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Today, if you have a few million bucks to spare, the Federal Communications Commission will be auctioning wireless licenses in the 700 MHz band — primo space in many respects because it is lower on the RF spectrum and offers longer range. But Auction 92, as it is called, is anything but primo, since it is for licenses that either received no bids in the previous Auction 73, held in 2008, or were sold in that auction to organizations that never paid in full. That earlier auction, which I covered at the time, is a sad story of opportunity lost, especially for Google.

Remember how that freed-up spectrum was up for auction and Google made loud noises about bidding. I even predicted that they would bid, because that’s what I was hearing from inside the Googleplex.  Google wanted to set up a national wireless network to rival anything from Verizon or AT&T. Only Google didn’t follow-through on its threat to bid and the frequencies were cherry-picked, instead, primarily by the big wireless incumbent carriers who have for the most part done little with them.

They bought the spectrum primarily to keep it out of play, to keep a viable competitor from emerging.

That decision not to bid back in 2008 seemed very short-sighted of Google. But now I hear from people who were inside the FCC at the time that Google was privately told by the Bush Administration not to bid.

What if Google had defied this government nudge? I guess the threat was they’d have it taken from them anyway through some regulatory action or legal challenge. But had Google succeeded, we wouldn’t be seeing bandwidth caps being imposed today on wireless data plans. And wireless data would be cheaper everywhere.

Our tax dollars at work….

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The Intertubes are alight this week with old news — that Netflix is the largest user of U.S. Internet bandwidth. Most stories cite a Sandvine report I won’t link to because you’d have to subscribe and I like you too much for that. Better still, look at the very interesting graphic above, courtesy of Arbor Networks. This chart has been floating around the net for a couple of months and shows the result of an Arbor study of several U.S. ISPs illustrating how we Americans spend our Internet bandwidth. There are three lessons I think we can learn from this chart: 1) that BitTorrent is no longer (or perhaps never was) the threat were were told by ISPs; 2) that video is by far the Big Kahuna of bandwidth, and: 3) that Netflix may be approaching the point where it is too big to fail.

First a look at BitTorrent, which ISPs love to complain about. Torrents are down to only eight percent of Internet traffic, but much more important is the fact that torrents have always been more polite than video streams. Here are two more graphs courtesy of Arbor Networks. First take a look at how web traffic varies over a typical 24 hour period: Now look at p2p traffic over the same period:The two are reciprocals of each other. This is by design, not coincidence. The nature of BitTorrent is to grab bandwidth not utilized by other services. So when web surfing declines in the late night and early morning hours BitTorrent increases.

Using only eight percent of Internet bandwidth and substantially less than that during peak hours, I think BitTorrent’s day as the Internet bogeyman are past, though I doubt the MPAA will see it that way.

Even more interesting is the rise of Internet video. Back in 2005 when iTunes users were downloading seven million three-minute music videos, readers of this column were downloading 2.5 million hours of NerdTV. I remember those downloads cost me $0.25 per gigabyte — ouch! In 2010 Netflix spent about $0.015 per gigabyte with an average 1.8-gigabyte movie download costing 2.7 cents to stream. Compare this to the average $1.00 Netflix spends to ship and receive every DVD and you can see their current business transformation from DVDs to streaming will lead to dramatically lower costs, freeing-up capital to buy more content.  It’s a virtuous cycle that Netflix (and all it’s competitors to be sure) will attempt to leverage into its own form of too big to fail.

None of this is big news, I suppose, but think for a moment about the implications it has for both future services and for the commercial value of the Internet. Streaming costs are going down, not up, so what’s cheap today will be cheaper still tomorrow. These lower costs will allow higher quality (1080p video, for example) and they’ll shortly reach the point where stream costs will be lower than over-the-air broadcast costs on a per-viewer basis, which in the longer run is an inevitable prescription for the death of broadcast TV. It’s not a matter of if but when this will happen.

Even Luddites will be sucked into the Internet age if they want to communicate.

Despite having spent billions to help along the recent digital TV conversion, I’m sure the Federal Communications Commission will be happy to see broadcast TV disappear since it will do so with a flurry of spectrum auctions bringing-in many more billions to the Treasury. And that freed-up spectrum will go into more data services as we move toward the all-IP all the time future for carriers I have long predicted.

As for Netflix, it is hard to bet against the company. Hollywood studios glower and hint that Netflix will be deprived of content as current content deals — specifically Starz — expire, but that won’t happen. Dropping DVDs completely would transfer $2 billion straight to Netflix’s content acquisition budget through a combination of an increased subscriber base at lower prices and no more postal fees.

That $2 billion will buy a heck of a lot of crow in Hollywood, where cash is king.

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FCC chairman weighs-in on width versus length debate

It wasn’t so many years ago, remember, when AT&T (the old AT&T, the U. S. national telephone monopoly) owned the phone wire in your walls. You put the wire there, or your builder did, and you certainly paid for it, but once dial tone filled the lines those lines became the physical property of Ma Bell and you couldn’t legally touch them. Everyone longing for the bad old days should remember when you couldn’t touch your own phone lines under penalty of law. Today or tomorrow, we’re told, the FCC will vote under the guise of net neutrality to re-instill some of those old ways of doing business, at least for wireless networks.

