This is good

Google Shrewdly Plays Wireless Bid
By Vishesh Kumar
TheStreet.com Senior Writer
12/6/2007 6:03 AM EST
URL: http://www.thestreet.com/newsanalysis/techstockupdate/10393139.html

Don't expect Google (GOOG) to win the upcoming wireless spectrum auction. But in many ways, the company already may have the prize it wanted. What's more, losing the auction actually may serve the search giant's purposes more than winning would have. Google said last Friday that it would bid on the 700-megahertz spectrum the Federal Communications Commission is auctioning beginning Jan. 24. Previously used for television broadcasts, the spectrum is highly powerful and could help the search giant make good on its highly ambitious plans for the mobile Internet market. And with nearly $13 billion in cash and no debt, Google has the balance sheet and financial muscle to be a serious player in the auction. Still, rather than actually winning the auction, Google's participation is likely intended to secure what it sees as the real reward: ensuring that whoever ends up owning the spectrum allows the open access of applications and devices. Indeed, as long as this goal is met, it's hard to see why Google would want to take on the costly task of building and running its own network. But given how much is at stake when it comes to the mobile market, Google's vigilance is shrewd, even if it never planned to own the spectrum. To make sure the spectrum stays open, says Jamie Townsend, head of strategy at research boutique JRPG, Google must bid a minimum of $4.6 billion in accordance with FCC guidelines. Over the summer, Google had successfully lobbied the FCC to include provisions in the auction that would force the winner to open access to applications and devices. But if those stipulations deterred bidders from putting in a bid of at least $4.6 billion, the spectrum would go back on sale 30 days later without the provisions. With that floor in place, the two elements most crucial to Google aren't removed from the process. Above that level, Google can simply drop out of the bidding process. Townsend expects the spectrum to go for close to $6 billion and says it's highly unlikely that its $4.6 billion bid will mean its left holding the bag. Given how vital Verizon (VZ) and AT&T (T) believe the spectrum is to the future of their businesses, it's easy to imagine the bidding going into the double-digit billions. Owning and operating a network, on the other hand, could make for a costly and distracting scenario. "The cost of building a network could reach more than $10 billion, significantly reducing our estimated 2008 cash balance [from] nearly $20 billion to [about] $5 billion," Goldman Sachs analyst Anthony Noto wrote in a research note on Google last week. It could also end up "diverting management's attention from its core search product and foray into display advertising," Noto wrote. Goldman Sachs makes a market in Google shares. Given the potential size of the mobile advertising opportunity over the long term, however, Google's efforts, even without the spectrum, should prove well worth it. While acknowledging that the market is still in its nascent stages and that forecasting is difficult, Citigroup published estimates last week that could see the global search market reach an astounding $28 billion by 2010. And that's exactly the type of large market Google needs to meet the aggressive growth expectations Wall Street has set for the company. Its stock, which closed trading Wednesday at $698.51 a share, trades at a price/earnings-to-growth ratio of 1.3. That means that analysts expect the company to grow earnings by almost 35% each year for the next five years. Through aggressive gamesmanship and legwork, Google seems to have set itself up to have as clean a shot as possible at the emerging mobile advertising pie. Given the heady growth expectations set out for the company, it's going to need that access.