Google Stirs up the Airwaves

Google’s long been considered a market disrupter for the changes it has rung in online advertising. But the search giant is now proposing to raise some hell among the companies that buy portions of the wireless spectrum managed by the Federal Communications Commission—and the established players are not taking the threat lightly.

At issue is just about the last solid chunk of the airwaves left to build on: the 700 megaherz (MHz) frequency, to be exact. It’s what will be left when the television stations move from operating both analog and high-definition versions to an all-HD menu in 2009. The 700MHz portion is particularly valuable because it’s got a long range and can pass through walls easily. So easily, in fact, that a carrier could provide wireless service to a city with far fewer cell towers than at lower frequencies.

For that reason, 700 MHz has been termed the “beachfront property” of the airwaves. It is also probably the last large swatch of spectrum left to buy, and thus constitutes something of a last point of entry for new competition in the wireless business.

Spectrum is sold at auction, but the FCC needs to set the terms of the auction, the minimum bid, and often some requirements as to what must or can be done with the airwaves for sale. That’s the process that’s going on now, under a legal deadline to complete the auction by January 28, 2008. And that’s the part of the process where Google is trying to exert some influence.

The company announced on Friday that it was willing to pony up the $4.6 billion minimum bid required, provided the FCC takes steps to open the wireless market to other than the carrier players. Specifically, Google wants the commission to stipulate that whoever wins the spectrum should sell some portions of it at wholesale prices to competing carriers.

Why would Google want to bid on wireless spectrum? To break the hold that conventional telcos have on what phones subscribers can use and what services they can access with them. Right now, both are dictated by the carriers, who are interested in maintaining a walled garden of services that run “on deck” on their users’ phones—that is, that appear on the home page of their data services. They also restrict the applications and content that can be downloaded over their networks, from ring tones to browser software.

Google, Yahoo! and the other Internet advertising powers would like to be able to bring their services to users directly, the way they can do over the PC browser, without having to strike carriage deals with the telcos. That would open their mobile audiences and, of course, increase their potential for mobile ad revenue.

Google CEO Eric Schmidt framed it in free-market terms in a letter sent Friday to FCC chairman Kevin Martin. “When Americans can use the software and handsets of their choice, over open and competitive networks, they win,” he wrote.

In a conference call with analysts, Schmidt linked open distribution of Google products more explicitly to ad revenue. “There’s really a direct connection between the open, interoperable network that we are now arguing for in [Securities and Exchange Commission] filings and so forth and the ultimate usage of Google services and applications, and of course advertiser satisfaction,” he said.

The traditional wireless carriers lost no time in charging that Google was essentially asking the FCC to draw up auction rules favoring its business model as a precondition to taking part in the bidding.

“This is an attempt to pressure the U.S. government to turn the auction process on its head by ensuring only a few, if any, bidders will compete with Google,” AT&T senior executive vice president for government affairs Jim Cicconi said in a release over the weekend.

Carrier Verizon said in a statement that the requested change in the auction rules would constitute “corporate welfare for Google.”

And CTIA, the trade organization that represents wireless carriers, essentially issued a “put up or shut up” challenge. “If Google wants to commit almost $5 billion for spectrum that it wants encumbered with various requirements, then let it win that spectrum in a competitive auction and choose that business model,” the group said in a letter. “The competitive wireless industry welcomes all new entrants, but no company should be able to buy a custom-fit government regulation that suits their particular business plan. Consumers should decide if they’re right, not the federal government.”

But Richard Whitt, Google’s telecom and media counsel in Washington, pointed out in a post Monday on the company’s public policy blog that an FCC spectrum auction is “an artificially defined market”, not a free public auction in which newcomers can participate as easily as incumbents. Further, he said, Google has consulted with “auction experts and game theorists” and has come to see that the auction deck is seriously stacked in favor of the entrenched carriers and against new entrants.

“Our position is simple enough,” Whitt writes. “FCC chairman Kevin Martin and the other commissioners have argued persuasively that we need a real third-pipe broadband competitor in this country. They also believe that the upcoming 700 MHz auction is the best way to get there. All we are saying is that, based on what we know, new broadband competition will emerge from the upcoming auction only if the FCC’s rules allow it to happen. For Google and other potential new entrants, the prevailing imbalance can be corrected most effectively by introducing license conditions based on open platforms.”

Setting aside the question of whether even Google could prevail against incumbent telcos in an auction, the company’s more immediate concern is persuading the five FCC commissioners to enact the wholesaling requirement as part of the auction rules. At press time, that seems dubious.

Chairman Martin has already proposed auction rules that would ensure opening up one block of the spectrum to be auctioned to any device or application. But in testimony before the House Energy and Commerce Subcommittee yesterday, he indicated that he did not favor Google’s proposal for enforced wholesaling of some of that bandwidth.

“The proposal I’ve put forth isn’t designed to facilitate the entry of any one company,” he said. If Google is “upset” by the omission of a wholesale requirement, he added, some of the telco participants are equally perturbed by the open-access requirements in his plan. Verizon, for example, opposes opening up portions of the new spectrum to any device, any application, although rival AT&T supports the idea.

The commission’s two Democratic members told the subcommittee that they supported Martin, a Republican appointee, on the open device/ open application auction rule, making it likely that the requirement will be adopted in the FCC final vote. It wasn’t clear where they stood on the broader Google suggestion.

At least one of Martin’s two fellow Republican commissioners said he was leaning toward opposing the open device/ open application requirements.

And several Republicans subcommittee members argued that the Martin requirements should be dropped in order to maximize the return from the auctions.

“The free market works best,” said Rep. Fred Upton (R-Mich.) “And successful auctions work best without encumbrances.”

What would Google do with the 700 MHz spectrum if the FCC enacted its rule change and it came out a winner at auction? Well, the company has installed and runs a Wi-Fi network in its Mountain View CA home town, and once expressed an interest in setting up a Wi-Fi network in San Francisco.

But observers think a more likely scenario than Google-branded muni Wi-Fi might have the company leasing some of that spectrum to small regional wireless carriers who would not impose the controls that the large mobile networks favor.