The FCC’s Auction 73 concluded last week having raised $19.6 billion for the Federal Treasury. While $19 billion is nothing to sneeze at, in the overall context of a Federal Budget measured in trillions of dollars (that’s 12-zeros versus 10-zeros), this isn’t going to be paying off the cost of the war in Iraq.If you look at the auction results strategically, we see that Google may be staking out a major spot in mobile unified communications.
The biggest buyers in the auction were the two major cellular carriers, Verizon and AT&T Wireless. With Verizon plopping down $9.36 billion and AT&T adding $6.6 billion they accounted for 83% of the total. T-Mobile sat this one out having spent heavily in the AWS auctions back in 2006, and Sprint doesn’t appear to have the money to build a WiMAX network in the 2.5 GHz BRS spectrum they already own.
The big winner may have been Google, and they didn’t win a single bid. With a mountain of cash and a stock price in the nosebleed range, Google has made no secret of their desire to expand in the fast growing mobile space. With barely have a toe in the wireless waters, Google has had had an impact that goes far beyond their direct participation. Google has been partnering with the cellular carriers (including Sprint) to incorporate their portal with mobile devices, and last year announced their plans for the Android development platform that would incorporate their search tools and location capabilities.
Google’s Move
In mid-2007, Google was key in lobbying the FCC regarding rules for the 22 MHz C Block spectrum. Based largely on Google’s urging (and an extended battle), the FCC modified the rules governing the C Block and added the requirement for open access solutions. That means any network deployed on these airwaves would have to be open to any device and any application. That is contrary to the cellular carriers' traditional walled gardenstrategy where they supplied the equipment and locked customers into their networks and favored their own content.
In the end, it was Verizon who won the C Block with a bid that was just 3% over the FCC-defined minimum. Verizon’s interest was not too surprising given that they have been fostering at least some degree of openness. Earlier this year announced an initiative to certify other people’s handsets to operate on their network. In a recent interview with Portfolio Magazine, Google’s Chief Executive Eric Schmidt said "The senior leadership of Verizon actually visited Google to talk to us about this and make sure they got it right".
Nice move. Google pressured the FCC into adding the openness requirement and Verizon bought the spectrum. As a result, the FCC took in less money than that C Block was worth. The basic way we value radio spectrum prices is cost/MHz/Pop, or the cost of 1 MHz of radio spectrum covering a population of 1 million people. According to RBC Capital Markets, the average cost per MHz/Pop for the unencumbered A and B Blocks were $1.17 and $2.24 respectively, while the C Block was $.76. Now Google can sell open devices in whatever service Verizon deploys in the C Block. Best of all they didn’t have to spend a dime for spectrum, they invested the lobbying budget!
Google’s Second Play
However, that’s only half of it.Since they stayed out of the 700 MHz auction, Google can now spend that money to buy Sprint, or at least Sprint’s WiMAX business, which is called Xohm.Sprint certainly needs the money. They posted a $29.5 billion loss for last year, lost a few hundred thousand post-paid subscribers (your bread-and-butter in cellular), replaced the CEO, laid off 4,000 employees- you get the picture.
In the midst of all that, they have committed to spend $5 billion to roll out a nationwide mobile WiMAX service to reach 100 million potential customers by the end of 2008. At the moment they have two trial networks running in Chicago and Baltimore/Washington. Sprint’s WiMAX unit has been involved in an on-again, off-again joint marketing arrangement with the other potential WiMAX supplier, Clearwire Communications. What the heck, Google can buy them too.
I have held from the outset that Google would be nuts to buy radio spectrum. To use it, they would have to develop a whole company with wireless expertise and risk sullying their stellar reputation if the whole thing fell on its face. Lots of companies have gone broke underestimating just how difficult it is to develop a profitable wireless network service. Forget the milk, Google is shopping for cows!
Conclusion
They say Google hires smart people, and if this deal comes out they way I think it will, this was a stroke of genius. The set the stage with the FCC, bluff Verizon into investing in what has to be an open network, and spend their own money to buy a second outlet for their core product. In the end, they wind up in the wireless business with two outlets for their content, become the dominant provider in the emerging WiMAX market, and pay off the desperate Sprint and Clear wire folks with stock. Who says business isn’t the best game you can play.