"While some have protested the international broadband penetration rankings," Adelstein said, alluding to some of his colleagues at the Commission, "the fact is the U.S. has dropped year-after-year. This downward trend and the lack of broadband value illustrate the sobering point that when it comes to giving our citizens affordable access to state-of the-art communications, the U.S. has fallen behind its global competitors."
Copps called the lack of a national broadband policy "tantamount to playing Russian roulette with our future."
"Each and every citizen of this great country should have access to the wonders of communications," Copps said. "I'm not talking about doing all these people some kind of feel-good, do-gooder favor by including them. I'm talking about doing America a favor. I'm talking about making certain our citizens can compete here at home and around the world with those who are already using broadband in all aspects of their lives."
“Freedom” is a word that gets used a lot in Washington, but what does it mean, exactly, for Google and its users? Tuesday night, our CEO Eric Schmidt told the Progress & Freedom Foundation’s annual Aspen Summit that freedom and openness are the core principles that helped make possible the Internet's – and Google's -- birth and growth.
The Internet was built on open standards, Eric noted, and that those platforms are really platforms of economic opportunity and free expression. Free markets and open standards have led to so much innovation, that it’s usually best for government not to rush into regulating new technology. And he cited both political empowerment (such as the YouTube presidential debates) and economic empowerment (like the $3 billion that we paid out to website owners last year through our advertising partnerships) as the fruits of Internet freedom.
In the policy arena, Eric offered three specific calls to action. First, he said we need to defend freedom of speech as more speech comes online – and give teeth to the issue by pressing governments to classify censorship as a trade barrier. Second, we need to continue working toward universal broadband access, by government collaborating with industry and making sure that networks remain content neutral. And third, he called on government to be more transparent to its citizens – citing as an example our Sitemaps partnership with the federal government and five state governments.
But freedom wasn’t the only thing on Eric’s mind Tuesday. The PFF crowd was particularly interested in Google’s positions on both the upcoming 700 MHz spectrum auction and on net neutrality (and posed a few questions skeptical of our stance). Without announcing any definitive plans to bid, and cautioning that we're still carefully evaluating our options, Eric indicated that Google “probably” would decide to participate in the auction.
Check out the complete video of Eric’s talk, and tell us what freedom on the 'Net means to you.
Those who complain about Google's purchase of DoubleClick make two claims. Both are flawed. The first argument is that, since both firms have a large market share of their respective spheres, a merger would be monopolistic. The flaw is that the two companies undertake activities that don't overlap. Google places text ads mainly on its own Web sites and search-result screens. DoubleClick delivers display ads from advertisers to Web sites. It creates no ads and controls no Web sites. Even if we believe that Internet advertising is a distinct market (debatable, since it comprises only about 5% of all advertising) the combined firms will not gain any market power since they do not have any business in common. The second argument comes from privacy advocates who have filed a brief with the FTC. They say the merger "could impact the privacy interests of 233 million Internet users in North America." The FTC's antitrust function and its consumer protection function are fundamentally different. Indeed, the more information markets have, the more competitive they are. If "privacy" advocates have their way, there would be less information and markets would not work as well.
Those who complain about Google's purchase of DoubleClick make two claims. Both are flawed.
The first argument is that, since both firms have a large market share of their respective spheres, a merger would be monopolistic. The flaw is that the two companies undertake activities that don't overlap. Google places text ads mainly on its own Web sites and search-result screens. DoubleClick delivers display ads from advertisers to Web sites. It creates no ads and controls no Web sites. Even if we believe that Internet advertising is a distinct market (debatable, since it comprises only about 5% of all advertising) the combined firms will not gain any market power since they do not have any business in common.
The second argument comes from privacy advocates who have filed a brief with the FTC. They say the merger "could impact the privacy interests of 233 million Internet users in North America." The FTC's antitrust function and its consumer protection function are fundamentally different. Indeed, the more information markets have, the more competitive they are. If "privacy" advocates have their way, there would be less information and markets would not work as well.
