Insight Community

For the sake of providing background, without wasting space here, let me mention that a breakdown of the rules relating to the 700MHz auction are available in brief here:

http://www.fiercewireless.com/story/fcc-sets-ground-rules-700-mhz-auction/2 007-07-31

So, on to the discussion...

The positioning and arguments that precede a spectrum auction are always as much gamesmanship as legitimate arguments, and the public positions of any stakeholder might be masking a different actual desire or motivation. The players, generally shrewd and experienced (this isn't eBay), are aware of the other players and their expected moves, and are constantly tweaking their strategies based on complex game theory. Google, AT&T, and Verizon are certainly among the more obtuse players, while Frontline is possibly more overt. Thus, it takes a fair bit of interpretation to actually guess what each player is really after. I'm going to break it up, player-by-player for some of the more interesting stakeholders:

Consumers:

Consumers advocates are aware that the current state of mobile communications is locked down. License for RF spectrum were given away too easily in the 40s and 50s, and our spectrum has since been tied up - much of it in unproductive use. A classic example is the huge swath controlled by TV broadcasters (http://www.ntia.doc.gov/osmhome/allochrt.pdf) which is in blue in the attached spectrum chart. This has left relatively little spectrum available for "unlicensed" use. 49MHz, 900MHz, 2.4GHz, and 5.8GHz come to mind. You might recognize those since all of your baby monitors, cordless phones, Wi-Fi equipment, and other gadgets probably use those channels.

What's amazing is the high amount of value created in these unlicensed bands. Basically, because of reduced license requirements, those (often poor quality) channels produce more value to the economy, more value to users, and more economic surplus per Hertz than most other bands. Thus, consumer advocates would like to see an experiment where additional spectrum is allocated in a more liberal fashion. Even better if it is high quality spectrum like the 700 band. But unlicensed spectrum isn't on the table for this auction, so consume groups are pushing for the next best thing: open access.

Open access would mimic the Carterphone decision for landlines, where any non-disruptive device could be attached to AT&T's fixed line system. Carterphone directly paved the way for fax machines, cheaper phones, better phones, dial-up modems, and less directly the Internet. The notion for consumers is that they want their pipe provider to sell them a pipe, and not force the purchase of a bunch of services or devices, and not limit the choice of services or devices. They want "network neutrality" over the wireless network.

Consumer groups also supported the Google request that would have forced the MNO (mobile network operator) to function as a wholesaler, and permit competing ISPs to offer retail service using their wireless infrastructure. This would be a parallel to the Telecom Act of 1996, which required the Bells to permit CLECs to offer DSL and phone service over their copper (think Covad). Of course, under this FCC and courts, those liberalizations were reversed. It was very unlikely that this consumer wish was to be granted, since it would greatly diminish operator interest in bidding on the spectrum. Google was the only company that proposed it would bid under such conditions.

TV Broadcasters:

These mooks have been sitting on the best spectrum in the country for decades, and haven't done jack with it besides pump out scare-mongering newscasts with steadily decaying quality levels, and reruns of Everyone Loves Raymond. The ironic kicker for how wasted this spectrum has been for years is that currently, only 8 - 10% of American households receive their TV over the air. The rest use cable or satellite, or other. And one could also surmise that the 10% who receive OTA broadcast TV have voted with their wallets that TV is not relatively important to them, since they don't buy cable. Yet, we have continued to wasted this spectrum up to 2009, and I propose it is wasted into the future. I don't like to see a national resource like communication spectrum wasted on The Simple Life. But bear in mind that if the broadcasters didn't broadcast, the FCC would have no censorship or content control over them, so the FCC's interest is to continue to waste spectrum on TV broadcast.

Anyway, the TV broadcasters have fought tooth and nail not to have to give up their analog spectrum. But it was a losing battle. Mainly, they wanted to see if THEY could capitalize on the incredible increase in value of the spectrum they were given decades ago. No such luck, said the FCC. B 2009, they have to pack up their bags, and get off the analog spectrum and shift to digital transmission. Good.

FCC / Treasury:

The FCC has conflicting motivations, mostly political and financial. They want to do right by their "friends" in industry (TV Broadcasters, big corporations, other donors and lobbyists), and they want to get the most revenue for the federal treasury, and they need to work within the rules Congress sets, and then lastly they will try to do right by the US citizenry for now and the future.

To maximize the bids in the auction, the FCC must make the spectrum as palpable and attractive as it can for the bidders who are likely to bid the most money. Simplified, this means the incumbents. The argument can be made that "the free market says that if more money is bid, then the spectrum will be put to more valuable use", but that is bunk. There are ample scenarios that disprove that rule, such as a monopolist who would bid simply to prevent a new competitor from entering the market. The monopolist would have ample cash reserves to outbid any new entrant. Therefore, the FCC should NOT be seeking to maximize bids. That is a stupid and short-sighted goal. A better goal is to maximize net present value of the net social benefit of the spectrum. Unfortunately, that's a bit harder to quantify... But NPV of NSB would include such things as: lives saved because of public safety use, increased productivity because of better communications, increases in efficiency because of greater competition, and much more.

