It is one of the most talked about pieces of air in the history of civilization, and for good reason. The 700 MHz spectrum of radio waves currently being auctioned by the U.S. Federal Communications Commission (FCC) will have a major impact on the future of mobile phones and the wireless Internet in the United States.

The auction kicked off last Thursday, January 24, and during the first two days of the auction, $3.7 billion in bids were made. We know that there are 214 pre-screened bidders, but we won’t know the identities of any of the winning bidders until the auction closes. However, we do know that the three biggest players in this game are Google, Verizon, and AT&T, and there are a variety of other interesting bidders, including Chevron, Qualcomm, Vulcan Ventures (led by Microsoft co-founder Paul Allen), EchoStar, U.S. Cellular, Alltel, Cox Communications, and Towerstream.

Why is 700 MHz worth billions?

All of these bidders want 700 MHz because the radio waves in that spectrum have long range (up to 20 miles) and can easily pass through walls and other physical obstacles. This makes it perfect for delivering broadband Internet over the airwaves at comparable speeds to cable and DSL. The spectrum has long been used for UHF television broadcasts in the United States, but on February 19, 2009, the TV broadcasts will go entirely digital, and the FCC decided to open up this valuable spectrum for commercial use. The graph below (based on data from Aloha Partners and GigaOm) shows how 700 MHz will allow a wireless carrier to cover the same area as higher slices of the spectrum but with much less infrastructure and at a much cheaper cost.

One company won’t win the entire 700 MHz spectrum at the auction. Some smaller players, such as Qualcomm, are looking to land specific pieces of the spectrum to further niche services, such as video for mobile phones. And regional telecom companies are naturally looking to grab regional slices of the spectrum they could use to offer local broadband Internet using a technology such as WiMAX.

Nevertheless, I would expect that when the results are released for all 1,099 licenses sometime in February, it is very likely that we will be able to declare a winner. The part of the spectrum to keep a close eye on is the highly coveted C block, which if one company were able to control it, would provide full nationwide coverage for a next generation wireless Internet network. However, in an effort to promote open standards and competition, the FCC has stipulated that licensees of the C block must “allow consumers to use the handset of their choice and download and use the applications of their choice in this spectrum block.”

It will take deep pockets to win the C block. The bidding was already up to almost $1.8 billion after two days and the FCC has set a reserve price of $4.6 billion. The conventional wisdom is that it will go in one of three directions: 1.) Verizon or AT&T, 2.) Google, or 3.) Someone else with deep pockets and a desire to enter the mobile Internet market. Let’s a take a look at the potential consequences for each of these three scenarios.

If Verizon or AT&T wins …

Both would likely hold onto the 700 MHz Class C block until their next generation 4G platforms are ready to deploy and they would probably do everything that they could to meet the absolute minimum requirements of openness. At different times, both of them have talked a big game about open platforms — especially Verizon recently — but both of them are primarily walled gardens that have a lot of opening up to do, and time and momentum are not on their side.

Market forces are pushing Verizon and AT&T toward open platforms, but both have long established legacies, policies, and infrastructures to overcome. They both covet 700 MHz Class C  to be able to more quickly compete against Sprint’s mobile WiMAX, which will launch in 2008 and begin the conversion of cellular providers to mobile Internet providers. Because of their stake in the current cellular business and their own infrastructure legacies, I have to believe that AT&T and Verizon would ultimately slow the growth and adoption of the mobile Internet if either of them won 700 MHz Class C. For the same reasons, these two are also likely to delay the move to open platforms.

If Google wins …

There would immediately be a debate about whether Google wants to become a wireless carrier or if it just wants to control the airwaves and rent them to wireless providers with the provision that they provide open access and are friendly to Google’s emerging mobile platform. Google’s ambitions are clear. It sees the Internet going mobile and it wants to build an ad network to monetize the Internet on mobile devices.

The question is whether Google would actually want to get into the messy and complicated business of becoming a service provider. That seems doubtful. So far in its short corporate history, Google has been content with letting others do all the hard work of building things and then Google has swept in and served as an information middle man with an ad network that scrapes money off the top of transactions.

If Google does actually win — which is a long shot — I think it would indicate that Google wants to jump into the service provider role. After all, Google has said again and again that it is a technology company and not a content company. If Google does win and start a new wireless broadband network, it would put tremendous pressure on the leading wireless carriers to open their networks and play fair. We’d also likely see 700 MHz implemented much more quickly because Google would have a clean slate to work with at the platform level and would be highly motivated to get something off the ground as soon as possible to start recouping its investment.

If someone else wins …

The unknown factor in the auction is the possibility of someone else swooping in and gobbling up the Class C licenses. Very few companies have the kind of money to play a hand at that table, but there are some, such as Vulcan and Chevron, who could make a run at it if they are serious about running a new national broadband network.

New competition for cable and DSL would be great. New competition for mobile phone providers in the United States would be even greater. A new vendor in this space with the valuable 700 MHz spectrum as its top asset would have major ripple effects across the cellular and Internet markets in the United States.

Of course, building a new nationwide network would be very, very challenging and risky. But the payoff could be enormous since the mobile Internet will revolutionize both the current Internet access industry and the mobile phone industry (by replacing the current cell networks with VoIP over the mobile Internet).

Additional resources

Conde Nast Portfolio has published an excellent visual illustration of the 700 MHz spectrum:

For more on the 700 MHz auction, see:

Who do you think will win the 700 MHz auction? What do you think it will mean for the future of mobile and wireless in the United States? Join the discussion.