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Why Apple Won't Bite on Spectrum Auction

According to BusinessWeek, sources say that "Steve Jobs & Co. have studied the implications of joining" the bidding in the upcoming FCC auction of valuable 700MHz spectrum. Well, I have "studied the implications" of becoming the head of the World Bank. Doesn't mean it's going to happen.

There are plenty of reasons why Apple, as compared to, say, Google, would be foolish to bid on the 700MHz band, which is considered the last prime real estate for advanced wireless networks in this country. (The auction is expected to generate upwards of $15 billion for the U.S. Treasury.)

Google is an advertising company, and it's active on an array of mobile fronts to create an open wireless ecosystem in which consumers and businesses will use its Web services, and click on ads it serves. Apple is a consumer electronics vendor and a provider of rich media, in the form of iTunes. Attempting to build (or control) its own wireless network, on spectrum it owns, would be akin to Toyota trying to build its own highway system: the cost is prohibitive, and why compete with existing roads?

Another argument against this shakily sourced rumor was provided last week by a pair of economists, Stanford University's Greg Rosston and Peter Cramton of the University of Maryland, who are acting as advisers to Frontline Wireless LLC in its own effort to win in the spectrum auction. Rosston and Cramton are auction experts, and they argue that the high "reserve prices" (i.e., minimum bids) set by the FCC for the 700MHz frequencies mean that a) the auction rules will favor the incumbents, i.e. the big wireless carriers, and b) the auction could fail altogether.

Their point boils down to this: the FCC has stipulated that if the reserve prices (equivalent to close to 100% of the spectrum's expected total value) are not met in the first round of the bidding, a "re-auction" will follow shortly. The new bidding will move forward either without reserve prices or with significantly lowered ones, and will not include the "open access" provisions mandated in the rules for the initial auction.

That means that Verizon Wireless and AT&T have a strong incentive to sit out the first wave of bidding, expecting their less deep-pocketed rivals not to meet the reserve prices, so that the incumbents can snap up the wavelengths at lower prices, and without the open-access rules (which the carriers despise) in the subsequent rounds. And it means that unless Steve Jobs wants to spend close to Apple's annual revenue on spectrum rights alone – to say nothing of the cost of actually building a wireless network to run over the frequencies – he'd be foolish to enter this rich man's game.

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