Google’s Fiber: Laugh All the Way to Bank

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The contest by Alphabet’s Google itself among the cities in 2010 was a brilliant stroke of genius in that it cost the company practically nothing, but it led to municipalities (munis) starting to contemplate building their own networks, which would potentially provoke established service providers to respond with their own enhanced broadband offerings. To the extent that the search engine powerhouse has just threatened to invade a particular territory with fiber, oftentimes existing competitors were quickly countering with at least their own announcements of network upgrades, new construction, lower pricing, etc. While Google has made a certain amount of investment in the deployment of fiber just to keep up the pretense, as we wrote in late 2014, its vested interest is in encouraging broadband build-outs by other entities in order to increase Internet traffic, which would have a positive effect on its core advertising business.

Several days ago, it was reported that MoffettNathanson collected data from the U.S. Copyright Office with the conclusion that “Google Fiber accounts for ‘5/100ths of 1 percent’ of the U.S. pay-TV market.” Even a year earlier, it commented, “Google Fiber is a bit like Ebola: very scary and something to be taken seriously … but the numbers are very small, it gets more press attention than it deserves and it ultimately doesn’t pose much of a risk (here in the U.S. at least).” Yet, the steady chorus of cheerleading from other industry analysts and press outlets on the firm’s stated plans has gone on unabated over the last 12 months, despite a diminishing rate of growth, as reported by International Business Times (IBT).

Even MoffettNathanson still takes Google seriously as really wanting to be a player in the optical access business as found in the IBT article, “None of this is intended as criticism, nor is it a suggestion that Google Fiber isn’t ‘doing well,’” Ironically, it almost gets to the truth by asserting, “The goal doesn’t seem to be how much ground they can cover. It seems to be how many different business models they can showcase.” Exactly, one of Google’s primary strategic objectives during its existence is simply to just show the way.

The Wall Street research firm points out that the lack of the Internet take-rate information could give a distorted view of Google’s performance. Still, it has to acknowledge (in the IBT piece) that from the standpoints of both the buyer and seller, a combined package of services is more attractive.

Once more, the critical aspect is that regardless of the actual amount of fiber deployment or services sold, Google has made a substantial impact in terms of at least potentially speeding up broadband deployment in the US, especially by spreading competition. In December, 2015, as the corporation had only deployed fiber in three cities (with just plans to penetrate six others) AT&T followed up with its intentions to expand its “GigaPower” service to 36 metros. When Google brought up Atlanta as one of its next targets, about two months later, Comcast came back with its two-gig fiber service for that city.

Before Google made inroads into its first choice, Kansas City, there would have been an argument at munis over just providing 100 megabits – now the conversation focuses on a gigabit at $70/month or nothing is going to happen. In addition, at a time when getting financing in the optics space can be close to impossible, we are aware of more private funding becoming available for various cities because of the belief that Google’s activities can be replicated.

However, it must be remembered that there has been a relatively high failure rate with muni networks, particularly without the right kinds of visionary leadership, technological expertise, and customer service. Also, Google can command advantages that other developers cannot, such as not even stepping into the city until all of the permit obstacles are out of the way.

[written by Mark Lutkowitz]