Google goes to Washington
The secretive search-engine company is pushing for Net neutrality and seems to want a piece of the wireless spectrum - but why?
By Stephanie Mehta, FORTUNE senior writer

NEW YORK (FORTUNE) - About a year ago, I asked Time Warner CEO Dick Parsons why he was so committed to controlling a cable company.

Parsons said he thought cable was a good business - getting into new sources of revenue such as phone services and providing the media company with consistent, solid cash flow. Besides, he added, "by owning a route to the sea, your content businesses have assured market opportunities." (Time Warner (Charts) owns Time Warner Cable; it also is the parent of FORTUNE and CNNMoney.)

I thought of Parsons' comment as I began looking at what Google has been up to in Washington lately.

The huge Internet company has emerged as a leading proponent of so-called Net neutrality legislation that would, among other things, prevent broadband providers such as the phone and cable companies from charging extra fees for delivering online content and applications. At the same time, Google (Charts) reportedly is interested in bidding on some wireless spectrum that the Federal Communications Commission is set to auction later this summer.

Secretive Google isn't saying what its plans are, but it would appear that the company is contemplating a route to the sea. If it owned its own wireless network, Google could have direct access to millions of customers. It also would have leverage - "assured market opportunities," as the politic Parsons would say - in dealing with the cable operators and phone companies that provide most consumers with Internet access.

For whatever the outcome of Google's legislative efforts - the House rejected a Net neutrality bill earlier this month, and the Senate is weighing a couple different versions of such rules this week - big Internet companies will always have to make business deals with the phone and cable companies.

Google, for example, is a customer of all the big Internet backbones, including those run by AT&T (Charts) and Verizon (Charts). Yahoo (Charts) offers broadband services in partnership with those companies, and Microsoft (Charts) is trying to sell them software to help run their nascent video efforts. Those negotiations would be more interesting if the Internet companies felt they could bypass the phone and cable companies and reach consumers directly.

Indeed, it might be a lot like the way cable companies and their content partners operate.

Content companies such as Time Warner want to make sure their programs get distributed to all the cable and satellite customers. If, say, News Corp. and Comcast controlled all that distribution, Time Warner might not have much power to demand top dollar for its shows; but with its own distribution company able to reach at least some customers, Time Warner always has the ability to build audiences and buzz for its programming.

Imagine the revolt in, say, Chicago (where Comcast operates) if only Time Warner's cable customers could get The Sopranos. Similarly, phone and cable broadband customers wouldn't be too happy to discover that their friends on a hypothetical Google broadband service were able to get the results of Google searches in milliseconds while they had to wait a bit longer for the same goods.

Of course, Google and others who reportedly are contemplating bids in the upcoming wireless auctions (a cast of characters that includes wireless pioneer Craig McCaw, Time Warner, Microsoft and even News Corp.) need to tread carefully, says Herschel Shostek, chairman of wireless research firm The Shostek Group.

Shostek says the airwaves up for grabs reside in a funky part of the wireless spectrum, and developing that spectrum for voice and data services could prove to be an expensive proposition for any bidder. (Google has sought permission to offer a Wi-Fi broadband service in San Francisco; Wi-Fi operates over an unlicensed spectrum.) And many analysts question the wisdom of any new player that wants to get into the fiercely competitive mobile telephone space.

But for Google, with its robust stock price, money is not an object. Wireless spectrum could cost the company hundreds of millions of dollars, but the ability to stand up to cable operators and telcos should they demand extra payments to deliver Google's traffic to consumers - well, that's priceless.

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