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Google's Good Bandwidth Gambit

Tom Evslin

Google Chairman Eric Schmidt has made the FCC an offer it shouldn't refuse. At this point it's unlikely that the FCC will accept but it would be good for the United States if it did — and good for Google, of course. Two problems with the Google offer: at&t and Verizon hate it and it probably would result in the 700MHz auction bringing in somewhat less money (immediately) for the treasury than an alternative which would encourage the telcos to bid.

Schmidt says Google will bid "at least" the $4.6 billion that the FCC proposes setting as a minimum or reserve for this part of the auction IF the FCC requires that whomever wins this chunk of spectrum is required to operate it according to four principles of openness:

  • Open applications: Consumers should be able to download and utilize any software applications, content, or services they desire;
  • Open devices: Consumers should be able to utilize a handheld communications device with whatever wireless network they prefer;
  • Open services: Third parties (resellers) should be able to acquire wireless services from a 700 MHz licensee on a wholesale basis, based on reasonably nondiscriminatory commercial terms; and
  • Open networks: Third parties (like internet service providers) should be able to interconnect at any technically feasible point in a 700 MHz licensee's wireless network.

Schmidt's letter guarantees the FCC that they don't have to worry that, if they set the rules in a way unfavorable to the incumbent telcos, they'll have an auction and nobody will come.

The telcos response — not entirely incorrect - is that Google is setting rules in a way which will let it win the auction for less money than if there were less rules. After all, they are implying, they the telcos will bid more if they aren't encumbered by all this silly openness restrictions.

From the New York Times: "Verizon Wireless has called the conditions 'corporate welfare for Google.' And AT&T rejected Google's latest effort, calling it an 'all or nothing ultimatum.' Further, says at&t's James Ciccone as quoted by Om Malik: "We would repeat that Google should put up or shut up — they can bid and enter the wireless market with any business model they prefer, then let consumers decide which model they like best."

In a competitive market, the arguments from at&t and Verizon would be persuasive. But we don't have a competitive market for either wireless voice access or any kind of broadband access in the United States. Verizon and at&t are huge vertically, integrated regional monopolies. In their regions they share duopolies in broadband access with the cablecos. This lack of competitiveness has left the US — where the Internet boom began — with broadband service which is inadequate in terms of capability, reach , or price compared to much of the rest of the developed world and even some of the not-so-developed world.

Forget about good and evil intent or good and evil people; just think about the business interests of the companies involved. Because the 700MHz frequencies can be used to establish at least one national and many regional alternatives to the access duopoly, they are threat to the broadband access duopoly. Even worse, they could be used to establish several competitive wireless networks for mobile phones (in the time before the phone and data networks completely converge). This network would compete with Verizon Wireless and at&t Wireless (nee Cingular), the most profitable parts respectively of their parent companies. Even if only one new competitor emerges, that means the end of duopoly; triopolies are much less stable. Someone is always going for marketshare at the expense of margins or doing expensive innovation in search of distinction.

It's worth it for at&t and Verizon and perhaps even big cablecos to bid high for these dangerous frequencies in order to protect their existing business. But they have no incentive to hurry to put these frequencies to use or ever allow them to emerge as the basis for competition to their lucrative retail businesses. The 700MHz frequencies are worth almost as much fallow as in use to them.

Google, on the other hand, has every incentive to relicense the frequencies it acquires or sell access over these frequencies to whomever can provide service. Google has no existing network to protect. Google is threatened by the existing cableco/telco duopoly wanting to capture a share of its margins and perhaps favoring their own retail business over competitive businesses owned by or important to Google. Google would like to provide more content and ads to mobile users; the best way to assure they aren't blocked from doing this is to get competitors established in the mobile business.

You don't have to believe Google's "do no evil" motto to realize that, in this case, Google has an incentive to increase competition and improve and open up broadband and mobile services. You don't have to believe telcos are evil incarnate to understand that they have an incentive to protect their current monopolies and duopolies.

Given that this non-competitive market exists, letting this valuable spectrum go to the highest bidder (which would ordinarily make sense) is just an invitation to increased concentration. If the FCC accepts Google's proposal, at&t and Verizon can still bid but they won't have the option to keep the resultant services closed if they win. They're not being shut out, just forced to bid on the value of operating these networks openly instead of (what may be of greater value to them) keeping them closed and underdeveloped. If they choose NOT to bid under these rules requiring openness, their intentions will be clear.

Om Malik is an expert on broadband shenanigans and a cynic. He blogs: "At the end of the day, whoever wins in these auctions, we are looking at the prospect of either the Bells or Google owning the spectrum. And none of them are that appetizing."

In this case Michael Arrington at TechCrunch is more optimistic: "Google isn't always not evil, but in this case they are going to bat for all of us against some players with pretty bad history when it comes to offering consumer products. I'm behind them on this. And to the FCC: please learn from past mistakes, ignore the lobbyists this time, and do what is in the best interests of the public."

I agree with Michael.

Related posts:
Good News from the FCC
Time to Write the FCC
Frontline Wireless' Bad Idea
Dialog with Frontline Wireless

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