Is Google Serious About the 700 Mhz Spectrum Auction Bid?

Google (NASDAQ: GOOG) has a history of coming out with surprises while announcing quarterly results. Recently, the company surprised us with the Android and Open Hand Set Alliance, instead of the rumored Gphone. The speculation is now about Google's bid in Auction 73, the Federal Communications Commission [FCC] spectrum auction that will provide the rights to operate the 700 MHz frequency band.

With television broadcasts in US going exclusively digital from February 17, 2009, FCC will provide the rights to operate the said band for other communication traffic. It was in mid July that Google announced its intention to participate in the auction - to be conducted in late January 2008, should

FCC adopt a framework requiring greater competition and choice. Following intense lobbying by Google and with the strong support of Democratic commissioners, FCC, on July 31, announced that upper 700 MHz C block licensee would need "to provide a platform that is more open to devices and applications". Currently, operators like Verizon (NYSE: VZ) and AT&T (NYSE: T) prevent the use of external applications (It is estimated that carriers sell more than 90% of the phones sold in US). With this FCC announcement, consumers got a shot in the arm as they can select the handset and also download/ use applications of their preference.

Google has certainly championed the cause of open applications and devices in an oligopolistic market (the leading three networks - AT&T, Verizon and Sprint (NYSE: S) - has almost three-fourth market share). And we believe, there is more to this incident than altruism. Media reports are rife about the company's plans to buy the spectrum, and that it is running a test version of a wireless network service on Android platform at its headquarters. Should Google wins the auction, it could be a national carrier, and can carry wireless internet signals. The company also has options like partnering with another player or leasing the spectrum to others. Taking into consideration Google's business model, an entry by Google will ensure the consumers cheaper yet high speed internet access through mobiles. Thus, we believe that the consumer switching to 'Google Network' would not be challenging. Google will also have new ad revenue streams.

But will this be an appropriate strategy for Google? The company will have to shell out a minimum of $4.6Bn, the aggregate reserve price for Block C license. While the company has enough wherewithal to provide $4.6Bn (Cash and Cash equivalents as of 30 Sep '07: $5.1Bn), further investment in infrastructure could prove to be painful for the company. Much of the company's energy will be taken away for capturing market-share in the overcrowded market (US has a mobile penetration rate of 81%).

As per the new rules, if no company meets the $4.6Bn minimum bid, the auction would be re-run devoid the open-access conditions, a situation that Google will not favor. Thus, Google will certainly bid. The question is – Will it bid to win? We consider that this bidding episode is about the company's necessity to exert its influence on the wireless networks, a plan that got reflected in the Android launch. The next two weeks will be provide some clues related to Google's plans, for those clued to this game. Google has time till December 3, the deadline to file an application to participate in Auction 73, to decide its course of action.

Disclosure: none

Comments

[Tom B]

It would make more sense for T to take more (in addition to what they just bought). With the iPhone franchise, T is the company to watch.

[helplessobserver]

WOW, put up a 700 foot tower and feed it with a powerful transmitter and you have a huge internet wireless footprint, none of this 3 - 4 mile range crap we have where at -100 dBm signal strength the internet connection is pokey like dial up and at -120 dBm transmissions cease.