Google's wireless auction play

Olga Kharif
20 Feb 2008
00:00

Think of Google as Garry Kasparov facing Bobby Fischer. Exposing its queen, the Web search giant bids $4.7 billion in a government auction of new wireless spectrum. Google's opponent, most likely Verizon or AT&T, pounces on the queen, raising the bid to corner Google's king.

Checkmate‾ Actually, this chess game ends in a draw. The high bidders, as yet undisclosed, are required to build an open wireless network allowing all sorts of new devices and software to run over it. And so in losing, Google (GOOG) still achieves its primary goal, revving up competition in the wireless market, without spending a dime.

No D Block auction‾

And yet that doesn't mean the victors in the Federal Communications Commission (FCC) auction will be afflicted with a severe case of buyer's remorse. If AT&T (T) and Verizon (VZ) emerge as the top spenders in the auction, which has already raised a record $19.4 billion even though an entire block of licenses may not sell, the two biggest U.S. mobile carriers will have scored in important ways.

For starters, they will have secured another big chunk of an especially scarce resource while impeding the expansion ambitions of smaller rivals such as Alltel. MetroPCS (PCS), and Leap (LEAP). And despite the record auction proceeds, a quirk in the auction rules may hand AT&T and Verizon a huge bargain on the 'C' block licenses, which carry the open-access requirements Google had championed.

The bidding, which began Jan. 24 and is drawing to a close, has been anonymous. But the FCC has disclosed the latest offers several times a day, prompting a parlor game among industry observers to discern the names from the bidding patterns. The current betting among these experts is that this auction is unlikely to produce a new national wireless provider. 'My guess is [the auction] will not transform the industry in a fundamental way,' says Peter Cramton, an economist at the University of Maryland who was instrumental in designing the first FCC auctions back in the 1990s.

Blame Google's apparent withdrawal and the auction's convoluted rules for that. While FCC Chairman Kevin Martin recently lauded the auction's high gross, Stanford University economist Greg Rosston says 'this auction is a total disaster from an auction efficiency standpoint.' Rosston had been an adviser to Frontline Wireless, a prospective new carrier that applied to participate in the auction, but apparently failed to raise enough backing and shut down before the bidding began. Frontline had been eyeing the 'D' block of spectrum, which the FCC was selling with a burdensome stipulation to provide services for public-safety agencies. That condition appears to have scared away all bidders, with the sole bid coming in below the FCC-set minimum. So barring an eleventh-hour bid, the D block will not be sold in this auction.

Obstacles for smaller companies

Critics are pointing to the FCC's unusual slicing of the spectrum, a new approach that had been pushed by Google. In this auction, one license covers the tiny Caribbean island Culebra, seven miles by five miles in size, while another covers the entire Great Lakes region. There's even a nationwide package that was seen as possibly leading to the creation of a new national provider. The FCC has never offered such a hodge podge in a single auction before.

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