Friday, February 01, 2008

Tech Confidential: Microsoft, Yahoo! seek to head off Google push into wireless world

Microsoft, Yahoo! seek to head off Google push into wireless world

by Ron Orol

[Posted on February 1, 2008 - 5:41 PM]

"Open-access" rules imposed on a huge swath of spectrum the Federal Communications Commission is auctioning were one factor in Microsoft Corp.'s decision to bid for Yahoo! Inc., telecom experts say.

The FCC is holding an auction of valuable telecommunications frequencies that it is reclaiming from broadcasters as part of the transition to digital TV. The expectation is that the channels will be used to create a new national broadband network. One key swath, known as the C Block, carries open-access obligations that require the winning bidder to allow outside services to connect to the network.

The open-access rules ensure that providers of online services such as Google Inc. and Yahoo! can access the new telecom channels. Yahoo, despite its declining fortunes, remains a formidable player in search engines and other key services. In many of those types of offerings, such as Microsoft's MSN search engine, the world's software giant has been an also-ran. Such services are expected to be critical components of new mobile broadband communications services to be rolled out soon.

"[Microsoft and Yahoo!] both need to extend their current Internet franchises into the wireless world, because mobile is where the biggest growth in the Internet space is going to happen," said Paul Gallant, senior vice president at Stanford Group Co. in Washington. "This combination can help facilitate that."

Microsoft's decision to bid $44.6 billion for Yahoo! Inc. shows that at least two other companies want a piece of that nascent mobile market and the advertising revenue available there as well. The other company, of course, is the one that agreed to pay $4.7 billion for the C Block in the FCC's auction that began last week. The FCC has not revealed bidders' identities, but the leading bid is believed to have come from Verizon Communications Inc. or even Google itself.

The $4.7 billion bid covers eight licenses that can be used to create a national network. That amount was the minimum price the FCC would accept in the ongoing auction. If the floor bid had not been reached, the FCC would have reauctioned the channels without the open-access conditions. Besides requiring the winning company to permit rivals the ability to have their wireless devices connect to the national system, the open-access measures also ensure that users have flexibility to choose from different software applications. Verizon has already offered to let customers use wireless devices and software applications not offered by the company by the end of 2008.

Google, if it is the winner, would form partnerships with phone companies such as T-Mobile to build out a national open network. Regardless of whether it actually takes the spectrum, Google wins, because the open-access conditions allow it to take advantage of the interoperable network by offering Google services and Google phones.

Although Google now presents a larger threat to Microsoft as broadband services expand, technology observers say they believe the open-access requirements produce a tantalizing opening for Yahoo! and Microsoft, which both also want a piece of the mobile devices and applications pie.

"Both Microsoft and Yahoo! benefit from the triggering of the open access considerations," said Gallant. "But they realize Google will be a major competitor there."

Eric Jackson, a technology-driven activist investor who uses YouTube videos and sites such as Wikipedia, and Facebook to attract individual investors to back his proposals at high-tech companies, said he believes Yahoo! and Microsoft are observing the expected outcome of the spectrum auction with concern. "Microsoft and Yahoo! have to be sitting down and saying, 'This is a scary prospect,'" Jackson said. "Google is taking its powerful search engine and moving that strategically to the mobile world." He added that Yahoo! and Microsoft consider themselves "as marginal competitors" to the mega-search engine company and believe they would be stronger together.

Both Microsoft and Yahoo! have already made incursions into the mobile space. Yahoo! on Thursday announced that it has renewed its partnership with AT&T Inc. That deal provides additional content for AT&T's wireless customers.

A key consideration for both Microsoft and Yahoo! relates to who will win another national spectrum license the FCC is auctioning. The agency will likely need to reauction another spectrum chunk, the so-called D Block, which the winning bidder must share with public safety users, an obligation that has created controversy.

The FCC's minimum "reserve price" for this block is $1.3 billion, an amount that appears increasingly unlikely to be achieved. After 24 rounds of bidding, only one bid has been placed on the D Block, for $472 million. Gallant notes that a likely outcome would be the losers in the C Block auction turning their sights onto the D Block when it is reauctioned. AT&T or EchoStar Communications Corp. could be eventual D bidders, as could Verizon, even if it wins the C Block, Gallant said.

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