As AT&T resorts to playground taunts, Google pushes up its glasses and resorts to economic theory. But it’s still not certain yet which side the FCC will take: the bully’s or the Poindexter’s.

Google Won’t Put Up Or Shut Up

After Google CEO Eric Schmidt wrote a letter to FCC chairman Kevin Martin committing to bid on a slice of the 700 MHz wireless spectrum as long as the regulatory agency required the auction winner to ensure true competition in the marketplace, AT&T hissed back at the search engine company to "put up or shut up."

What AT&T Senior VP Jim Cicconi meant by that was that Google should be willing to bid head-to-head with incumbent telecommunications providers, no holds barred, no special considerations given.

CTIA-The Wireless Association president and CEO Steve Largent wasn’t thrilled about Google’s proposal either, accusing them of trying to rig the auction in their favor.

"The competitive wireless industry welcomes all new entrants, but no company should be able to buy a custom-fit government regulation that suits their particular business plan. Consumers should decide if they’re right, not the federal government," said Largent.

Coincidentally, Largent’s name means "money" in French, which is what is at stake for telecom incumbents. Lots and lots of it.

And while Largent’s argument is well crafted enough (at least, it’s better than Cicconi’s "put up or shut up" shove) to convince surface-level free market defenders – I say "surface level" because there’s nothing free about the market we are discussing – Google Washington Telecom and Media Counsel Richard Whitt argues that the spectrum auction is already rigged in favor of incumbents.

In essence, if so, then customers won’t be able to decide because, as only a few (or two) companies control the spectrum, then those companies will control the decisions made. Already that should make intuitive sense to you, given the telecom industry’s monopolistic or duopolistic histories. But also, if new entrants are prevented, AT&T has a clear path to ownership, and thus, to market control.

Whitt begins with the burning question: Why doesn’t Google bid in the auction outright, head-to-head with AT&T and Verizon? He argues that traditional auctions benefit from open entry, but the FCC is auction is "a different animal" where only well-capitalized corporations can afford to bid, thus barring new entrants.

"As we have seriously considered entering the 700 MHz auction," he says, "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."

Not only do new entrants not have the cash to compete with incumbents, they don’t have the infrastructure, either. In addition to whatever price they would have pay, which will be artificially driven up by incumbents willing to pay whatever necessary, new entrants would also have to build and operate a network, an expense incumbents will not have to endure.

Thus, new entrants will not (cannot) enter the spectrum auction, structured as it is currently.

But there is also incumbent incentive to block new entrants altogether. "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."

And this is where it gets shady: once new entrants are effectively barred from the auction, prices go down as incumbents are only bidding against each other, something Google calls the "incumbent dilution discount."

Whitt doesn’t fail to note the irony of incumbents accusing Google of trying skew the auction in its favor.   

"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," he said. "The American people get full value for their spectrum, plus open broadband platforms — and even the possibility of a real third pipe competitor."