Are we really surprised?

Stage 3 of the FCC’s forward auction closed after a single round on Monday, propelling the proceedings toward an expected Stage 4 reverse auction start date next week.

According to the FCC’s Incentive Auction Dashboard, Stage 3 forward auction proceeds totaled just $19.7 billion against a clearing cost of $40.3 billion. BTIG's Walter Piecyk noted the figure represented an 8.6 percent drop from the Stage 2 proceed total.

“The relatively quick completion of the third stage of the forward auction comes as no surprise given pre-auction indications from potential purchasers and the current state of the mobile industry in the United States,” Dan Hays of PwC Strategy& Principal said. “Despite strong commitments to date from buyers in the forward auction, top-line proceeds may struggle to make it north of $20 billion as operators' capital spending priorities have seemingly shifted away from spectrum at this time."

The proceedings will now move on to a Stage 4 reverse auction, with an expected (but not yet confirmed) clearing target of 84 MHz, down from 108 MHz in Stage 3. Analysts, including Hays, said they expect the drop to come with a corresponding dip in the clearing cost. But while just how much of a dip there will be is anyone’s guess, it won’t be determined by broadcasters.

As explained earlier on Monday by FCC Incentive Auction Task Force Senior Advisor Charles Meisch, the clearing cost is determined by two “separate but related” factors: the number of station licenses the Commission needs to buy and the price the Commission needs to pay to purchase those stations. Each time the spectrum clearing target drops, Meisch explained, the Commission needs to buy fewer licenses because it gains more UHF channel space in the TV band in which to repack stations as they drop out of bidding. And the smaller the number of licenses the FCC is required to buy, the lower the Commission can drive prices paid to an individual reverse auction bidders.

More on how those two factors function can be found here. But the important thing to note is that twice as many UHF channels will become available between Stages 3 and 4 as were freed up between Stages 1 and 2, when there was a 37 percent drop in the clearing cost.

In his Monday afternoon note, Piecyk speculated this could result in a price drop that brings the clearing price down below $25 billion.

"We think it is therefore reasonable to expect the Stage 4 reverse auction bids to surpass the 37 percent drop experienced in Stage 2, resulting in less than $25 billion of provisional winning bids and an auction bogey of ~$26 billion or lower when factoring in clearing costs and fees," Piecyk wrote. "If the Stage 4 reverse auction bogey drops to $26 billion, it would be within reach of forward bidders to end the auction. Bids would simply have to rise $2.1 billion (11 percent) to trigger the extended round and $6.5 billion (33 percent) to end the auction. If that is still too high, it would be on to Stage 5, which we estimate could deliver a $20 billion auction bogey. In that scenario, the amount of spectrum sourced to wireless operators would only be 60 MHz, and the auction would still have a shot at a Q1 close."

The FCC said it is planning to release a public notice containing details about the Stage 4 proceedings on Friday, and said it expects bidding in the reverse auction to begin on Tuesday, Dec. 13.

Piecyk forecasted a Stage 4 forward auction could close by the end of January, with a potential Stage 5 forward auction wrapping up by mid-March.