Is Verizon gaming Google in US wireless auction?

Divide and blanket


Analysis In the battle for the so-called 700-MHz band - a lip-smackingly juicy slice of the US wireless spectrum - somebody just pulled a fast one. And you can bet it was Verizon, yanking the rug out from under Google and a crazed Eric Schmidt.

As the US Federal Communications Commission (FCC) auctions off the 700-MHz band - a five-tiered wireless layer ideal for high-speed internet access - all bids are secret. So we don't really know who's up to what.

But all clues point to an epic tete-a-tete between the world's largest search engine (which has spent the last six months fighting for "open access" to the band) and the world's most obnoxious telco (which has spent the last six months playing Google spoiler).

Last summer, after heavy lobbying from Google, the FCC agreed that if bidding for the 700-MHz "C Block" reached $4.6bn, the block would indeed carry an open access requirement. (The band has five frequency tiers: the A through E Blocks) In theory, this requirement would force the winning bidder to allow access from any device and any application.

Well, on Thursday, someone laid down a $4.7bn bid for the block - and the open access requirement officially kicked in.

Chances are, this bid came from Google. Despite claims to the contrary, all other players with that sort of cash, including Verizon and AT&T, have no interest is answering to an FCC open access requirement. They prefer the status quo, where they decide which apps and devices access their wireless networks.

That said, Verizon desperately wants the C Block. In the fall, the company asked a US Appeals Court to remove the FCC's open access requirement entirely. And when that didn't work, it told the world that its current network would be "open" by the end of this year.

With this in mind, we're betting Verizon was behind the clever little trick that went down during yesterday's bidding.

You see, there are two ways to bid for the C Block.

"The C Block is an interesting animal," says David Moshal, the man behind Optimal Markets, a firm that builds tools for simulating and analyzing FCC auctions. "In the continental US, there are eight different regions. You can bid on regions by themselves, but you can also bid on a package that covers the whole lot."

On Thursday, in round 17 of the auction, someone bid $4.7bn for the whole package. But yesterday, in rounds 27 through 30, someone started bidding large for the regional licenses. Eventually, the sum of the regional bids topped the bid for the whole package. If the auction ended today, the regionals bids would take the cake.

"If the sum of the children is greater than the parent, then the children win," explains Moshal.

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Bid Busting For Fun and Profit

Chances are, it was Google that made the overarching $4.7bn bid - and it was Verizon that started tossing around regional bids, trying to win the C Block in a whole new way.

What happens if someone like Verizon only wins some of the regional licenses? Obviously, they can't use the others. But they could fill in the holes with spectrum from other slices of the 700-MHz band: the A, B, and E Blocks. These blocks - which sit at a different frequency - are also split up into regional licenses, but they can't be purchased as complete 50-state packages.

(The D Block is a different matter. It can only be won as a nationwide whole, and whoever wins it is required to build a wireless network specifically for public safety).

So, Verizon could piece together a nationwide network by mixing and matching slices of spectrum from the A, B, C, and E Blocks. It just has to make sure that the sum of the bids for the regional C Block licenses top the bid for the entire C Block package.

"If you wanted to cover the whole country with a network," says Moshal, "you could also win some of the pieces of the C Block and make up the rest by bidding on other blocks."

Judging from current bidding patterns, it seem like Verizon - or someone else - is hoping to do this very thing.

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There's one more question to ask: If Verizon is indeed trying to win the C Block through the individual regional licenses, does Google care? After all, the open access requirement is now in place. Some have speculated that Google was never interested in actually building its own wireless network and merely wanted the FCC to force open access on the big telcos.

Or course, the open access requirement may not force open access on the big telcos. We've always contended that if Verizon wins the C Block, it will play fast and loose with the word "open."

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