There is an excellent business case for Google bidding megabucks in the upcoming 700MHz auction and investing even more to get a network up and running. I think Google is well aware of the value to them if they win and the harm they’d suffer if the duopoly wins instead. Google can make big bucks with a nationwide third network AND make things better for all Internet users AND improve the United States’ pathetic competitive position in the contest for broadband access. Hope this post doesn’t end up post-tagged “wishful thinking”.

Pessimists know that the spectrum which’ll be vacated by broadcasters in February 2009 is worth more dead than alive to the telco/cableco duopoly: it can potentially be used to provide a competitive service which will hasten the end of their landline phone business, force the mobile phone business to be open and much less profitable, end the telcos hopes of using their access monopoly to muscle their way into content ala cable, and end the cablecos hopes of using their current lock on content distribution to muscle their way into telephony. Oh yeah, and if a new open network with great roaming capability, high bandwidth, and low prices comes along which doesn’t have to say “Mother, may I?” to the owners of the wires that come into our houses today, there goes the duopoly’s ability to charge high prices for inadequate Internet access service.

So no question it’s worth the telco/cableco duopoly members bidding big bucks to make sure no one radical gets hold of this spectrum. The “use it or lose it” provisions that the FCC has proposed actually allow the winner to hold every square inch of territory and every hertz of spectrum for eight years with NO use and NO buildout before they forfeit anything. Not bad on a ten year license. Sure, they’ll build in the places where it’s profitable for even over-stuffed monopolies with high overhead to build and they’ll be careful not to create any surplus capacity anywhere which might rock the club.

How’s Google supposed to bid against that? And, if Google wins, it actually has to assure that a network gets built. It can only lose by a slow buildout or letting the capacity lie fallow. The negative to Google of not having third network is that the owners of the access duopoly may well find some way to dam and then collect tolls on Google’s revenue stream.

But there’s also a huge positive opportunity for Google and one it appears that the company is well-aware of. The opportunity, very specifically, is to resell whatever spectrum Google wins on a “shared spectrum” basis. When radio spectrum is licensed slice-by-slice to different users, most of it goes unused. In a letter to the FCC sent before the auction and before its “ultimatum letter”, Google said:

“As has been pointed out by various studies, the vast majority of viable spectrum in this country simply goes unused, or else is grossly underutilized. Our nation typically uses only about five percent of one of our most precious resources, and even that minimal use is inefficient compared to what is technically possible today…”

Google was asking the FCC to clarify that the winner of the auction would be able to resell spectrum as a wholesaler. Unofficially, the FCC did just that in remarks from the Chairman and all of the commissioners. If Google wins, they can resell as a wholesaler - the traditional carriers have dared them to bide enough to win and do just that.

For reasons I blogged about more fully here and here, spectrum to which there is open access and for which there is contention gets much better overall usage than spectrum allocated in slivers. WiFi and Bluetooth are brilliant demonstrations of the efficiency of chaos in allocating a scarce resource. Actually, so is the Internet itself. The fact that WiFi and Bluetooth frequencies are totally unlicensed has certainly helped fuel innovation in their use but nominal licensing fees without expensive usage monitoring or bookkeeping won’t break the model. Google could charge a small fee as part of the sale of consumer devices which use the frequencies and/or lease or auction rights to contend for the frequencies to providers in relatively small geographic chunks and make more money overall than a traditional carrier running a closed network. Google suggested this strategy in its letter to the FCC so is certainly considering it.

Google can compete both for traditional cellular business—at the wholesale level—and for wholesale Internet access business and suck the remaining value out of the landline voice business—all by licensing the rights to contend for “it’s” spectrum. Many small sales and very reasonable prices will yield more overall revenue than a few large sales at high prices because the overall usage of the spectrum will be enough more efficient to create more capacity to sell. Low prices will pull demand from the traditional networks. Low prices create new uses and new usage. We’ve seen that result with the wired Internet; we will see it in a radio access network.

This strategy may let Google avoid the expense of a national buildout. Radios using Google frequencies by virtue of Google licenses could go on existing towers and new towers built by others to take advantage of the new opportunity. There is no reason for all those radios to be part of a “network”; they just need the same Internet connections any ISP needs. Google may provide some of the backbone but it’s certainly not necessary for them to do that everywhere.

It will be even more profitable for Google to wholesale the spectrum coming up for auction than it would be for the cablecos and telcos to keep the spectrum safely out of competition with their existing networks. If Google can license a “network” into existence rather than build it themselves, they’re spared that expense and we get coverage everywhere faster.

Ergo, Google DOES have a good business case to outbid the other guys. And they’ve got the money. Hope it happens.