 2001; later it was postponed to December 2001. So it will be three-and-a-half years from the original auction date to this November's event.

"I'm looking forward to seeing the results," said Dr. Mark Fratrik, vice president at BIA Financial Network. He said the FM auction's concentration of small markets is in line with current trends in FM activities.

"We're seeing increasing sales going on quite a lot in the smaller and unrated markets because there's simply not a lot of favorable, available properties in the larger markets. Those have all pretty much been purchased by the big groups and the properties are already part of clusters."

The FCC's Wireless Bureau will conduct the auction. Although its final take in no way will compare to the billions of dollars raised by many of the FCC's wireless auctions for telecommunications spectrum, minimum opening bids for all 290 CPs total nearly $11 million, according to the FCC's Web site. Opening bids range from $1,500 to $200,000, with the average at under $40,000.

A typical minimum bid is about 5 percent of the projected value of a given channel, according to James Bradshaw, deputy chief of the FCC Media Bureau's Audio Division.

Those statistics suggest a possible auction total intake of $240 million. But the actual amount could vary widely. There are no previous broadcast auction statistics with so many allotments to use as a benchmark.

New FM allotments often result from rulemaking petitions, and in the case of Auction No. 37, many proposed CPs have simply piled up after years of court proceedings and other delays. Also, some allotments are being reclaimed - i.e., where previous parties received CPs but never built facilities for various reasons, including license revocations or death - according to commission staffers.

The FCC is introducing a New Entrant Bidding Credit (Public Notice DA 01-119) that attempts to help level the playing field in the bidding process. It includes a 35 percent credit to winning bidders who have "no attributable interest" in other mass media; a 25 percent credit goes to winning bidders who demonstrate attributable interest in no more than three mass media facilities.

No potential bidders contacted would comment on their auction plans, if any, prior to the bidding itself. Omar Thompson, vice president of marketing and communications at Clear Channel Radio, said, "We are evaluating licenses that are available."

One government official familiar with the bidding procedure, speaking on the condition of anonymity, told Radio World he has heard that one or more parties may place minimum bids on all 290 CPs on the table - which would indicate a minimum $11 million commitment - in order to stay in play as the bidding progresses around the country starting Nov. 3.

Yet Fratrik does not foresee big buyers, in the end, gobbling up all the allotments in sight.

"We get a little too carried away about the so-called 'deep pockets.' These companies are in business to make money. If it doesn't make financial sense to them, why bid? I actually think there's a lot of potential where smaller groups, or an individual station, could look around and decide to pick up another FM to enhance its presence in an area, for example. They won't have to be huge to do that."


Jack Mullaney, president of consulting engineering group Mullaney Engineering Inc., believes it is critical that bidders use legal and technical advisors to evaluate each of the FM allotments.

Mullaney pointed out that the commission's auction notices include the phrase "due diligence," which places the sole responsibility on the bidder for investigating and evaluating all factors that may have a bearing on the value of the facility. Mullaney agrees with the agency's caution that obtaining a CP in no way guarantees future financial success for the winning bidder

An FCC spokeswoman said all FCC activities of a similar nature carry a "due diligence" disclaimer.

Mullaney said the notices fail to disclose important information properly "to the unsuspecting public."

"According to the FCC's database, about three dozen allotments being auctioned off are currently being evaluated in ongoing rulemaking proceedings which may, if adopted, change the channel or class, totally delete the channel, or move the channel to another community," Mullaney said.

The Audio Division's Bradshaw responded that the 2004 allocation list is as up to date as possible. He said any FM allotment could be subject to some change of one kind or another in the future.

"The fact is, this is a very dynamic industry. Because something that might be put in play should then be taken out of the auction would mean we would never see any auctions at all.

"Fifty-plus allotments have been removed from the (original 2001) list and several other allotments have been modified to specify new channels, communities, coordinates, and so on, as a result of various rulemaking proceedings that have been adopted since 2001," said Bradshaw.

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While non-commercial broadcasters were able to reserve frequencies in the 88-92 MHz portion of the band, dozens of such interests could wind up competing with commercial parties in the unreserved band of 92-108 MHz.

Robin Miller, acquisitions director at Public Radio Capital, said the auction could not come at a better time for public stations. "The demand for public radio services is growing significantly and its audience has actually doubled in the past decade."

The fact that most of the 290 CPs up for auction eventually will serve small and rural communities, Miller said, also represents a good fit for pubcasters "because these are the same communities that often lack access to in-depth news or serious music formats and are typically underserved by broadcast media. Because the minimum opening bids are more affordable than they would otherwise be for frequencies in larger markets, this is another benefit for public radio interests," Miller said.

NAB Senior Vice President General Counsel Jack Goodman said Auction No. 37 would signal a new way of life for radio broadcasters.

"This is how contested licenses will be awarded. This is kind of a catch-up auction because of all the delays involved with it, coming after this long freeze, and now I think now we'll see (auctions) periodically for broadcasters."

Goodman said one of the immediate benefits of spectrum auctions is its speed: "It's fast. Rather than having contested comparative proceedings that could easily stretch out to a decade, with an auction you put your bid in, wait to see if you win, and you can start building quickly."

The Auction No. 37 process begins this summer with short forms and initial paper work, which must be on file with the commission no later than Aug. 6 (FCC Form 175). Goodman expects the fall auction - technically, the FCC calls it an "electronic simultaneous multiple round auction" - to continue for perhaps two to three weeks beyond its Nov. 3 start date for bids.

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