Google's Huge, Risky Wireless Plan Could Crush Cash Flow

In awe about how much Google has spent on capital expenditures in recent years? ($3.9 billion in the last eight quarters). You ain’t seen nothing yet.

According to the WSJ, Google is indeed preparing to bid in January’s wireless spectrum auction, with the spectrum expected to go for $4.6 billion or more. If Google wins the auction and builds its own national wireless network (presumably the idea), the network itself could cost an additional $3 billion. So, in total, that’s about $8 billion.

On the positive side, Google is so fantastically wealthy that $8 billion is equivalent to only about two years of current cash flow. The WSJ also says Google is exploring financing options, which could presumably include equity or debt partners, as well as the creation of a separate Google Wireless company. The latter structure would preserve the current company’s profit margins and cash flow. But no matter how you look at it, it’s still a big bet…

Google’s stock has been hammered over the past two weeks, falling 15% from a high close of $742 on November 6th to $629 yesterday. Part of this drop is probably the usual post-earnings sell-off. Part of it is probably the cratering economy. And part of it has probably been word about Google’s wireless spectrum plans leaking out. Investors hate reductions in free cash flow, and Google’s wireless spectrum plans could obliterate it.

Consumers should cheer: Google’s wireless plans can only be good for them. Google purists should also cheer: The company is staying true to its IPO mission statement, in which it said it would not shy away from making big bets in order to preserve pristine quarterly earnings reports (which it has managed to do most of the time anyway). But investors are right to worry: Bidding on spectrum and constructing and operating national wireless networks are miles beyond Google’s core competencies. This doesn’t mean they’ll fail.  It does mean they’ll be taking a major, expensive risk.

See Also: Why Google Won’t Become A Phone Company
Why Google Won’t Buy Sprint Nextel
Google Phones: Four Things We Still Don’t Know

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