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Weekly Column

October Surprise:: How high technology may well smooth Al Gore's path to the White House

Status: [CLOSED]
By Robert X. Cringely

In the world of Presidential politics an "October Surprise" is something good to give and bad to get. It is a stunning political event that takes place so late in the campaign season - in October - when it is simply too late for the opponent to recover before the November election. Ronald Reagan feared an October Surprise back in 1980 when he thought Jimmy Carter might make a deal to spring thehostages in Iran just before the election. No matter what he had to give up to gain the hostages' release, the resultant euphoria would have kept Carter in office. That October Surprise never happened, though conspiracy theorists like to suggest that Reagan had a surprise of his own that specifically delayed the hostage release until the day of his inauguration. I don't know about that, but I do know that we can expect an October Surprise this year, and the beneficiary of that surprise is likely to be Al Gore.

What does this have to do with high technology? Plenty. This year's October Surprise will be made possible by the next generation of cellular telephone service, generally called Third Generation Wireless, or 3G.

Whether we are assigning credit or blame for this phenomenon, the inspiration clearly comes from Britain, which auctioned five 20-year3G wireless licenses in March for a total of more than $36 billion — about seven times more than the UK government had said it expected toraise. This windfall has not only given the government of prime minister Tony Blair the biggest budget surplus in UK history, it is being seen as a leading indicator for similar auctions in the rest of Europe and the U.S. And with the U.S. auction scheduled for September, the bidding frenzy should soon be hard upon us.

Before we consider the breathless sums now expected to be raised in the U.S. auction, let's try to better understand what exactly that money will be buying. First generation wireless is the analog anddigital cellphone services that have been with us for 20 years. Second generation wireless is the lower power digital PCS phoneservice from licensees like Sprint. It should be noted that the 2Glicense auction of several years ago also raised a lot of money, much of which was never received by the U.S. government due to defaults andbankruptcies by several winning bidders.

Third generation wireless is really exciting, an all-digital service optimized for data rather than voice that actually treats voice asjust another kind of data. Third generation wireless promises peak data rates up to two megabits-per-second. That's enough bandwidth to not only receive NBA scores on your cellphone, it's enough to WATCH the NBA playoffs on that tiny screen, along with simultaneous web browsing, e-mail, and a wealth of Internet services yet to be invented.

So if the UK licenses sold for $36 billion, what is the 3G franchise for the U.S. worth? Only the auction, itself, will tell, but it is very interesting to look at the various pricing algorithms presently being discussed. The simplest pricing plan just compares the populations of the UK and U.S. and applies that multiple as a coefficient. With about four times the population of the UK, the U.S. licenses could be expected then to go for a total of around $144 billion. At the other edge of reality are the bidding strategies that apply Metcalfe's Law. Coined by Ethernet inventor Bob Metcalfe, this "law" says the value of a digital network increases with the square of its number of nodes. So if a network with 10 nodes is worth $10, then a network with 100 nodes is worth $1000, or 100 times as much. Pundits are applying Metcalfe's Law to the 3G license auction in various ways from comparing the number of UK cellphones with the number of U.S. cellphones then taking the square of the difference, right up to those who simply square the difference in total populations of the two countries. That latter calculation, by the way, values the U.S. 3G licenses at $576 billion. Throw in some auction frenzy and a $1 trillion number might be even possible. I am not making this up.

It is interesting to note that the Clinton administration, as part of its plan to balance the budget and pay down the national debt, has stated only that it expects the 3G auction to raise around $2.67 billion, which is a huge underestimate no matter which bidding calculation you believe. The U.S. 3G auction was originally slated by the Federal Communications Commission to take place in June, though it may now be delayed until September to have more time for all parties to calculate the impact of the UK results and to resolve some interference problems with the 100 or so television stations that currently occupy the spectrum being auctioned off. By either schedule it is easy to see the 3G auction as a surprise addition to Clinton's legacy and a political windfall for candidate Al Gore. It's simple, really. With that kind of cash coming in, Gore can order a tax cut, pay down half a trillion in national debt and still have money left over. And since it happens on his watch, it's to his credit. Now THAT's an October Surprise.

Fortunately, what is not likely to come from this auction are the defaults and bankruptcies that plagued the U.S. second generation wireless auction. What's different this time around is that the dollars are so much bigger that the smaller companies that were winners in the 2G auction won't even be in positions to bid. And the auction, itself, is being conducted differently by the FCC. Like the UK auction, the U.S. auction will use ascending rather than sealed bids. In such a system the bidding goes in rounds and is open. Any participant that does not lead the bidding can still raise its bid and take the license. This technique, which works as well for eBay as it does for governments, leads both to more knowledgeable bidders AND higher prices. This may in part explain why the UK auction results were so high.

Right now the potential U.S. 3G bidders are grousing about radio interference and generally trying to drive down the opening price. But this too shall pass and they will pay what it takes to win the day. No matter what that price, it still involves a major transfer of public debt to private. It will also involve generally the same players, because there are only so many outfits with the technical and financial qualifications to bid. Vodaphone-Airtouch, for example, won the largest UK 3G license under its new Verizon moniker and will certainly be a bidder for a U.S. license. With these companies bidding so much for licenses in so many markets, it is possible to imagine that they would too financially strapped to even build out their networks, but this is where the public markets (and the next Internet investing frenzy) come in. More about that in a later column.

But since we are ultimately going to be paying for it, we deserve to know what Third Generation Wireless is and what it isn't. It is a clever new technology that makes very efficient use of digital bandwidth to provide a solid platform for new always-on services. Those services include Internet access and a very credible alternative to present wireline phone service. What 3G probably won't do is challenge television, since one premise of the system is that bandwidth will be shared efficiently between millions of users. While 3G may scale to two megabits-per-second, it only works well if most of us aren't using that much bandwidth on a regular basis.

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