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Why Google Fiber Is Cable's Biggest Nightmare

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What's faster than a speeding cable Internet connection, and able to leap between mobile computing and old-school TV in a single bound? If you ask Google (NASDAQ: GOOGL  ) , the answer's simple: lightning-fast fiber-optic Internet service.

As it stands, broad access to Google's service has been limited to the greater Kansas City area, so Fiber's been little more than an intriguing notion. But with news that Austin, Texas, is next up on Google Fiber's hit parade, the prospects are becoming intriguing that Google could build an entirely new source of revenue and turn the Internet industry upside down.

Austin, here we come
The official announcement that Fiber is coming to Austin was supposed to be a closely guarded secret, but that didn't last long. A local news outlet leaked the story a week ago that Google Fiber was going to be the subject of the joint press conference with Google and Austin Mayor Lee Leffingwell. Austin seems like a natural for Fiber, since it's widely viewed as a domestic hotbed of IT. Beginning in mid-2014, local residents will be able to choose Internet service for $70 a month, or $120 a month with Fiber TV service, at connection speeds 100 times faster than cable, according to Google.

With two new Fiber announcements in a matter of weeks -- the service is also expanding to Olathe, Kan. -- it appears Google Fiber is ramping up after its K.C.-area beta test. Though most industry insiders don't believe Google intends to take over the Internet connectivity market, Google CFO Patrick Pichette did say, "We really think that we should be making business -- a good business -- with this opportunity [Fiber], and we're going to continue to look at the possibility of expanding." Investors and Google shareholders should like the sound of that; more revenue streams mean less reliance on Internet advertising.

Cable companies must be scared, right?
Are cable Internet providers concerned about the threat posed by Google Fiber? If so, they aren't showing it yet. It's probably just a coincidence that my cable provider, Comcast (NASDAQ: CMCSA  ) , recently offered to crank up my Internet connectivity speed at no charge. That's right -- a cable company opted to improve service without charging. Interesting.

Time Warner Cable (UNKNOWN: TWC.DL  ) , Comcast, and Charter Communications (NASDAQ: CHTR  ) , have all been on the other side of the Internet subscriber fence. Phone companies such as AT&T and Verizon began losing customers to these and other cable Internet providers some time ago, largely because of speed and connectivity issues. And now along comes Google Fiber with an alternative that blows the doors off anything Comcast, Time Warner, or Charter can offer, and often for the same or less money. If the cable industry isn't worried, it should be.

Not all the growth in cable companies' Internet customers comes from defections from the phone companies, but Internet continues to be a profitable area of growth in the industry. Charter saw an 8% jump in Internet customers in 2012 compared with the prior year. Time Warner Cable and Comcast also enjoyed substantial Internet growth last year, with annual revenues up 13.7% and 9.2% compared to 2011, respectively. With margins as high as 97% on cable Internet, according to a Bernstein analyst, these guys have a lot to lose if Google Fiber really takes off. And you can bet Google knows about those ridiculously high margins, too.

Google may be downplaying Fiber, at least in terms of how quickly it's chosen to roll the service out to mainstream America. As Charter, Time Warner Cable, and Comcast can attest, the opportunity for Google Fiber to become a significant source of alternative revenue can't be denied. And Google certainly has the wherewithal to invest in Fiber for the long haul, with more than $48 billion in cash and equivalents, and operating cash flow that's off the charts.

Fiber is going to change the way we connect to the Internet, and it's yet another example of why Google is close to an ideal growth stock. If it's not already, Google should be on your short list of investment options.

As one of the most dominant Internet companies ever, Google has made a habit of driving strong returns for its shareholders. However, like many other Web companies, it's also struggling to grow additional sources of revenue. That's why it's more important than ever to understand each piece of Google's sprawling empire. In The Motley Fool's new premium research report on Google, we break down the risks and potential rewards for Google investors. Simply click here now to unlock your copy of this invaluable resource.

Read/Post Comments (6) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 10, 2013, at 7:59 PM, vv234 wrote:

    I do not understand why Google is not testing its fiber internet service near its home: SF bay area? Isn't it easier than Austin?

  • Report this Comment On April 10, 2013, at 9:47 PM, Riskysam wrote:

    Now we know what all that purchase of cable in 09 and 10 was for. Anyone doubt this company will hit $1000 by 2016?

  • Report this Comment On April 11, 2013, at 2:10 AM, KevinniveK wrote:

    Yep big scare - goog might have 30% geo coverage by like umm the year 2022

  • Report this Comment On April 11, 2013, at 8:58 AM, overbuilder wrote:

    As much of a fan as I am of competition, GOOGs initiative will be limited long term. Many 'overbuilders' have preceded them - RCN, Everest, Seren, Knology, Grande, and WOW to name a few. What is puzzling is why the two cities GOOG has chosen already have an overbuilder present (KC with Everest and Austin with Grande).

    The economics of this business plan are questionable. Many munis have tried - most don't do well. (Read: Burlington Telecom). Assuming a range of $600-$900 per home passed for basic network infrastructure and a 33% market share, you get an $1800-$2700 investment per sub plus the equipment in the home - minimum $500. Cable companies sell for a multiple of cash flow, but generally around $3k per sub. GOOG can beat these numbers for a while by extracting favors from the cities they enter, higher market share due to brand name / higher speed, etc but in the end, we are price-shoppers. We have no loyalty and GOOG will be no different.

    GOOG chose cities it chose based on what the city would offer up (tax breaks, access to muni owned poles, right of way agreements, etc) - anything to reduce cost to build. the cost to build San Fran vs KC or Austin is astronomic. A tier 1 city (passing all homes which GOOG isn't doing) could burn $1B....not a typo. I think GOOG would be better off acquiring several failing munis - many have FTTH networks - that they could acquire for a fraction of the cost to build and get high market share based on their brand....

    But, what do I know.

  • Report this Comment On April 11, 2013, at 10:02 AM, silvermount wrote:

    A bit more research would have made a better article. Phone companies such as verizon have been adding customers, not loosing them because they have had fiber for some time. The product is called FIOS. How could you have missed that?

  • Report this Comment On April 11, 2013, at 10:37 AM, overbuilder wrote:

    Actually, VZ FiOS has also been a challenge. Several years ago (2010), VZ indicated they would finish building where they had franchises, but would accept no more franchises. For the same reason I mentioned above. The business plan is too difficult to justify financially. The investment per sub (inclusive of acquisition costs), is not justified by the cash flow.

    Further, FiOS would not net ADD subs as VZ was already the incumbent phone provider in these areas, it would have bled subs more slowly than other ILEC markets. There may be a case or two where their ILEC market had already lost so many phone subs that they were getting them back, but still not enough to justify the investment.

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