700 MHz PreGame Show: Reading the Tea Leaves on Verizon and AT&T's Last Moves

Well the short forms are in, and a surprising number of companies are keeping mum about whether they even filed or not. But a few more interesting tidbits have turned up — notably that Echostar will come to the ball without its dance partner from the AWS auction, fellow satellite TV provider DIRECTV. And Clearwire, an anticipated participant, will sit this one out.

But of course, all eyes turn to the expected big boys of the auction, the largest incumbents, the returning champions, those winners of wireless, the masters of mobility, AT&T and Verizon! These are the guys to beat, the multi-billion wireless guerrillas that should be unstoppable and able to dictate to the market whatever they want. With the cable guys eliminated, they should be on easy street. But with Google making its play, and Frontline getting a 25% “designated entity” discount if it bids on D Block, even the mighty incumbents need to tread warily and brace for battle, lest they end up playing the French to Google’s Henry V at the spectrum equivalent of Agincourt.

With the necessary paperwork in to the FCC on December 3 triggering the anti-collusion rules and ending the last chance to say or do anything related to the auction, every last minute twitch and adjustment of the incumbent will be under intense scrutiny. Professional prognosticators, armchair analysts, and even random bloggers like yr hmbl obdn’t will try to read the tea leaves and predict the outcome of the upcomming spectrum steel cage smackdown.

So with this in mind, it is interesting to note the unusual a last minute wireless asset swap between AT&T and Verizon. Traditionally, wireless carriers have avoided these sort of mutually beneficial deals, preferring to duke it out directly with rivals. But AT&T Wireless and Verizon Wireless are now fully assimilated into the ILEC Borg Collective. Is this last minute swap a sign that the major wireless players will act more like wireline incumbents and work to defend their common interests — such as resisting the intrusion of newcomers Google and Frontline? Or is it merely that there are so few players to whom the companies can divest these assets (in both cases, the swaps are for licenses the FCC ordered divested as conditions on acquisitions) profitably before the Dec 3 short form deadline that this trade was inevitable?

And what should we make of Verizon’s announcement it will embrace Google’s “android” open platform for wireless? Is it just another move by Verizon to adjust to the T. Googlii lifestyle needs and turn a challenge to its business model into an opportunity to make huge profits? Or is this a final effort by Verizon to ward off my Apocalyptic Google Prophecy by persuading Google it doesn’t need to win licenses to get what it wants?

Finally, there is Verizon’s Petition for Reconsideration asking the FCC to reverse its decision to allow Frontline to keep its “Designated Entity” bidding credit while still doing 100% wholesale, but only for D Block. Is this just yet-another-round of the non-stop sniping between Frontline and Verizon? A signal that Verizon is interested in D Block? Or even a possible feint to disguise it’s intention to go for C Block and leave D Block to others?

More below . . . .

Much as I would love to believe that my Appocolyptic Google Prophecy has struck terror into the heart of the telcos so that they, like the people of Nineveh after the prophecy of Jonah, are scrambling to repenteth of their evil ways, I think this unlikely. With the exception of the Verizon Petition for Recon on the Frontline DE matter, these things have non-auction related reasons as well as auction related reasons. But I believe that the auction deadlines and auction pressure are having a definite impact. And, whatever the reason for taking the action, it is certain to have an impact on the bidders during the auction — although exactly what that impact will be is damn hard to determine.

With that nod to the reality that not everything in the world is about the 700 MHz auction, on to the analysis.

Past Auctions Are No Longer Prologue

Another of these “obvious when you say it but you really need to think about the implications” things is how the complete integration of the major wireless carriers into their wireline parents changes behavior. Until AT&T absorbed BellSouth (and thus assumed 100% ownership of Cingular) and Verizon assimilated control of its wireless unit, wireless carriers acted primarily as wireless carriers. They had similar interests, competed against each other, and generally behaved as a unified class.

That has changed in the last year or so. The total integration of AT&T Wireless and Verizon Wireless means that the unified corporate entity is now seeing the wireless aspect as tied to its wireline interests. This impacts behavior. For one thing, as I have written at length elsewhere, it means that the telcos will evaluate their actions in this auction on the basis of their overall strategy for wireline and wireless, not merely on the basis of what looks good for their wireless business alone.

But of greater relevance here, this difference creates a split in the wireless world between AT&T and Verizon and everyone else. This increasingly shows up at the FCC with regard to things like access charges (how much wireless companies pay to call someone on a landline and vice versa). Sprint and T-Mobile find themselves squeezed in ways that will look familiar to anyone who watched the Bells (aka “incumbent local exchange carriers, or ”ILECs“) take on the competing phone companies (”CLECs“). As a result, we see more instances of AT&T Wireless and Verizon Wireless acting like brother ILECs and less like fierce competitors, although traditionally Verizon and AT&T (when it was Cingular) did everything they could to disadvantage each other in the market.

The AT&T/Verizon Spectrum Swap — Does ILEC Brotherhood Trump Wireless Competition?

Which brings us to the announcement that AT&T and Verizon will swap some wireless assets. Both Verizon and AT&T have been acquiring rural carriers as a means of cutting down on roaming costs. In several markets, the FCC concluded that the transaction would give teh acquiring wireless carrier too much control of the market, and forced some modest divestitures.

