Google and the FCC Spectrum Auction

By popular demand, more game theory!

In addition to the Tuesday articles, which have an academic focus, I will occasionally post a bonus article, which will be about game theory in the news. Since the task will involve industry specific knowledge, you’ll get less of me and more from experts and top-notch economic writers.

I already anticipate a few problems. One is philosophical. I can see that for every article someone will complain “Oh, it wasn’t game theory they used but marketing / psychology / etc.” While these criticisms may be valid, they don’t help us make better decisions. These discussions are about examples where businesses and people think strategically, consciously or not. Hence, I label them “game theory,” and I hope the discussions will help you think strategically too.

The other issue is practical. Strategy often works because it is concealed. This means that useful methods will be underreported. An example: sports agents might secretly seek out offers from competing teams, but then deny it in the press. While we might not know what the agent did, we can speculate about which secret methods would have been productive. It will mean less certainty and more intuition, but that’s part of the game.

With these reservations on the table, let’s begin.

Google and the FCC Spectrum Auction

Google, Verizon, and AT&T were big players in a recently publicized spectrum auction.

What is a spectrum auction? Here’s a great definition from the Directory Journal:

A Spectrum auction is a process where governments throughout the world sell the rights to transmit signals. Companies who are in the business of providing wireless communication services need to bid at these auctions and win the licenses provided by the government.

Federal Communications Commission (FCC) conducts these auctions and assigns thousands of licenses to many firms. These auctions are sold for billions of dollars. This auction method for assigning Spectrum resources, which are scarce, is being used widely everywhere in the world.

In a recent auction, Google entered as somewhat of a mysterious bidder. There was much speculation as to why Google entered (new cell phone? new technology?). Not surprisingly, Google kept its reasons secret.

I won’t go into the amusing details, as all that speculation was pointless. As it turned out, Google did not end up winning any auction.

But the loss turned out to be fruitful, and part of the plan all along. It was a “strategic loss.”

What does that mean?

Here’s an explanation from economist Aaron Schiff:

As Google’s blog post illustrates, Google didn’t really want to win the auction, but did want the reserve price to be reached so that whoever did win would be bound by these conditions. This would enable Google to get a slice of the action without being a spectrum owner. So Google was playing a billion dollar chicken game, trying to push the price up but not be the eventual winner.

Aaron suggests Google created all the buzz to bind the winner to pay more and be restricted in its license.

In other words, the mystery and intrigue going into the auction allowed Google to make credible threats and weaken opponents even though it never had any intention of winning.

The result is beneficial to Google and apparently to customers in general. As reported in PC Magazine:

Though Google did not place any winning bids on the spectrum, “partly as a result of our bidding, consumers soon should have new freedom to get the most out of their mobile phones and other wireless devices,” Whitt and Faber wrote.

Google placed its bids electronically, and in ten of the bidding rounds, “we actually raised our own bid — even though no one was bidding against us — to ensure aggressive bidding on the C-block,” they wrote.

I takeaway the lesson that with proper strategy, you can make losses useful. That is, you can win without winning.