The WSJ article today: “Google has even bigger plans for mobile phones” appropriately addresses the big “open” question of whether Google is serious about becoming a wireless carrier, because if it is, it will need to bid and win substantial spectrum in the upcoming FCC 700 MHz spectrum auction.
The WSJ article states: “the behind-the-scenes moves illustrate just how serious the Internet giant is about trying to reshape the wireless world.” The evidence in favor of Google’s serious entry into wireless is significant, as Google:
- Successfully extracted unprecedented FCC auction rules that would favor Google’s advertising business model over the existing wireless subscription model, and that would likely depress the business utility of the spectrum so Google could acquire it at below market value;
- (Google understands it broke a lot of china at the FCC and in Washington this summer in order to win the “Google spectrum concessions.” Hopefully, Google also understands it would be more than bad form to slap the hand that tries to feed you, by not bidding on the band specially tailored for Google’s model.)
- Has repeatedly pledged it would bid almost $5b in the auction;
- Acquired a test wireless license, built towers and is operating a wireless service at its headquarters using “googley” phones;
- Has hired game theorists to game out its strategy;
- “Discovered Wall Street was enthusiastic about the company’s ability to raise any needed cash;”
- (Truly amazing that Wall Street bankers would in fact loan a company money that already has ~$10b in cash in the bank and the number one brand in the world. Good for Google for clearing up that big uncertainty…) and
- Had discussions with a variety of potential partners like Clearwire, but is reportedly likely to go it alone to maximize its bidding flexibility.
Let me add another reason that the Googlers may bid: EGO. Googlers believe they are the smartest of the smart, and they must be drawn to the challenge and complexity of this “high-level chess game” in auction game theory. What better forum to showcase their intellectual, algorithmic, and business acumen superiority?
Regardless of whether Google actually bids or not, or whether Google wins the auction and becomes a wireless carrier, I remain deeply skeptical that becoming a wireless carrier is good for Google’s public investors.
- I believe there is a strong case, which I make below, why becoming a wireless carrier is folly and/or hubris for Google’s public shareholders.
First, becoming a wireless carrier could be highly deflating for Google’s stratospheric expectations warranting a ~50x earnings valuation multiple.
- While some have speculated that Google is the only one to “blow open” the wireless business model, I believe wireless entry may turn out to be the best way for Google to “blow away” the “pixie dust” that is responsible for levitating Google’s stock to heights that are reminiscent of the dot.com bubble.
Is a ~50x earnings valuation multiple compatible with:
· Carrying multiple billions in long term debt for 15+ year assets like spectrum, towers and equipment?
· Planning to spend ~$10b in new cap-ex/op-ex with an earliest expectation of a return on investment (ROI) in 5 years? If ever?
§ (The spectrum isn’t available until 2009-10, the network has to be built, the operating, sales and retail customer service infrastructure, needs to be built out, and then customers need to be acquired as the last-to-market entrant in a maturing industry.)
o Hasn’t the short-termism that dominates the public markets proven repeatedly that big cap-ex investments that don’t have a current year ROI are punished with lower valuation multiples?
§ (Microsoft’s stock was punished for years for its big long term investments; Verizon’s stock was punished for its long term Fios fiber optic investments, etc. …).
o Another question on this point. What would an endeavor this big mean for Google’s near-perfect, quarterly-margin management at about 32% over the last several quarters despite eye-popping growth?
· Becoming a regulated company? While wireless is much less regulated than wire line, it is still regulated by the FCC.
o Google’s implicit plan to use wireless to favor its own applications creates the potential for wireless regulatory requirements and expectations to creep into Google’s currently unregulated applications business. Google hasn't yet learned that wooing regulators is like snuggling up with fly paper.
· Becoming this era’s equivalent of a CLEC, (competitive local exchange carrier for those with short memories) -- at the advice of the Washington CLEC retreads that Google has hired for their Washington office.
o How soon people forget that there are only so many dollars and so many customers in the market – pixie dust excluded.
o It appears that the market has amnesia about the complete market meltdown of the CLEC industry for pursuing expensive and unproven business models., created out of whole cloth by regulators.
· Departing from the company’s core competency, which it uses to dominate globally, and entering a highly competitive, largely penetrated, mature market, on a piecemeal basis?
· Leaving the advantaged space search where Google benefits from global standardization and low barriers to entry and entering a highly capital-intensive, regulated wireless business that is highly fragmented by: distribution technology, transmission technology, air interface, spectrum license, region, and country -- among other non-standard elements.
Second, wouldn’t becoming a regulated wireless carrier shatter the notion that Google is different from broadband providers and that Google and Google search, should not be considered an Internet access provider subject to net neutrality expectations?
Third, isn’t there a risk of Google bringing more ads to cell-phones, a place where consumers have grown accustomed to not being assaulting with advertising?
- To date, advertising driven telephony models have gone no where.
- Moreover, remember the FTC’s “do-not-call” list against tele-marketing also applies to cellphones, so consumers have already spoken loudly that they do not want aggressive advertising reaching them on their cell-phones.
- And have investors missed the ominous and pertinent development for Google, that consumer groups just announced, a new “do-not-call”-like initiative called “do-not-track,” which would directly target Google’s vision of cross-platform tracking of people’s click stream behavior implicit in the Google-DoubleClick merger?
Bottom line: Google may very well bid and win spectrum in the upcoming FCC 700 MHz auction.
- The question for public shareholders of Google is simple: is the Google as wireless carrier scenario good for the valuation of their investment in Google?
- …uuuuhhh... more pixie dust please….
