700 MHz Endgame: Martin Antes. AT&T Raises. Google Calls. Does AT&T Fold or Call?

So yesterday, AT&T was extolling the virtues of the Martin plan. Among its virtues, Jim Ciconni included:

In effect, Chairman Martin’s plan faces Google and others with a “put up or shut up” opportunity. If they are serious, they will be able to bid and test their model in the marketplace against the business models of companies already enjoying widespread consumer acceptance.

Critically, Ciconni was referring to the “reserve price” feature of the Martin plan. To protect himself against the threat that even his device only open access would depress auction revenues, if the 22 MHz “C” block did not fetch at least $4.6 billion in bids, the FCC would cancel that part of the auction, split the 22 MHz int two 11 MHz blocks, and reauction without conditions. (Reserve prices are not uncommon in spectrum auctions, although as far as I know they have never been tied to a specific condition.)

So today, Google’s Eric Schmidt called Ciconni’s raise. In a letter to Chairman Martin, Schmidt committed to bidding a minimum of $4.6 for the “C” Block — but only if the Commission adopts all “four opens” that Google demanded in its letter last week and endorsed by the public interest coalition, Frontline, and a bunch of others. That means not just real device attachment and open application rules, but also real wholesale obligations at non-discriminatory prices. (You can find Google’s blog post explaining their letter here.)

The fear that Google would not bid no matter what, or that only one or two companies would bid on a license with wholesale open access conditions, has been one of the central features of the debate. Even ardent believers in real open access like Commissioner Adelstein have expressed real concerns over this. And, as I have noted previously, AT&T and its various sock puppets and Republican subsidiaries have used the threat of messing with the revenues as a major weapon against wholesale open access.

In a stroke, the Google letter changes the nature of the game. Google has now guaranteed that the feds will make their auction projections — but only if they include real open access. Meanwhile, rumors swirl that it may be AT&T, rather than Google, that sits this auction out. Suddenly, we switch from “will including wholesale open access keep out bidders and lower the revenue” to “will not including wholesale open access keep out needed bidders and drive down revenue.”

Meanwhile, the clocks ticks toward deadline. What does it mean? What happens next? And will I ever get a vacation this summer?

See below . . . .

“Not Chess, Mr. Spock. Poker.” –James T. Kirk, From the Classic Trek Episode The Corbomite Maneuver.

I will say this for Google, having started as total wussies in this proceeding, they have developed, as Our Master Stephen Colbert would say, a truly grand set of double-Os to sit between those two Gs. This is a bold stroke, at a time when AT&T finds itself under increasing pressure and standing alone as the political target.

First, the likely timetable. Although not yet announced, the conventional wisdom has Martin scheduling a meeting for July 31. That means that “Sunshine” (under which all communications to the agency must cease, except for some loopholes through which the initiated can drive a herd of renegade Apatosaurs) will kick in at 5 p.m. Tuesday July 24 — unless the FCC extends the time for public meetings as they did last time. But I don’t think they will. I think they want to cut off debate and get this thing over with.

So all formal letters and petitions and meetings at the agency will end next week. But we will still get the House Commerce Committee Hearing on Tuesday afternoon, as well as various press events, editorials, etc. that Commissioners will possibly read or hear about. But even so, there is not a heck of a lot of time for last minute maneuvering here.

What Does This Change?

The two biggest issues on wholesale open access are that (a) Google and Co wont show up; and (b) Only Google will show up, thus getting valuable licenses dirt cheap. There’s other crap about not legislating business models (as if every God damn decision about wireless wasn’t “regulating a business model” or “picking winners”), but on a practical level these two are the biggies. As noted above, even wholesale open access supporters like Adelstein had real concerns over this, making it difficult for them to push hard for wholesale.

Martin, knowing he’d get flack on these issues for even his version of open access-lite, included a reserve price. Basically, Martin anted $4.6 billion and said, “this is what we figure is the minimum to protect the auction revenue.” Remember, the conditions only apply to the “C” block, so there is no concern that the other licenses will “suffer” and drive down revenue.

Google had argued that this was not enough to get them to enter the auction. As I have explained, the issue here is what folks are calling the “blocking premium.” It works like this: a new entrant values the license on how much revenue the license will bring in. But an incumbent values the license on the revenue + the value of excluding a new competitor. So if it is rational for a new entrant can bid $1 billion based on expected revenue, a rational incumbent would bid more, because the license is worth more because of its value to exclude a competitor. So an incumbent will always win against a new entrant, because they get a higher return on the license and can therefore bid more than a rational new entrant. There is also an “incumbent discount,” which is the difference in cost between an incumbent making incremental changes in the existing network for new licenses v. needing to build an entire new business from scratch. Google argued that wholesale open access eliminates the blocking premium and helps level the incumbent discount, because (a) you can’t block new entrants even if you win the licenses (assuming the FCC is serious on enforcement) and (b) because whoever wins will need to develop new network technologies to handle the wholesale. Therefore, only if the FCC includes wholesale open access can even a cash-rich giant like Google hope to win.

Enter AT&T, thinking it would call Google’s bluff, defying Google to win the licenses and “test its business model.” Google now calls, saying it will guarantee the minimum price set by Martin, but only if it has a chance of winning, for which it needs wholesale open access.

