Is Google Fiber Going to Eat Your Internet Service Provider?

Fri, Feb 28, 2014 - 9:48am

Google has its fingers in so many technological pies that it’s hard to keep track of them — even the ones not hidden in Google X, the company’s development lab.

One of those pies is Google’s small and early-stage project to deliver high-speed internet through its own fiberoptic network. And high-speed does mean high-speed — so-called “gigabit” internet at speeds 100 times those typical of current broadband.

So far, Google Fiber has been rolled out to two cities — Provo, UT, and Kansas City. But the company recently announced that it had targeted 34 more cities across the U.S. as its next targets for expanding the network, including San Jose, CA, Portland, OR, Phoenix, AZ, and Raleigh Durham, NC. In the announcement, Google noted the momentum building behind next-generation highspeed internet from city administrations which recognize the educational and economic significance of broadband access. With the administrators of the target cities, they’ve been discussing “what it would take to bring them Google Fiber… [working] closely with each city’s leaders on a joint planning process.”

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The Sign of Things to Come?

Source: Kurzweil Accelerating Intelligence

What’s in It for the Cities?

Why are cities eager to talk to Google? The pricing plans for Google Fiber in Provo and Kansas City explain the reason.

For 0 a month, customers get gigabit internet and TV. For a month, customers get gigabit internet. For zero dollars a month, customers get “standard” broadband access speeds. That is, Google is essentially offering city governments free universal broadband access for their residents, for the price of cooperating in planning the network. It seems a small price to pay, given the potential economic benefits to the city.

Reaction From Analysts

Goldman Sachs estimates that a nationwide rollout of Google Fiber could take 0 billion in capital investment. They question whether Google really wants to get involved in the relatively low-margin business of providing internet plumbing (currently, Google’s pretax profit margin is higher than that of Comcast).

Skeptical analysts suggest that Google Fiber is a card that Google is playing in the ongoing “net neutrality” struggle.

“Net Neutrality”

Net neutrality is a voluntary principle — not a law — which says that the companies running the internet’s pipes won’t give preference to some data over other data on the basis of payment or other criteria. All the data should treated equally.

Advocates of net neutrality say that it is necessary to avoid anticompetitive practices, and think it should be written into law. Opponents of net neutrality laws think that such laws would reduce the power of service providers to maintain high quality for the data customers want the most.

Some internet service providers have disregarded net neutrality in the past, but only in marginal areas — for example, constricting the bandwidth used by peer-to-peer file-transfer protocols, which are often used for piracy.

But recently, Comcast and Netflix reached a deal which skirts the edge of net neutrality, with Netflix getting a preferential “onramp” into Comcast’s delivery system. At peak times, some 30 percent of U.S. internet traffic can come from Netflix streaming — so this deal will mean less annoyances for customers as they watch highdefinition movies.

Google is of course watching these developments very closely. It delivers its data through other people’s pipes — and it clearly doesn’t want a situation where it has to be bidding against competitors (such as Facebook and Twitter) for preferential treatment. So some analysts think Google Fiber is a shot across the bow of service providers — saying to them in essence: “If you drop net neutrality, we can just build our own pipes.” They may not be serious about doing it — they may just be sending a message.

But Maybe They’re Serious

Others believe that Google’s view is long-term enough that they could well be planning for dominance in the provision of broadband internet. One analyst writes: “It may not make a huge difference for Google or for the incumbents in the next one, two or three years, but Google is taking the long view and we think in five or more years, it could turn out to be a significant, profitable business for Google and headwind for incumbents.”

Google knows that competition — from Twitter, Facebook, and other online ad venues — will be gradually eroding their advertising business, which currently comprises the lion’s share of their revenues. Many of the plans we have heard from Google’s creative spirits will eventually be doing the heavy lifting for the company. Google Fiber, while it may or may not become a dominant force in broadband service provision, certainly gives us reason to think that Google’s leadership is not asleep at the wheel.

For more commentary or information on Guild Investment Management, please go to guildinvestment.com.

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