Take Two: Google’s Wireless Ambitions

[qi:083] Google’s mobile ambitions have by now been widely articulated in the media, and after my initial post, I spent some time on the phone with various people discussing whether or not it made any financial sense for Google to be chasing the wireless dream. Many of the folks I chatted with expressed reservations about Google actually building a network, and felt that the company is using a big stick to get U.S. carriers to get a move on.
The FCC, for instance, has offered Google (GOOG) some measured encouragement in the hopes that the firm’s involvement in the wireless auctions would help push the prices up past the $10 billion mark. Google is, after all, obligated to make at least a minimum bid of $4.6 billion since the FCC agreed to their “Open Access” requirements for the C Block.
Secondly, this is going to be one expensive exercise for them. Assuming they win the 700 MHz auction and it costs them about $5 billion and another $2 billion in network buildout costs — that means a little less than $1 per share in lost income. Of course there is also the question of management focus, something that is much more difficult to quantify. By the way, our good friend, Ben Schacter who follows Google for UBS Research helped with the math here:

Think of it as not getting the interest on $7b and then tax affect it. So assume $7b multiplied by 5% (interest rate), then a 26% tax rate = about $260 million a year in lost income, or well less than $1.00 per share.

I think I am being conservative here. According to UBS estimates, the cost to build out the network is going to be about $25 a pop in urban markets and as much as $40 a pop in suburban markets, adding up to a total of between $8 billion and $10 billion. Of course, the operational costs of maintaining a nationwide network are humungous, never mind the service-support infrastructure.
The more I think about it, the less likely it seems that Google is going to build their own network. My guess is that they are going to try and participate via investments in other efforts. I had outlined one crazy scenario last week. Nevertheless, it is fun to see Google drive the wireless carriers batty with its posturing, and at the same time get what it really wants.