Coveted bits of the radio spectrum called "white spaces" -- unused areas of spectrum wedged between licensed TV channels -- may soon be freed up by the Federal Communications Commission. Right now no broadband devices are allowed to use these parts of the spectrum, but the FCC is considering whether to let companies sell FCC-certified wireless devices that would be used without an exclusive broadcast license in these slivers of bandwidth. Such white-space devices (WSDs) would be low-power and so would emit signals over very small geographic areas. White space within the TV band is unlicensed, like WiFi, but is physically better suited than WiFi for broadband transmission.
Google and other companies (including Dell, EarthLink, Hewlett-Packard, Intel, Microsoft, and Philips) have formed the "White Spaces Coalition," to persuade the FCC to establish appropriate interference standards that would allow entrepreneurs to develop fixed and mobile devices that utilize these airwaves. Earlier this year, the coalition submitted two prototype devices (from Microsoft and Philips) to the FCC's engineers to demonstrate the feasibility of this approach.
The FCC's engineering analysis, released two weeks ago, confirms what we have stated all along: it is technologically feasible to provide Internet access through this segment of spectrum without interfering with either digital television signals or wireless microphones. While one of the prototypes unfortunately was damaged, the other prototype fully demonstrated the promise of using these "white spaces" for Internet access. The coalition filed comments at the FCC yesterday responding to these test results.FCC Chairman Kevin Martin has expressed a keen interest in keeping this matter moving forward, and the coalition will be working with FCC staff to address any remaining technical issues. As the Washington Post notes today, the promise that this spectrum holds for bringing the Internet to more Americans is too great to ignore:
Just two months ago, the notion that the FCC would take such a big step forward to give consumers meaningful choice through this auction seemed unlikely at best. Today -- thanks in no small part to broad public support for greater competition -- the FCC has embraced important principles of openness, and endorsed the unfettered workings of the free market for software applications and communications devices. Moreover, over the last few weeks several leading wireless carriers have reversed course and for the first time acknowledged our call for more open platforms in wireless networks. By any measure, that's real progress.
By the same token, it would have a more complete victory for consumers had the FCC adopted all four of the license conditions that we advocated, in order to pave the way for the real "third pipe" broadband competition that FCC Chairman Kevin Martin has been touting. For our part, we will need time to carefully study the actual text of the FCC's rules, due out in a few weeks, before we can make any definitive decisions about our possible participation in the auction.
In the meantime, we thank Chairman Martin for his leadership, and his compelling insight that American consumers deserve better in the wireless and broadband worlds. We've also had the pleasure of working on this issue with a broad cross-section of public interest groups that understand the need to foster more choices and competition in the wireless and broadband worlds.
The upcoming FCC 700 MHz spectrum auction certainly has spurred both lively debate and, at times, heated rhetoric. With the FCC set to vote tomorrow on the rules for the auction, I thought it would be useful to summarize briefly where things stand at this point.
FCC Chairman Kevin Martin has stated from the beginning that his number one priority is to make broadband available to all Americans through a “third pipe” to the home (in addition to telephone and cable company broadband service). In support of that viewpoint, the Chairman has taken a bold stand for consumer choice by proposing that licensees must allow the use of any device or application on a specified portion of the 700 MHz spectrum. This approach -- if crafted with appropriately effective and enforceable provisions -- would free consumers from burdensome and artificial constraints on what they can do with their phones and software. These license conditions for the first time will enable device and applications competition at the "edges" of the wireless network.
Unfortunately, these same conditions fall well short of Chairman Martin's own goal of fostering the creation of a third pipe competitor. As long as incumbents are motivated by a desire to protect their current business models, and can continue to use a “blocking premium” to thwart fair market rates, they have every incentive to outbid would-be rivals. Such an auction outcome will constitute business as usual -- with no new broadband options in sight for consumers.
