Google Likely Out, And Happy

http://www.forbes.com/business/businesstech/2008/02/06/auction-wireless-spectrum-tech-wire-cx_ew_0206auction.html

Wireless Auction
Google Likely Out, And Happy
Elizabeth Woyke
02.06.08

After dominating the U.S. wireless spectrum auction for months, from influencing the terms of the auction to bidding, it looks like Google is off the hook.

Nine days into the closely watched Federal Communications Commission auction, it appears that enough competitors are keen on the spectrum that Google won't be stuck shelling out billions of dollars for the right to own and operate a new wireless network. Instead, analysts believe that Verizon--thought to be the only bidder besides Google that is both rich and motivated enough--is poised to win the coveted C block of spectrum that Google was eyeing.

The spectrum is being auctioned off in five blocks, labeled A, B, C, D and E. Blocks C and D are national; the others are divided into regional licenses. To prevent cheating, bidding is anonymous and companies are barred from discussing their participation.

"Verizon wants more spectrum to close the gap between it and AT&T," said Stifel Nicolaus analyst Rebecca Arbogast. Verizon owns 49 megahertz of spectrum compared to AT&T's 75 megahertz. "I'm reasonably confident that Google does not have the spectrum now," she added.

But Verizon likely didn't bid for the C block directly, analysts said. Instead, it likely bid on a host of less expensive regional slices of spectrum and made sure that the total amount was more than what was bid for the C block. It's a savvy strategy, because under FCC rules, if the regional bids top the bids for the C block, that block must be split up and apportioned to the highest bidder or bidders. By the end of Tuesday, the regional bids added up to $4.74 billion, about $30 million more than the current total for the C block.

Analysts speculated that Google likely bid $4.7 billion for the C block last week. Under FCC rules, a bid of at least $4.6 billion would ensure the creation of a broadband network "open" to any devices or application. Industry watchers speculated that Google, which lobbied the FCC to adopt open access rules for the auction, was participating in the auction out of a sense of duty rather than a desire to win.

Ceding the C block to Verizon would allow Google to exit the auction gracefully and direct its billions elsewhere. For instance, the Internet giant is reportedly interested in providing financial assistance to Yahoo! to stave off an unsolicited acquisition bid from Microsoft. (See: "Google Slams Microsoft Bid For Yahoo!")

Spectrum serving Chicago (currently priced at $892 million) and Seattle ($219 million) is in high demand, with various operators, including regional players such as Leap Wireless and Metro PCS, likely battling for these regions. Cable companies could also be in the mix. Cablevision, Cox Communications and EchoStar are all approved bidders.

The auction isn't over yet. Under FCC rules, it stays open until all bids dry up; the latest round of bidding, late Tuesday, attracted 90 new bids and an additional $6 million. Taken together, high bids for all five blocks totaled $18.9 billion on Tuesday night. Still, analysts and observers are already calling it a done deal. "We're now seeing stability in the C and D blocks," says Arbogast. "I don't think there will be any radical shifts."

Industry watchers say Verizon has a clinch on the C block while another carrier, perhaps Alltel, likely has won one or two licenses. Google is presumed to be (happily) out, and AT&T, the other major player, is thought to be buying up smaller, cheaper slices of spectrum in the A and B blocks to complement a chunk of spectrum it acquired from an independent company last October.

A new FCC rule should also speed up the auction. Starting Wednesday morning, auction participants will have to use more (95% rather than 85%) of their "bidding units" to discourage them from sitting out rounds or making other stealth moves. "It will flush out people's positions," Arbogast said.

That's not likely to help the D block, however, which has languished since the auction's first round, when it attracted its sole bid of $472 million. The FCC wants the D block to be used as a combined commercial and public safety communications network. Experts say the challenges of building out such a network has scared bidders away. If the $1.3 billion reserve price isn't met, it will probably be auctioned again.

The only question left is whether the E block will sell. It is considered less useful because it is limited to one-way data transmission. Bids on that block are still 10% below the FCC's reserve price. If the floor price isn't met, it could be auctioned again as well, but Arbogast suspects that wireless technology firm Qualcomm will step up and grab it. The company is a registered bidder and already owns similar spectrum that it uses for its mobile TV network, mediaFLO.