Well it won’t work.

The short story of what’s happening at the FCC is that the agency is trying to grab power over the Internet and to make that happen is paying-off any number of constituencies. With everything eventually going onto the net as a data service, the FCC wants to avoid irrelevancy, so this is how they are doing it with the help of Google and Verizon. Net neutrality partisans appear willing to accept more oversight if it comes with guarantees against packet throttling. And phone companies are willing to accept broader restrictions if they can still throttle or introduce tiered charges on their only networks that matter anymore — wireless.

These new rules, then, establish three fundamental ideas: 1) the FCC has regulatory authority over the U. S. Internet; 2) Internet Service Providers (ISPs) can’t discriminate between data types like video, voice, or torrents on their wired networks, but; 3) wireless ISP’s can discriminate between data types and applications as long as they aren’t giving preferential treatment to their own competing products or services.

So T-Mobile, just as an example, can limit or create a surcharge for Hulu, but only if it isn’t offering a service of its own that is competitive with Hulu and for which it doesn’t make such a surcharge.

The theory behind this rule is that wireless networks are a more bandwidth-limited resource than wired networks.

While the new FCC rules allow tiered pricing and limited packet filtering for wireless networks, they do so with the loud (and I think fairly legitimate) argument that competition will work to mitigate any telco abuses. There are nearly always three or more wireless network providers in any area and those mobile providers that punish their customers will be punished in turn by the loss of those customers to more enlightened network operators.

But to my way of thinking it really doesn’t matter, because those who would put limits on the Internet really don’t understand how the Internet works.

Look for shortly to appear what I’m calling the Trojan App, a hybrid mobile application that doesn’t exist yet but certainly will within hours or days of the new rules going into effect. The Trojan App is a legitimate mobile application that performs multiple functions, at least one of which is to circumvent the new wireless rules.

Here’s what I mean. Maybe you saw the story a couple of days ago about technology being brought to market that would enable mobile phone companies to charge Facebook users by the page for access. Under the new rules a mobile carrier can do that, no problem. But because that mobile network offers its own voice service (they all do) under the new rules they can’t similarly restrict Skype or Google Voice or any of the dozens or hundreds of Voice-over-IP third-party services out there. So what’s to keep Skype or Google or Yahoo or iChat or MrVoIP from offering a mobile version of its service that includes a free gateway to Facebook?

Nothing.

These are perfectly legitimate applications that are protected from throttling by virtue of their competing with a core service of the ISP, yet in this instance they will have gained a secondary function of acting as a Virtual Private Network link to an otherwise-regulated service like Facebook.

It’s a digital loophole.

Some might argue this simply won’t happen but they’ll be wrong. That’s because there is a long and successful tradition of using functional VPNs to accomplish such ends on the Internet. That’s how I watch Top Gear. But even more importantly the major players will do it because they’ll be forced into it by the minor players.

I could set-up in the cloud overnight a VoIP or some other qualifying service like mail or chat or video streaming. If I add a Facebook gateway to my new service and Yahoo doesn’t to theirs, well Yahoo loses.

Okay, maybe Yahoo isn’t the best example, given their decided lack of common sense for the past decade or so, but you get my point. Skype would lose. Google would lose. Microsoft would lose. And you know they won’t stand for that.

The Internet — even the wireless Internet — is a living thing that will optimize itself around any obstruction.

Resistance is futile.

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Bill Joy used to say, “not all smart people work at Sun” (he was right). Max Levchin is making a killing in Web 2.0 by resuscitating Web 1.0 projects that were too ambitious for 1999 but — thanks primarily to Moore’s Law — are just right for 2009.  Sometimes all it takes is a change of scene or season for something that was a failure the last time to be a big success today. And that’s why I’m predicting the eventual return of Teledesic or something just like it — some new form of Internet in the sky.

This is the first of probably three columns about what will be in coming months the huge story of how the Obama Administration reinvents the Internet.  They are obliged by law to do so and are required, in fact, to submit a grand plan to Congress by February 16, 2010. This National Broadband Plan is intended to accomplish the very same goals as the Clinton-era National Information Infrastructure (remember Al Gore’s “information superhighway?”) only this time it might actually succeed, again thanks mainly to Moore’s Law.

I’ve written before about the last time we went through an exercise like this.  It wasn’t pretty, with the big telephone companies essentially stealing $200+ billion in tax credits in exchange for, well, nothing.  That’s why U.S. broadband, which used to be the best and cheapest in the world is only middle-of-the-pack today.  The National Broadband Plan is supposed to fix that, though at a cost some are predicting (hoping?) will be more than $100 billion.  This time the cable TV companies will be joining the telcos at that trough.

In the broadest of terms what the Obama Administration wants to do is to bring 100 megabit-per-second Internet service to every home and business in America.  They will task ISPs to provide such a service in exchange for being allowed to continue operating as ISPs.  In places where such services can be easily provided at reasonable cost with an acceptable level of profit, which is to say in urban and higher-density suburban areas, this will be no problem.  Ramp-up fiber-to-the-home, fiber-to-the-curb, and DOCSIS 3.0 cable modem services and we’re there.  The simple business expedient of putting local TV stations out of business and grabbing their advertising income will, alone, more than pay for the upgrade costs.

