Why Google May Still Bid

Journalists and industry analysts have been characterizing Tuesday’s FCC decision not to include a wholesale open access condition on the C block licenses as a defeat for Google which makes it very unlikely that Google will bid in the 700 MHz auction, obviating the best chance for emergence of a third broadband pipe to challenge the cablecos and telcos. This seems highly premature to me for several reasons.

Google’s letter to Chairman Martin offering to enter the auction and bid to at least a $4.6 billion reserve price if its conditions were met by the FCC was strategic. It was aimed at increasing the likelihood that Google would prevail at auction by making the C block less attractive to major cable and telephone incumbents and, thus, discouraging their entry, while ensuring that the federal government would suffer no serious revenue loss as a consequence. Google at least broke even with the Commission’s decision. Conditions which would have made the C block less attractive to Verizon, SpectrumCo, or ATT were not adopted, but the FCC did not prohibit the winner of the C block from implementing Google’s proposed business plan on its own: Google would still be free to lease access on a wholesale, nondiscriminatory basis permitting open access for all comers.

The first question is whether the reason for which Google considered entering the wholesale broadband market in the first place still holds.

The absence of a third broadband pipe ultimately means, to paraphrase George Orwell, a cableco/telco boot in Google’s face forever. Net neutrality has not prevailed legislatively or at the FCC, and even if it had, it would carry with it an enforcement nightmare with incumbents constantly seeking to evade. Cableco and telco control of the pipes affords them the opportunity to impose oligopoly rents on Google at any time in the future and the longer this situation obtains, the worse it gets for Google. The only escape for Google is either to own a third pipe or facilitate creation of a third pipe on open access principles. The latter is cheaper, easier, and helps overcome the incumbent premium which Google identified in the argument for its proposed conditions. This hasn’t changed a whit.

The next question is whether Google can win the C block in an auction in which the major incumbents are serious contenders.

Obviously it would have been hugely to Google’s advantage for the FCC to mandate the wholesale open access condition. However, the Commission’s adoption of anonymous bidding rules creates a bidding environment which is considerably more favorable to Google than previous bidding rules. Anonymous bidding makes imposition of a blocking premium to deter new entrants impossible: incumbents cannot identify new entrants to block, since only the amount of the highest bid on each license with no bidder identification is revealed at the end of each round. A very significant incumbent advantage ended when anonymous bidding was adopted: blocking bidding and retaliatory bidding are gone. It is relatively easy in game theoretic terms to discern several strategies under anonymous bidding under which Google could prevail over incumbent cablecos and telcos.

The reason Google got involved in the 700 MHz auction proceeding in the first place still holds, and Google stands a good chance of winning the C block under the rules the FCC adopted. I don’t think anyone can truthfully say that Tuesday’s FCC meeting put Google out of the auction. Google has some interesting calculations still to make. We may get a third pipe yet.