So now no one can claim that a mandatory wholesale open access condition will mess with the auction revenue. AT&T (and its cronies) cannot complain that Google is trying to get the licenses cheaply, because they already praised the $4.6 billion reserve price as sufficient to protect the public from a revenue shortfall. That only leaves the “regulating business models” crap. But again, Google now has a ready answer “We are willing to put our money where our mouth is and risk failing. But we won’t ever get a chance to even try our business model if we can’t win the license. You can still come bid against us, but without the blocking premium. If you think we’re going to fall on our fanny if we win, why should you care? Or is it that you are afraid we will win in a fair fight and that our wholesale business model will work. Because we all know that if we get a chance to do real wholesale open access, all your yummy monopoly-like rents from needlessly high prices to consumers to premiums exacted from equipment manufacturers will go bye-bye.”

Impact at the FCC
In my assessment of Martin’s draft offer, I opined that I took Martin at his word that he wanted to resolve real problems but was balancing various political costs of moving forward and the risks of being wrong. The Google letter gives Martin a chance to get more aggressive if he wants to (or needs to). While Martin can still threaten to drop open access (even open access-lite) entirely by going to fellow Republican McDowell for a 3-2 vote, that would mean accepting a total loss on the band plan. Martin would walk away with nothing to show for three months of additional slogging and leave himself open to political backlash from Congressional Dems and industry folks that supported the network device attachment rules. At the same time, he has a much more difficult time justifying walking away from wholesale, since Google has vowed to show up and ensured that the C block will get at least what Martin himself said was a fair price.

Similarly, the Democrats now find their worst nightmares resolved. This should strengthen their hand considerably in negotiations. They can proceed confident that, if they get their way, the auction will not be a failure (unless no one shows up to bid on the “unencumbered” licenses). That has to take a huge load off their minds and free them up to play a stronger game of hardball.

Impact on Telcos
Meanwhile, the telcos find their own auction revenue bluff called. As Om Malik observed, the Bells have some financial constraints of their own. While Verizon has made it clear for more than two years that it regards this as a major auction, AT&T has been far more coy about their proposed level of participation.

This has led to some speculation that AT&T will not, in fact, bid in a serious way. AT&T has pretty good spectrum already (in fact, they are so fat with spectrum that we convinced the FCC to require divestiture of some spectrum when they merged with BellSouth). Further, unlike the non-telco wireless guys, AT&T has plenty of spectrum in the “sweet spot” below 1 GHz from when the FCC gave every Baby Bell free PCS licenses back in the 1980s. So while this spectrum is nice, and I think they really want it, it isn’t life or death for them. Further, AT&T has some huge capital expenditures related to its system upgrades, and it is worried about revenue from domestic residential service and how it manages to compete with cable.

Suddenly, the question of what brings in bidders (and therefore revenue) is reversed. Google is clearly serious — if they get the conditions they want. But is AT&T serious, even if it keeps wholesale open access out? If I were Martin, I’d want to see AT&T make a commitment equal to Google’s that they will come play if Martin doesn’t include wholesale open access. Because Martin now faces a new nightmare scenario. What if he sides with AT&T against Google and doesn’t include wholesale conditions? Then what if Google doesn’t bid, but neither does AT&T. The “C” Block misses the reserve bid, and they hold the reauction. But suppose the newly created 11 MHz REAGs still don’t meet the reserve price. If that happens, Martin will pay a steep political price, because every Democrat will remind him that if he had given Google wholesale conditions, he would have at least met the reserve price.

So Martin should want a commitment from the Bells that they will bid up to the reserve price no matter what if he doesn’t include a wholesale condition. But the Bells may not be in position to do that — especially if Verizon has its sites set on the public safety “D” Block and AT&T is unsure how hearty they want to party.

So, will the Bells call Google? Or fold?

Stay tuned . . . .

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3 Comments

  1. Tom Coseven says:

    Chairman Martin must feel like he is in the catbird seat. With Google trying to “buy the pot,” they can’t come back later and say “never mind.” Also there is no way the Telco, MSO and Sat players can BOTH play it safe AND argue for no open device/application conditions. If they want to argue for no conditions, they will need to raise Googles floor bid. Otherwise, Martin gets to set a $4.7B floor for open access without wholesale with the new fallback condition being Google’s plan if no one meets the floor bid. Martin is in a no lose situation on the “C” block. Google can be locked into bidding as a back-up, and the telco’s can’t say they were forced to no bid because of the wholesale requirement! Sure puts the pressure on McDowell and Tate to join the Chairman.

  2. Jim Aimone says:

    The key player here is Verizon Wireless who already is a large player in the 700Mhz space (Fed Gov. Contract to build a 700Mhz network)and must get a large slice (Nationwide) of the Upper Bands if they want to stay competitive in their Cellular business. They need the spectrum to offload their existing Narrowband Data Services off their EV-DO net and come in with a serious Broadband offering or they will lose their market to AT&T and Sprint/Nextel (WiMAX play). Not sure who will bid against them for the Upper Band-would love to see Google go for some of that Premium Spectrum and force VW to spend some real $$.
    My question is:
    Will the FCC open up some of the 22Mhz for local providers to bid on the spectrum in their local COunties (CMA and EAs)??
    If not will the FCC require Google to deal with the Service Providers in its Wholesale model??

    Jacomo

  3. Jim Aimone says:

    AT&T really does need to play in this space as well, otherwise a Google will gain their much sought after Last Mile Play and begin a slow process of bypassing AT&T (and all other Incumbents)Broadband Wired services nationwide.
    With this spectrum, assuming it is conducive to true 2 Way communications (Very congested Lower Band) Google will be able to provide an entirely new level of Broadband Services since they would own and operate an end to end Broadband Distriubtion network that would effectively bypass the best effort Interent and deliver very high quality (Carrier Grade-love that) services to local service providers and or direct to customers.

    Jacomo

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