With the auction coming up, the time frame for making deals was fairly short (AT&T only just got the approval fto acquire Dobson two weeks ago). So swapping the assets right away with the only other player big enough to make a quick trade without a complicated dicker makes sense. It also takes some of the preassure off AT&T if its strategy in the 700 MHz Auction is to avoid big ticket licenses in C Block and D block and go after smaller licenses to fill in the holes left after the Aloha deal. For Verizon, it gets some cash in hand (always nice before an auction) and takes some of the pressure off its own rural holes.

What makes this deal unusual is that, a year or two ago, it is not clear that these reasons woul have been enough to push Verzon Wireless to do such a deal with Cingular. There would have been much more concern by Verizon and Cingular about whether it was giving a very close rival too much of what it needed. The deal might still have happened — there are sound business reasons for it. But seeing a deal like this raises questions. Are we seeing the dominant carriers less concerned about competing against each other (a la the wireline world) and more concerned about possible newcomers like Google or about building a beter ”quadruple play“ to fight cable?

While this won’t impact behavior in the auction directly (the combination of anonymous bidding and anti-collusion will prevent AT&T and Verizon from assisting each other), it may give some indication of their priorities and overall strategy. If AT&T and Verizon are not worried about each other so much as about others, it may shape the spectrum they try to acquire and the way in which they bid. I have no clue how to read this (that takes people with better math and access to more information than me), but I note it as one more factor in an already unpredictable auction.

Verizon’s Decision To Support Android: What Does Google Do Now?

Next, there is Verizon’s announcement it will support Google’s ”Android“ open platform on its new ”open network.“ Verizon’s initial announcement had left unresolved whether Verizon would support Android and/or join Google’s ”open network alliance,“ and the new announcement (right before the anti-collusion deadline kicked in forcing everyone to shut their yaps) resolves this. Verizon will support Android as one of the options on its system, although it will also support other platforms and will still sell is own locked, subsidized ”full support“ equipment and service contract as well.

There are many non-auction related reasons for doing this. Android will be a major platform and many developers will naturally want to use it. Given that Verizon has stated that a critical goal is harnessing the innovation of users and developers (and prevent subscribers who value openness from leaving for Sprint or T-Mobile), it makes sense to support what will undoubtedly become one of the first widely accepted open platforms for development of mobile applications. It also helps deflect skepticism about whether Verizon will be genuinely open or ”open-lite.“ If Android is the standard of openness supported by the other ”open“ wireless networks, and Verizon supports Android, then Veizon is open. Q.E.D. and stop asking for regulation already.

But this announcement also strikes at the heart of my Great Google Prophecy. If I am right (always a big if) that Google wants to ensure a network open enough for it to prosper, but doesn’t want to spend more money than it must, Verizon has just extended an olive branch. ”Look,“ says Verizon. ”You don’t need to hold the licenses to have sufficient control of the operating system to ensure you get what you want. You control Android, and we will support it. So do you still really need to spend billions on licenses you don’t want and take a stock hit? Wouldn’t it be easier — and more fiscally prudent — to rely on our pledge to support Android instead?“

Much as I want to see Google bid, I gotta imagine this is a big temptation and — I suspect — a cause of much discussion back at the Google Mother Ship. Because while Google did commit to bidding, I gotta imagine there were folks at the highest level less than enthusiastic about it. They will certainly push that Google should take Verizon’s pledge to support Google into account when bidding, and should therefore reduce the amount of cash Google will pay for licenses because winning is now less urgent.

OTOH, Verizon’s adoption of Android is still voluntary, and can be dropped at any time. Again, for perfectly legitimate business reasons, Verizon might decide in 2010 ”Android really doesn’t work for us, we will no longer support it.“ Or, as with the question of whether Verizon is ”open“ enough to make Google happy, Google must consider whether Verizon will ”support” Android in the way Google wants, or whether Google wants to spend $5 billion or more to keep the kind of control that comes from actually holding and controlling the use of the licenses.

Very tough question. And again, not one I can answer without more info and more math than I have.

Verizon’s Recon Petition

Finally, what (if anything) to make of Verizon’s recent request to the FCC that it reconsider its decision of a few weeks ago to grant a designated entity credit to DEs that do 100% wholesale — but only for D Block. If Verizon did not intend to go for D Block, would it care about whether Frontline wins by virtue of a DE credit. Well, maybe. After all, it’s not like Verizon wants anyone to come in with a radically different business model that would utterly undermine the value it derives from keeping access to spectrum scarce. This alone — as well as the fact that Frontline and Verizon have utterly pissed each other off over the last six months — might well justify asking the FCC to reconsider.

Alternatively, does this signal Verizon interest in D Block itself? I have argued that Verizon’s interest in opening its network derives in no small part from Verizon wanting to capture C Block. But I may be wrong, or Verizon may want to keep its options open going in to the auction. Possibly Verizon may want to capture both C and D blocks. True, D Block’s mandatory cooperation with the public safety block (in exchange for access to public safety spectrum) remains undefined. But Verizon is in a good position to negotiate with public safety and meet their needs — if it must. Finally, Verizon is well aware that it’s every move is under scrutiny by rival bidders, who will shape their strategies by trying to anticipate Verizon’s strategy. Is this merely a feint, an effort to raise doubt about its interest in C Block and divert the attention of rival bidders elsewhere?

Again, not a question easily answered. On this one, perhaps the easiest answer is that Verizon wants to keep its options open. And sticking it to Frontline just makes it that much more attractive.

Stay tuned . . . .