Google has joined numerous public interest groups and other Web companies in seeking more fundamental “wholesale open access” conditions. We believe these additional conditions would ensure that, no matter who wins the auction, consumers, along with service providers of all shapes and sizes, will have a seat at the table. We even committed to invest at least $4.6 billion in such a scenario, despite the fact that we have not traditionally been a communications company. Some have criticized us for, in their view, rigging the auction to our own benefit. We think quite the reverse is true: only by imposing certain openness conditions will potential new market entrants have a fair shot at successfully bidding in the auction.
Openness, user choice, and innovation have been elements fundamental to the rise and success of the Internet. We believe those same elements are critical for even the possibility of new broadband competition in the wireless space. If the FCC ultimately decides not to adopt "wholesale open access" license conditions, we do not see how significant new competition can emerge from this auction.
The time for debate is drawing to a close. The five FCC commissioners are this moment contemplating the relative merits of the parties' arguments, and are set to make a final decision on Tuesday morning. The prospects for fostering robust competition in this slender but valuable slice of spectrum hangs in the balance.
And just this week, two more announcements highlighted the tremendous activity in this space:
What does all this mean? It means that each of the leading Internet companies believe that they can position themselves to succeed in the online advertising space -- through the free market, and without government intervention. These companies believe that there are many ways to compete in this business.
Google, Microsoft, AOL, Yahoo, and others are developing different combinations of capabilities in an effort to provide the most compelling offering to advertisers, publishers, and customers. For example, Microsoft’s purchase of aQuantive will eventually result in it owning an ad serving business that competes with DoubleClick, and will also make Microsoft one of the largest interactive advertising agencies in the U.S. In DoubleClick, Google is acquiring a technology that delivers and measures the performance of display ads – a technology that is critical if we are to compete in display advertising.
Beyond the different approaches that companies are taking, more capital infusion into the online ad business also means that more entrepreneurs will enter it, too. In fact, we have noticed that several startups in the online advertising space have received venture funding since April. More entrepreneurs, more market participants, and more capital are combining to create more competition and innovation.
Brian McAndrews, the President and CEO of aQuantive (which, as noted above, has been purchased by Microsoft) recently said about online advertising: "We're in the first or second inning of a long game here. There's no monopoly on innovation. I don't think you're going to see two or three big players and then game over. There will continue to be a broad range of companies." We couldn’t agree more.
In recent days, and especially following Eric Schmidt's July 20 letter to FCC Chairman Kevin Martin, many people have asked us a straightforward question: why don't you just attempt to win the spectrum bidding outright, and then implement an open wholesaling business model yourself? Or, as AT&T has put it, "put up or shut up."
That question makes a lot of sense, especially for those most familiar with the ordinary marketplace structures they see on eBay, or Home Shopping Network, or at Target. In those everyday cases, the buyers and sellers collectively determine what is the fair market value for something, based on what willing participants on both sides agree should be the price. The free market is the optimal market.
But an FCC spectrum auction is a very different animal. Unlike in most commercial transactions, participants in an FCC auction operate in an artificially defined market. Initially, the spectrum comes sliced and diced in predetermined packages of varying bandwidth, geography, and duration. Those discrete slices tend to be compatible with what regulators perceive to be the prevailing services and technologies of the moment, such as centralized voice communications.
Further, given the sizable investments involved, only well-capitalized corporations can afford to bid at auctions. Ordinary citizens or entrepreneurs with novel ideas don't even show up. Even so, players still come to the table with unique assets, and in some cases disparate business models. For the upcoming 700 MHz auction in particular, the issue boils down to the different incentives at work between the existing national wireless carriers -- the incumbents -- and those companies seeking to enter the market for the first time -- potential new entrants.
As we have seriously considered entering the 700 MHz auction, we have been consulting with auction experts and game theorists to help us better understand the dynamics of a typical spectrum auction. What they have been telling us is that in a head-to-head bidding war between an incumbent wireless carrier and a potential new entrant, the incumbent almost invariably will prevail. Why? The answer involves two key economic factors: what we call the "incumbent blocking premium" and the "incumbent dilution discount."
Incumbent blocking premium
A significant economic factor that comes into play in an auction environment is the incentive and ability of one of the players to thwart the designs of the other. In the context of an FCC spectrum auction, there are at least three pertinent elements.
