Incentive auction: do the financiers’ windfalls matter?

The March 2016 US incentive auction may be a US solution to a US problem, but it could still be very influential in the rest of the world. If it makes healthy profits, ministers will ask their civil servants “why aren’t we doing that?”

The law of unintended consequences applies to most policy initiatives, and the incentive auction is no exception, as PolicyTracker has been discussing in recent weeks. Some stations stand to make proportionally far more than others and furthermore, much of the profits will go to financiers.

Will this discourage other countries from holding their own incentive auctions? 

The mechanism has been popularly understood as a way of determining how much UHF is worth to TV stations, compared to other means of delivery. We imagine a broadcaster thinking, “OK, for $100 million I can quit terrestrial broadcasting, invest hugely in an online alternative, run an advertising campaign to promote it, spend some money on programming and still show a healthy profit.”

That argument works fine if the TV station is owned by a company dedicated to making money by broadcasting. But what if it is owned by a financier like Blackstone or Michael Dell’s MSD Capital, whose perfectly legitimate purpose is maximising returns on its investments? They would probably think “$100 million is a healthy return: let’s take the profits and sell the TV station brand to whoever is willing to make an offer.” In that case there is no re-investment in the TV industry. 

On the other hand, isn’t the involvement of the financial community entirely predictable and possibly quite welcome? If the government indicates that profits could be made on small TV licences, investors are bound to take an interest, as Michael Dell started doing four years ago.

Broadcasters who have already sold to investors must have got a reasonable deal or they would not have agreed. So they made some money for potential reinvestment in the TV industry, although Dell and his like will probably make more. 

But isn’t that the nature of the free market? Those with the deepest pockets can afford to take the biggest risks: some will come off and some won’t. We are assuming the incentive auction was a risk worth taking, but we won’t know for sure until March. Also, some of the stations bought out by the investors had gone bankrupt – so in those cases the investors are not muscling out legitimate broadcasters. 

So will the chance of investor profiteering discourage other countries from holding incentive auctions? That depends on the nature of their broadcasting market. Not many countries have lots of small terrestrial TV stations like the US: in other nations commercial ownership is typically limited to a handful of companies.  

These are large commercial broadcasters, typically too big to buy outright. Investment houses could buy a shareholding and influence behaviour but they couldn’t dictate, so an incentive auction is unlikely to destroy these companies’ “broadcasting ethos”.

But would any government want to have an incentive auction where the only possible sellers are one or two commercial broadcasters? They could name their prices! A traditional compensation-based refarming is more attractive. The incentive auction continues to look like a US solution to a US problem.