Winner of the 700-MHz Auction is ... Google !

The United States has recently ended (March 2008) the auction 5 blocks (see details below) of the analog TV spectrum band of 700-MHz. More specifically the band between 698 - 763 MHz (UL) and 728 - 793 MHZ (DL), with a total bandwidth of 2x28 MHz. In addition a single band 1x6 MHz in 722 - 728 MHz range was likewise auctioned. The analog TV band is expected to be completely vacated by Q1 2009.

The USA 700 MHz auction result was an impressive total of $19.12 billion, spend buying the following spectrum blocks: A (2x6 MHz), B (2x6 MHz), C (2x11 MHz) and E (1x6 MHz) blocks. The D (2x5 Mhz) block did not reach the minimum level. A total of 52 MHz (i.e, 2x23 + 1x6 MHz) bandwidth was auctioned off.

Looking with European eyes on the available spectrum allocated per block it is not very impressive. The 700 MHz frequency is clearly very economical for radio network coverage deployment in particular compared the high-frequency AWS spectrum used by T-Mobile, Verizon and Sprint. However, the 6 to 11 MHz (UL/DL) is not very impressive from a capacity sustainance perspective. It is quiet likely that this spectrum would be exhausted and rapidly leading to a significant additional financial commitment to cell splits / capacity extensions.

This $19.12 billion for 52 MHz translates to $1.22 per MHz spectrum per Population @ 700 MHz.

This should be compared to following historical auctions
* $0.56/MHz/Pop @ 1,700 MHz in 2006 US AWS auction
* $0.15/MHz/Pop (USA Auction 22 @ 1999) to $4.74/MHz/Pop (NYC, Verizon).
* $1.23/MHz/Pop Canadian 2000 PCS1900 Auction of 40MHz.
* $5.94/MHz/Pop UK UMTS auction (2001) in UK auctioning a total of 2x60 MHz FDD spectrum (TDD not considered).
* $7.84/MHz/Pop German UMTS auction in 2001 (2x60 MHz FDD, TDD not considered).

(Note: the excesses of the European UMTS auctions clearly illustrates a different time and place).

What is particular interesting is that Verizon "knocked-out" Google by paying $4.74 billion for the nationwide C-block of 2x11 MHz. "Beating" Google's offer of $4.6 billion.

However, Google does not appear too sadened of the outcome and .... why should they! Google has to a great extend influenced the spectrum conditions allowing for open access (although it remains to be seen what this really means) to the C spectrum block; The USA Federal Communications Commission (FCC) has proposed to apply "open access" requirements for devices and applications on a the nation wide spectrum block C (2x11 MHz).

Clearly Google should be regarded as the winner of the 700 MHz auction. They have avoided committing a huge amount of cash for the spectrum and on-top having to deploy even more cash to build and operate a wireless network (i.e., which is really their core business anyway).

Googling the Business Case
Google was willing to put down $4.6 billion for the 2x11 MHz @ 700 MHz. Let's stop up an ask how their business case possible could have looked like.

At 700 MHz, with not too ambitious bandwidth per user requirements, Google might achieve a typical cell range between 2.5 and 4 km (Uplink limited, i.e., user equipment connection to base station). Although in "broadcast/downlink" mode, the cell range could be significantly larger (and downlink is all you really need for advertisement and broadcast;-).

Assume Google's ambition was top-100 cities and 1-2% of the USA surface area they would need at least 30 thousand nodes. Financially (all included) this would likely result in $3 to $5 billion network capital expense (Capex) and a technology driven annual operational expense (Opex) of $300 to $500 million (in steady-state). On top of the spectrum price.

Using above rough technology indicators Google (if driven by sound financial principles) must have had a positive business case for a cash-out of minimum $8 billion over 10 years, incl. spectrum and discounted with WACC of 8% (all in all being very generous) and annual Technology Opex of minimum $300 million. On top of this comes customer acquisition, sales & marketing, building a wireless business operations (obviously they might choose to outsource all that jazz).

... and then dont forget the customer device that needs to be developed for the 700 MHz band (note GSM 750 MHz falls inside the C-band). Typically takes between 3 to 5 years to get a critical customer mass and then only if the market is stimulated.

It would appear to be a better business proporsition to let somebody else pay for spectrum, infrastructure, operation, etc... and just do what Google does best ... selling advertisments and deliver search results ... for mobile devices ... maybe even agnostic to the frequency (seems better than wait until critical mass has been reached at the 700 MHz).

But then again ... Google reported for full year 2007 a $16.4 billion in advertising revenues (up 56% compared to the previous year).(see refs Google Investor Relations). Imagine what this could be if extended to wireless / mobile market. Still lower than Verizon's 2007 full year revnue of $23.8B (up 5.5% from 2006) but not that much lower considering the difference in growth rate.

The "successfull" proud owners (Verizon, AT&T Mobility, etc....) of the 700 MHz spectrum might want to keep in mind that Google's business case for entering wireless must have been far beyond the their proposed $4.6 billion.


Appendix:

The former analog TV spectrum auction has been divided UHF spectrum into 5 blocks:
Block A: 2x6 MHz bandwidth (698–704 and 728–734 MHz); $3.96 billion
Block B: 2x6 MHz bandwidth (704–710 and 734–740 MHz); $9.14 billion dominated by AT&T Mobility.
Block C: 2x11 MHz bandwidth (746–757 and 776–787 MHz) Verizon $4.74 billion
Block D: 2x5 MHz bandwidth (758–763 and 788–793 MHz) No bids above the minimum.
Block E: 1x6 MHz bandwidth (722–728 MHz)Frontier Wireless LCC $1.26 billion