Where there’s a problem is providing this same level of Internet service (100 mbps) in all the more sparsely-populated parts of America.  It is from those areas the telcos and cable companies will come, hat in hand, to ask the government to cover the difference between what they can charge and what it actually costs to provide the service.

Serving these non-urban areas is what I see driving a return to satellite projects like the ill-fated Teledesic.

For those who don’t remember it or have forgotten, Teledesic was one of a number of 1990s plans to use low-earth orbiting satellites to provide wireless Internet service almost everywhere on Earth.  By being closer to the ground than geosynchronous communication satellites, the Teledesic network could support many more low-power users (analogous to having more cell towers) and support low-latency services like Voice over IP (VoIP) which won’t work on a geosynchronous satellite link. The original Teledesic plan called for 840 satellites, later reduced to 288 satellites that would be flying in somewhat higher orbits.  Craig McCaw, Paul Allen, and Bill Gates were all involved in the project, which eventually died when the Internet bubble popped and it couldn’t be financed.

I know I am putting this all too simply, smartypants, but for the purposes of this column that is enough detail.

Teledesic died because it was too ambitious, too costly, and the people behind it made some fundamental mistakes, some involving rockets and the true cost of sending stuff into space, which I know something about.  Remember my Moon shot?  Well it is continuing and I’ve learned quite a bit about space economics along the way.

For Teledesic one key requirement was getting 840 or 288 satellites into orbit for a good price.  Toward that end they standardized on a satellite design that could be launched by any space-faring nation which was supposed to put all those nations in competition, fighting for Teledesic’s business. To set an aggressive baseline price, Bill Gates personally flew to Russia to cut Teledesic’s launch deal himself.

The Russians saw Bill coming.

Gates was negotiating for use of former Soviet SS-18 intercontinental ballistic missiles to launch scads of Teledesic satellites at a time.  Bill’s negotiating position was a tough one (or so he thought) paying no more than $7 million per launch.

Let’s pause for a moment to understand something about those SS-18 missiles.  These were (and still are) the biggest ICBMs around, each capable of lofting 10 independently targetable H-bombs over the pole at the U.S..  SS-18s were launched from underground silos that were designed with a different philosophy than U.S. Minuteman silos: SS-18 silos are hardened to survive a U.S. nuclear attack and then make a second strike.  This second strike capability made the SS-18s the scariest mothers around.  Forget about mutually assured destruction (MAD), the SS-18s made possible mutually assured RE-destruction, killing any survivors of the first wave.  In the eyes of U.S. generals and diplomats, those SS-18s simply had to go.

And they did go, or were at least intended to, as a major condition in the Strategic Arms Reduction Talks (START and START-2).  In exchange for certain favors including chopping the wings off American B-52 bombers, the Russians agreed to destroy 100 SS-18s, taking 1000 warheads out of the game.  There were a number of ways to accomplish this, but the cheapest by far was to launch the SS-18s into space.  It’s easily verifiable, almost impossible to spoof, and might even accomplish some good, like providing the world with 100 mbps Internet service.

Back to that $7 million launch price negotiated by Bill Gates. For the Russians, launching SS-18s came with a negative price, since each launch eliminated the need to disassemble, destroy, and verify the destruction of a missile, the total cost of which could easily reach $1 million.  So launching satellites, while it incurred certain costs for modifying the missiles to replace H-bombs as cargo, began with a price of negative $1 million. The cost of the missile, itself, was zero.  And Bill Gates‘ $7 million would have been nearly all profit for the Russians.

The Russians could have launched the entire Teledesic network for free and still come out financially ahead.

Had Teledesic been able to cut the right deal with the Russians, their satellite constellations would have been launched almost for nothing and we might have satellite Internet service today.

Speaking of today, a decade later, technical and political realities have changed.  Where Teledesic was a $9 billion gamble that didn’t pay off, there is right now $7.2 billion sitting in the FCC’s Universal Service Fund — money the telcos and cable companies are going to try to claim to provide National Broadband service to indian reservations and logging camps.  To serve all of America’s 110 million housing units will cost a lot more than $7.2 billion, which is where those numbers approaching $100 billion came from.  There’s going to be a financial food fight at the FCC to pay for rural broadband service.

But not if a Teledesic-like satellite system were revived.  What would have cost $9 billion in 1996 would cost less today because digital technology always gets cheaper.  Where the 1996 money was coming mainly from private capital markets, $7.2 billion could come from the FCC this afternoon.  By embracing a bold satellite initiative using low-orbiting satellites with low latency the Obama Administration could sidestep dozens of local and regional boondoggles saving tens of billions, providing a solid service that would not only reach every remote part of the U.S., but the rest of the world, too.

Imagine the international political power that would come with having such a global network.  Friendly nations could get cheap Internet, unfriendly nations would find it difficult to keep their citizens off the net.  It could be a bully pulpit in space.

And I know a thing or two about pulpits.