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Take Two: Google's Wireless Ambitions

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[qi:083] Google’s mobile ambitions have by now been widely articulated in the media, and after my initial post, I spent some time on the phone with various people discussing whether or not it made any financial sense for Google to be chasing the wireless dream. Many of the folks I chatted with expressed reservations about Google actually building a network, and felt that the company is using a big stick to get U.S. carriers to get a move on.

The FCC, for instance, has offered Google (GOOG) some measured encouragement in the hopes that the firm’s involvement in the wireless auctions would help push the prices up past the $10 billion mark. Google is, after all, obligated to make at least a minimum bid of $4.6 billion since the FCC agreed to their “Open Access” requirements for the C Block.

Secondly, this is going to be one expensive exercise for them. Assuming they win the 700 MHz auction and it costs them about $5 billion and another $2 billion in network buildout costs — that means a little less than $1 per share in lost income. Of course there is also the question of management focus, something that is much more difficult to quantify. By the way, our good friend, Ben Schacter who follows Google for UBS Research helped with the math here:

Think of it as not getting the interest on $7b and then tax affect it. So assume $7b multiplied by 5% (interest rate), then a 26% tax rate = about $260 million a year in lost income, or well less than $1.00 per share.

I think I am being conservative here. According to UBS estimates, the cost to build out the network is going to be about $25 a pop in urban markets and as much as $40 a pop in suburban markets, adding up to a total of between $8 billion and $10 billion. Of course, the operational costs of maintaining a nationwide network are humungous, never mind the service-support infrastructure.

The more I think about it, the less likely it seems that Google is going to build their own network. My guess is that they are going to try and participate via investments in other efforts. I had outlined one crazy scenario last week. Nevertheless, it is fun to see Google drive the wireless carriers batty with its posturing, and at the same time get what it really wants.

17 Responses to “Take Two: Google's Wireless Ambitions”

  1. Infrastructure builds, along with spectrum licenses, are w/o question the biggest barrier to entry. Rights of way. Leasing costs. Sheer hell. If Google’s big stick can make carriers build better networks with more capacity, hallelujah. Mobile carriers seem interested mostly in finding every way possible to dodge CAPEX while simultaneously trying to reduce subscriber churn fed up with dropped calls and spotty coverage. Om, we must hope that the Google stick can reverse current trends.

    1. The phone companies have never wanted to be landlords.
    2. Being a landlord long term is a good business.
    3. Google could be a good landlord and rent space on its network to others and make a killing.

    If the mobile operators worked on providing the finest networks, Google provided the best search (Focus on One thing is in their 10 commandments) and search-related ad network, while renting space to other more traditional ad networks and taking a cut all will work out fine.

    I believe I was at a conference where it was suggested – ask Andy Seybold –
    a) the C block was not enough for a nationwide service
    b) it was about $17B to build out a nationwide network

    However, Google is algorithm driven – with good compression -aside from Shannon – maybe you can increase capacity – or better still get your uses – a la Meraki – to build out the expensive last 50 yds of the network – so maybe Google knows something about the C block that isn’t generally recognized and they have figured out how to monetize it.

    Just let’s hope the shareholders give Eric and co the leeway to invest properly and not make them go for short term profits as has hampered so many other potential strategic investments.

  2. I agree. I think Google building the network on their own would be a last resort. There are just too many other parties that have much to gain from this and would participate, and Google would welcome it as long as they are bringing something to the table. Om, your prediction last week may be “crazy” but I certainly wouldn’t bet against something along those lines.

    Sent from my mobile using FeedM8

  3. Fred Smith

    It will be interesting to see how the advent of the gPhone will affect YouTube’s fortunes. The NewsVisual article on Google’s Open Handset Alliance implies that it’s really personal connections among business leaders that determine future success in the competitive marketplace. Maybe, YouTube needs to form the right business connections as a precondition to monetization.

  4. David Sachs

    It hardly seems fair to calculate the opportunity cost to Google as merely lost interest income. Perhaps its cost of capital instead? Or, better yet, the returns on other investment opportunities it has to forgo to deploy its cash to build out a wireless network?

  5. You’re assuming they will provide support. All of Google’s products – unless you’re in the top percentile as a paying customer – are self-serve. Open wireless network with an ad supported and paid premium model where only the paid people get any kind of support. Perhaps the support is through a partnership with an existing carrier who also gets to use the wireless spectrum.