So this time around, the FCC has come to some surprising middle ground, given their history. The Open Access requirement of the auction appears to unusually favor the consumer. Perhaps the actual motivation is to create the perception of fighting for the consumer, whether it actually does anything or not. Without the wholesale requirements that Google and consumer advocates wanted, it may be impractical to "bring any device" to the network.

Google:

Google's singular motivation: ensure a connection (last-mile) to the customer. Because of what Ed Whitacre said before he left (that Google was using HIS pipes for free), Google is right to want at least one pipe into US households that isn't beholden to a Goliath oligopolist (cablecos, telcos). They've tried (unsuccessfully) to use Muni Wi-Fi, they've struck an important deal with Sprint's WiMAX project, but they wanted to have some pipe be truly competitive. That's why they pushed for the Wholesale contingency on the C Block up for auction. Wholesale would mean that somebody else would put up the network (an MNO) and that if they filtered out Google, or favored a competitor, Google could become an MVNO on the pipe. That's the benefit of getting last-mile access to the customer, without having to deploy a network. THAT is what Google truly wants. But that wasn't going to happen, according to the FCC, unless Google "put up or shut up", meaning posted a reserve bid of $4.6 Billion.

Google did not want to bid at all, and Google does not want to win. Google wants to influence the rules (to favor truly open competition) but let someone else actually deploy the network on which they can access the customer. Yes, they want to have their cake and eat it, too. But in this case, Google is actually very aligned with what is good for the citizenry - greater competition.

In my opinion, by forcing the issue and guaranteeing a bid Google took on an important role that should be performed by government: taking a risk with an asset because if it works, it will radically change the market in a way that benefits the country over the long term. In some ways, it's depressing that a public company has to wrestle with our FCC to provide us with an outcome that is in the citizenry's interest. Regardless, by now Google has largely failed.

Other analysts have suggested that Google won, because they asked for more than they wanted, and are happy with what they got. Well, there is some success for Google under the Open Access rules: there is a provision that the network operator be application agnostic. This is good, but it depends on cooperation, enforcement, and compliance with the spirit of the law. If a MNO flouts this and offers degraded service to Google, they do not have the "wholesale" requirement that would allow them to compete. --bear in mind that they probably would never have to compete, because the mere presence of the wholesale clause would spawn other MVNOs like Covad, Earthlink, etc. and thus provide a competitive environment. Competitive environments cause Network Neutrality inherently, without any need for regulation.

Google didn't get the terms that they want, and they still don't want to bid at auction, but now they need to even more, because they need to assure that at least the Open Access as proposed by Kevin Martin passes. Google will only bid a small amount over the reserve, because they don't really want to be responsible to build a network - the price/earning ration of telcos is horrible compared to Google's. If Google wins, don't expect them to build out  network on their own. They will form a consortium, or re-sell spectrum (even at a discount if needs be). These guys are shrewd, but they're hardly in a place they want to be.

AT&T, Verizon, big carriers:

These guys will dominate the auctions, as they always do. They have the access to capital, the equipment, the relationships, the labs, the technology, the know-how, the brands, the existing customer relationships, and just about everything you would need to extract value from a spectrum license. Also, they have the defensive motivations of preventing new entrants and competitors from winning. In fact, they may even bid more for the Open Access Block C than for the other block for the sole purpose of preventing a radical shake-up of the market.

If they bid and win C Block licenses, the Open Access requirements may prove to have no teeth. By controlling the technology used for the radio link, and because of the unusual spectrum, they may still have full control over the devices that connect to the network. Yet I think the Open Access requirements, at least, will require this spectrum to remain application-neutral.

Impact:

This is highly speculative, but here goes...

There will be bidders over the reserve for the Block C licences. The big telcos will be in the bidding, Google will bid, Google will be outbid at some point, because their motivation is simply not as strong as the incumbents. Google is motivated by the "sorta" threat of a non-neutral network, but once they bid $4.6B, the "Application-Neutral" aspect of Block C is guaranteed, then a carrier will bid slightly higher, and Google will have a much reduced motivation to bid further. Some new entrants like Frontline will bid, and may actually win some spectrum. The new entrants will likely be consortia, so that they can be large enough to buy spectrum and deploy a network. Look for a cable consortium to play a role again.

The short-term effect on the telecom market will be nil, of course. But over the longer term, post 2009 and into 2010, there will be some wireless substitutes competing for the DSL dollar, some with mobility: Sprint's WiMAX network (whether it's still "Sprint" or not and whether it's still "WiMAX" or not), and the winners of the 700MHz auctions will have a positive effect on competition in the broadband market, but we will remain largely an oligopoly of large telcos. The biggest change will be in the proportion of real estate in the country that has access to broadband: this will increase greatly because of the strong economics of an OFDMA system over 700MHz.

The mobile broadband market will be far more competitive than it is now, not in the sense that there will be many more competitors, but in the sense that the prices/MB of service will drop radically. This will usher in a new age of mobile connectivity - the kind of thing we've been hearing about since all the brouhaha about 3G started in 1999.