First, incumbent wireless carriers come to the auction with a vast array of existing assets, including thousands of radio towers, tens of thousands of miles of communications "backhaul" networks, and millions of customers, along with numerous retail outlets and tons of advertising. And perhaps most important of all, incumbents already own lots of spectrum -- much of which the FCC gave away for free some years ago, rather than sold at auction. By contrast, a true new entrant has none of these assets. Thus, to an incumbent, purchasing another wireless license is just an incremental investment, one made that much less costly given the existing, readily-available business inputs. To a new entrant, facing the daunting challenges of actually building and operating a network for the first time, the investment is less certain.
Second, the incumbent has the added benefit of operating in a less than fully competitive environment. Some use the term "monopoly rents" to describe the situation where a company enjoys revenues and profits that exceed what normally would be the case in a robustly competitive environment. Potential new entrants do not enjoy the same advantage.
Third, and perhaps most important, the incumbents have every incentive to preserve and protect their existing business model. Given their investment in all the necessary business inputs, and the relatively high prices and low bandwidth characteristics of their existing service offerings, the incumbents must prevent the entry of potential competitors to the market. In a spectrum auction, this means paying whatever it takes to block new entry. Not surprisingly, economists call this a "blocking premium."
As the diagram below shows, these three elements together mean that an incumbent will almost always be in a position to outbid a potential new entrant, simply by bidding above and beyond the fair market price. Unlike in a healthy auction situation, the final price would be higher than otherwise would be commercially reasonable.
The second significant economic factor that comes into play in any auction environment is related to the number of players who actually show up to participate in the bidding. Again, in a normal commercial environment, market prices are shaped by the number of willing buyers, from just a few to potentially millions. However, an FCC spectrum auction presents a comparatively artificial scenario.
Given the existence of the incumbent blocking premium, as described above, it is often the case that there are no new potential entrants to bid against an incumbent. Why should a new player even bother to bid, or bid aggressively, if the incumbent inevitably will prevail? Where there may be only two incumbents -- or even one -- left to bid for a license, obviously the resulting price will not reflect the fair market value that otherwise would have been reached. The dilution of competitive bidders means the final price will be lower than otherwise would be the case. Recent studies have confirmed that this is a pervasive aspect of the FCC auction environment.
Un-skewing the spectrum auction
When looking at the combined impact of the incumbent blocking premium and the incumbent dilution discount, it's easy to see how FCC auction results become skewed.
Ironically enough, it is Google that has been accused of attempting to skew the auction structure, by our recommendation that the licenses be conditioned on certain "open platforms" requirements. Of course, as we have explained it is the current auction system that skews the results away from potential new entrants and in favor of existing incumbents.
Our position is simple enough. FCC Chairman Kevin Martin and the other commissioners have argued persuasively that we need a real third pipe broadband competitor in this country. They also believe that the upcoming 700 MHz auction is the best way to get there. All we are saying is that, based on what we know, new broadband competition will emerge from the upcoming auction only if the FCC's rules allow it to happen. For Google, and other potential new entrants, the prevailing imbalance can be corrected most effectively by introducing license conditions based on open platforms.
While Google embraces the kinds of openness and innovation that are the hallmark of the Internet, the incumbents apparently prefer their existing business models. That of course is their prerogative. However, open platforms -- specifically, open applications, open devices, open wholesale services, and open network access -- together make the spectrum more valuable to Google, or any other potential bidder seeking to create innovative, higher-speed, lower-priced offerings.
That is why Google has indicated that it is willing to spend a minimum of $4.6 billion in the auction, which is the FCC's reserve price for the particular spectrum block in question. At the same time, incumbents are unable to leverage anti-competitive blocking in this scenario. Regardless of who wins the bidding, however, the end result is an auction that yields a fair market price, with the added bonus of a new broadband network that is open to all comers. The American people get full value for their spectrum, plus open broadband platforms -- and even the possibility of a real third pipe competitor. Not a bad deal overall.
