Google's Wireless Status: Kingpin
Despite intensifying speculation about Google's posture in the Jan. 24 spectrum auction--from being a tease to partnering with stealth equals--the search giant is demonstrating its ability to serve as a catalyst for change. Google is not only an 800-pound gorilla because of its financial heft, rooted in $10 billion in cash reserves, $18 billion in net revenues growing at 33% annually and virtually no debt. It is because it gets the future. Google understood and served the need to locate, manage and personalize the Internet's information, which it has smartly monetized.
The Google brain trust comprehends the next-level uses of the wireless spectrum--from universal handheld devices that will become ubiquitous to investing or partnering in the build-out process.
However, Google isn't just banking on its spectrum participation. Its recently unveiled Android platform, which provides applications software for mobile devices such as cell phones and BlackBerrys, neatly assuring its place at the user end of the process. Coupled with its Open Handset Alliance, Google already has assured itself a seat at the global wireless table and an ecosystem of open devices and open applications. Lehman Brothers analysts estimate Google has the opportunity to grow the mobile ad market to an estimated $11 billion by 2011, from $1.5 billion today.
The Federal Communications Commission has established no lock/no block parameters that assure the free flow and open access of all wireless services and platforms, for which Google has passionately campaigned. Google's software downloads, including Google Search, News, Maps, YouTube and GOOG-411, are designed to provide consumers with "a better experience" on any platform or device--always with an underlying layer of advertising and commerce. Still, chances are that Google is not as interested in becoming a regulated infrastructure player as continuing to be king of the open interactive platform environment.
Assuming that Google could acquire the 700 MHz spectrum on its own for an estimated $5 billion, Bernstein Research analyst Jeffrey Lindsay estimates Google could lease it the first year (2009) to companies such as Craig McCaw's Clearwire for nearly $800 million, and for more than $1 billion by 2011. One of the many ways Google could use ownership of the spectrum as a bargaining chip would be to leasing it out conditionally to assure its access.
Constructing a national wireless network would be a costly proposition even for Google--requiring as much as an $8 billion investment through 2011, on the bet it could begin generating $2 billion to $2.5 billion in annual revenues by 2010. Sprint will spend at least $5 billion on construction of its larger-market wireless network for which it intends to partner with major cable operators, such as Comcast, Time Warner, and Advance-Newhouse. Google could probably fund such a build-out entirely from its operations, or resort to raising several billions in debt to maintain a cash cushion, although analysts consider such a plan to be costly and high-risk. It would dramatically alter Google's profile as a concern more invested in intellectual and technical aspects of the digital world than the physical, concrete infrastructure. (So far, the only exception has been Google's experimental local wireless network at its headquarters in Mountain View, CA.)
Google, a truly visionary company, appears to have better things to do with its money--like go to the moon and funding the 23andMe personalized DNA saliva test. So it might prefer to be an equity partner in such an enterprise--with Sprint, T-Mobile or even Verizon --while it continues building out advertising, search and other core applications. The speculation about how and with whom Google will partner with has lately gone to the extreme, with talk of Google buying companies such as Sprint or Skype.
Those core killer app competencies will make Google a winner in the wireless spectrum auction regardless of the outcome of the bidding, the application deadline for which is Dec. 3. "By not bidding, or bidding just enough to lock in the open access rules but not enough to win outright, Google may still get a reasonable outcome," Lindsay said. Google would likely make its shareholders happy by keeping $10 billion-plus in its pocket for other future acquisitions or stock buybacks, while obliging counter-bidders to work with the Internet giant in order to better fund their hefty spectrum investment.
"The sad fact is that most of the U.S.'s wireless industry's overly cautious approach to data service development has probably cost it billions in lost opportunities already, with only AT&T Wireless so far seeming to have received its wake-up call," Bernstein Research analysts said. Making the most of wireless connections between consumers and companies is the value-added component of a wireless network, which is what Google does best. Regardless of its spectrum auction posture, it still is a kingpin at the wireless table. "In terms of opening access to the new spectrum, Google has already succeeded--the provision was triggered and the rules have been changed," Bernstein analysts note.
Still, there is a yawning gap to be closed between where Wi-Fi and its advanced cousin, WiMax, are now--and where Google and others want to take it. EarthLink this week announced it is exiting the local Wi-Fi business. The plans for countless proposed municipal wireless networks in some of the largest domestic hubs--like Chicago, Philadelphia and Boston--have collapsed in the past year for lack of direction and funding. On the other hand, CBS has ingeniously opted to use some of the spectrum broadcasters are using to provide limited digital service in New York. Despite the well-funded investments by Craig McCaw and his Clearwire Corp., WiMax and WiFi ventures in the U.S. have been slow to build and catch on. Cable operators (working with Sprint in a dubious wireless joint venture) and satellite providers (working with Clearwire) have long underestimated the importance of a wireless extension of their bundled services outside the home, particularly on mobile phones.
At the same time, more than 150 countries gathered at last week's World Radiocommunications Conference in Paris. They unanimously agreed that countries should use a slice of versatile, ultra-high frequency 700MHz for wireless broadband services, such as cell phones, mobile devices and WiMax, which will provide a solid base for global wireless broadband services and technologies. That may have been the last bit of incentive a worldly Google needed to jump into the wireless fray in unexpected ways.