Why Google isn't playing to win the wireless auction

November 29, 2007: 9:55 AM ET

By Yi-Wyn Yen

Google's official declaration today that it will submit a solo bid for the upcoming wireless spectrum auction has prompted speculation that the Internet giant is planning to launch its own mobile network. After all, the whole point of bidding on the wireless airwaves is to run a broadband network, right?

Not if you're Google.

Google may play the part of a serious bidder, but the company isn't necessarily looking to become the next national wireless provider, according to analysts and telecom experts. The U.S. consumer mobile market is already saturated, they say, and Google's inexperience combined with the complexity of building and managing a new wireless network makes winning the Federal Communications Commission's Jan. 24 700 MHz auction too costly a proposition.

The consensus on the Street is that Google (GOOG) is unlikely to bid to win. Co-founder Larry Page concurs. "I don't think we feel like there is a desperate need for us to have to bid to win or anything like that," Page told analysts during the company's quarterly earnings call last month. "We have many, many different options available to us as a company in terms of spectrum."

Verizon's announcement this week that it is opening its network also makes it less crucial for Google to win the auction for the so-called C-block spectrum. Verizon will let consumers use any phone on its network as well as allow third-party developers to develop software for those devices. Google has made open standards the centerpiece of its Android initiative.

"Their incentive is arguably less because they've already achieved that victory," says Blair Levin, a telecom analyst with Stifel Nicolaus and former FCC chief of staff. "They can bring an Android device onto the C-block and not deal with operating the network. I can't imagine Google wants to change its business plan to be the last-mile pipe and start selling service subscriptions."

So why would Google even go through the motions of bidding? Here's why: In July, Google persuaded the FCC to require the winner of the 700 MHz C-block auction to open its airwaves to any device and application. If no company notifies the FCC of an intent to bid by the Dec. 3 deadline, the auction will be reset without Google's rules and the eventual winner of the highly-coveted spectrum could run a closed network. "We believe Google needs to bid in the auction to save face," UBS analyst Benjamin Schacter says in a report.

And the search giant does want to change the rules of the game in the wireless market. Google would like to see mobile Internet rival web access on PCs and laptops. The more consumers move their PC-based search habits onto cell phones, the bigger the opportunity the company has to benefit from mobile advertising. And thus Google's move to create the Open Handset Alliance and the Android mobile platform for software services. Certainly, it won't need to build out tens of thousands of cell towers across the nation to make that happen.

"Our goal is to make sure that American consumers have more choices in an open and competitive wireless world," says a Google spokesman. "We have already made great progress in achieving this outcome and expect more progress in the future."

But critics say Google's brash, bring-it-on attitude can rub others the wrong way around Capitol Hill. "They're talking out of both sides of their mouth. They're playing a dangerous game," says Scott Cleland, a long-time telecom policy watcher with the Precursor Group that consults for major wireless, cable and telecom companies. "They're running around Washington trying to change the business model to make their life easier. They're going to find out that wireless is very, very challenging. They have a high opinion of themselves, but they'll learn."

Google may be cocky, but it's far from stupid. Google got a glimpse of the logistical nightmare of what it'd be like to build a national network with its Wi-Fi experiment in San Francisco. It partnered with Earthlink (ELNK) to provide free Wi-Fi for the city, but financial problems and complaints from politicians and civic groups about privacy issues have turned the initiative into a political nightmare. The same team that worked on Google's municipal Wi-Fi initiative is now working on its spectrum issues. A source familiar with Google's telecom strategy says the municipal Wi-Fi experience made the company realize that operating a network is a "very challenging business."

That's because the FCC imposes strict rules on building out the wireless broadband spectrum. The winner of the C-block auction is required to cover 40% of the nation within the first four years. Google says that if it did win, it could partner with a carrier to operate a network or lease the spectrum to another company.

That would still put Google at a major disadvantage over likely auction bidders, No. 1 AT&T  (T) or No. 2 carrier Verizon (VZ), which have the equipment, infrastructure and customer support needed. Also, Google would be allowed to operate only on the 700 spectrum, while other carriers already have other chunks of airwaves to run their networks. "From [the carriers'] perspective, this isn't a huge problem," says John Muleta, CEO of m2Z Networks and a former FCC wireless official. "This would be like changing a card at the bottom of the tower. This is a minimal expense."

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