Buyers of struggling little TV stations could make big money in airwave auction

Reporting from Washington —  As TV broadcasters go, KSCI Channel 18 in Long Beach is a little fish in a big pond.

The independent station, which airs local shows in Chinese, Korean and Tagalog as well as other Asian-language programs, was in bankruptcy in 2012 when Texas-based NRJ TV bought it and two small stations for a reported $45 million.

But in the federal government’s upcoming auction of TV airwaves, KSCI’s slice of the nation’s second-largest market could be a precious catch — worth as much as $585 million to telecommunications companies, according to opening bids released by the Federal Communications Commission last fall.

On Tuesday, the FCC will take its latest step toward using multimillion-dollar payoffs to urge broadcasters to give up their airwaves, which in many cases would force them off the air.

The spectrum then would be auctioned to telecommunications companies to be used to deliver mobile broadband and Wi-Fi services for America’s fast-growing wireless appetite.

The biggest winners in the first-of-its-kind auction could be a handful of the nation’s newest — and most anonymous — station owners.

Companies such as NRJ TV, OTA Broadcasting and LocusPoint Networks have kept a low profile the last few years while snatching up dozens of small TV stations in Los Angeles, San Diego, San Francisco, New York, Chicago and other markets.

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The buyers, which include one involving computer magnate Michael Dell, are widely seen as speculators in on the 21st century frontier of wireless spectrum.

They have purchased sometimes-struggling TV stations on the cheap and are expected to try to sell the rights to their airwaves in the FCC auction that begins Tuesday.

As with KSCI, known as LA18, there’s potential for a huge windfall.

Seven companies have purchased a total of 68 TV stations over the last five years for a combined $445 million as of October, about two months before broadcasters had to apply to participate in the auction, said Robin Flynn, research director at media analyst SNL Kagan. The airwaves of those stations could be worth as much as $17.4 billion, she said.

But the unique nature of the one-time-only auction is almost certain to reduce that figure significantly.

Station owners can receive smaller paydays for agreeing to move to a less-desirable frequency instead of giving up their airwave rights completely. KSCI, for example, could receive up to $439 million to move its channel location.

Stations also could remain on the air by selling their spectrum and making a deal with another broadcaster to use some of theirs.

Still, some station owners could end up with no money at all from the auction if they hold out for too much.

“Speculators are coming in for a big profit,” said Harold Feld, senior vice president at digital rights group Public Knowledge. “It may not be the big payoff that a lot of people were hoping for, but from a speculator’s perspective, there’s not a hell of a lot of risk either. And who knows, it might pay off.”

Congress authorized the broadcast incentive auction in 2012 to free up more airwaves for mobile services for smartphones and other devices. Over-the-air viewership has declined sharply in recent decades with the advent of cable, satellite and the Internet — although there’s been an uptick lately from so-called cord-cutters.

Lawmakers also saw the auction as a way to raise billions of dollars to help reduce the federal budget deficit.

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The goal is simple: entice some broadcasters to give up their rights to use prime public airwaves in exchange for a cut of the proceeds from auctioning them off to telecommunications companies.

As more people access the Internet wirelessly, demand for airwaves has increased. An FCC spectrum auction that ended in early 2015 brought in a record $44.9 billion.

Broadcast airwaves are the highest quality, able to carry signals deep into buildings and over long distances. The Congressional Budget Office has estimated the auction could raise as much as $40 billion for the federal government after payments are made to broadcasters.

But the auction, which is expected to take several months to complete, is extremely complicated. That’s where the risk arises for speculators.

The FCC initiative, which has never been tried before, is two parallel auctions. FCC Chairman Tom Wheeler has described it as having “more moving parts than a Swiss watch.”

The FCC would purchase airwaves from broadcasters in a reverse auction. It involves rounds of slowly lowering bids so the FCC can purchase the spectrum for the least possible amount to maximize the government’s profit.

After each round, broadcasters must decide if they will go to the next round of lower prices. The FCC must decide at which point to stop lowering the prices and purchase the airwaves or risk not having enough spectrum — particularly in congested markets such as Los Angeles — to offer to wireless companies in the second part of the auction.

For that reason, the maximum value of the airwaves in the opening bid prices released by the FCC most likely significantly overstate the final price to be paid in all but a handful of markets. Those areas are the ones in which demand from wireless companies would be high or few TV stations are interested in selling.

Still, given the low prices paid in many cases by speculators for TV stations, most would be able to turn a profit, Flynn said.

A few of the station purchases were not very astute, she said. “But most were very well considered and in markets likely to be in demand, bought at attractive prices.”

The companies that have been making the purchases have not been explicit that they intend to sell them in the auction, but that is “the commonly held belief,” Flynn said.

Executives at the three largest purchasers, NRJ TV, OTA Broadcasting and LocusPoint Networks, either declined to comment, citing an FCC-imposed quiet period in place before the auction, or did not respond to a request for comment.

OTA Broadcasting, in Fairfax, Va., “was formed in early 2011 to own and operate independent television stations in large markets throughout the United States,” according to its website. It is owned by an affiliate of MSD Partners, an investment company owned by Dell, the billionaire founder of Dell Computers.

OTA has purchased 24 stations — the most of any speculator — for $80 million, according to SNL Kagan. Among the stations is KMIR in Palm Springs, purchased in 2013. Terms of the deal were not released, but the FCC’s opening bid for KMIR’s airwaves is $86 million.

NRJ TV, headed by investor Ted Bartley, has spent the most money: $254 million to acquire 16 stations, Flynn said.

When NRJ TV purchased KSCI in Long Beach, Bartley issued a statement saying, “Under NRJ TV’s new ownership, we are confident that the current management and staff can further strengthen the station’s services in the community and the Asian advertising industry.”

An NRJ TV executive declined to comment on its intentions for the station in the auction.

KSCI’s approximately 100 employees have been told the station is not going off the air, production director Trevor Roberts said.

In August, NRJ TV purchased KSKT Channel 36 in San Marcos in northern San Diego County for $9.8 million from Blue Skies Broadcasting. The FCC’s opening bid is $142 million for the airwaves of the station, which broadcasts local programming. Roberts said KSKT would be adding Asian programming soon as part of its ownership by NRJ TV.

Still, the purchase agreement says Blue Skies would receive 10% of any auction proceeds above the sale price. A similar provision was contained in the sales agreement for KXLK, an Austin, Texas, TV station that was purchased in June by Radio Spectrum Partners of Washington, D.C., Flynn said.

The company bought the station for $1.8 million. The opening auction bid is $168 million, according to the FCC.

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