Why Google's Competing for Your Internet Service

This week AT&T began rolling out its one-gigabyte-per-second fiber-optic Internet cables in Austin, Texas -- ahead of Google's (NASDAQ: GOOGL  ) high-speed Internet plans for the city.

But despite AT&T reaching Austin first, Ma Bell and other broadband companies should be more than a little scared of Google's intentions.

Not just for kicks and Googles
Although Google has been known to start projects for fun and then kill them off later (ahem, Reader), the company has made it clear that its fiber project is serious business. Back in May, Google's VP of access services, Milo Medin, said the company fully expects to make money from its fiber business.

But just how much money isn't clear yet.

Actually, there isn't much that's financially clear about Google Fiber at all. What we have are just analyst estimates putting the cost of rolling out Google Fiber at about $7 billion to $10 billion by 2020 and covering around 8 million homes by the same time.

Google Fiber logo. Source: Google.

Right now, Google's efforts have only materialized in parts of Kansas and Missouri, with plans to expand the service to other parts of both states, and then Austin and Provo, Utah. But after that, there's not much more detail.

So, why does Google want to enter the Internet business when AT&T, Verizon, and others are already entrenched in it?

There's no simple answer to that question, but BTIG Research offered some thoughts on its blog back in April. BTIG outlined six main areas Google could benefit from laying fiber throughout the US, paraphrased below:

  • Strongly encourage Internet service providers, or ISPs, to increase broadband speeds.
  • Prohibit ISPs from disadvantaging Google through bandwidth caps or net neutrality.
  • Keep innovation flowing by bringing high-speed Internet to schools and other non-business entities.
  • Bridge the digital-divide gap, bring more people into Google's services.
  • Bring YouTube to set-top boxes just like any other network channel.
  • Institute highly targeted television ads based on Web searches and TV viewing habits.

It's this last point that's the most interesting, though. In order to help sell its ultra-fast Internet, Google offers a television service just like cable networks do. By doing so, it opens up an avenue that's been harder to tap into before: television viewing data. Google already offers relevant ads based on Internet searches, e-mail content, YouTube videos, and other online habits, and it may be able to do that with TV commercials, as well.

Google is expected to bring in $38.6 billion in advertising revenue this year, about one-third of all revenue brought in by online ad companies. Tapping television ads could add even more to Google's advertising dominance. 

But even if Google doesn't tap into television habits to bring targeted ads to TVs, that doesn't mean there isn't money to be made. As a Quarz article mentioned last month, Google found that faster Internet speeds lead to more Internet usage, more searches, more YouTube videos, and, eventually, more online advertising opportunities.

Google sees its Fiber project as a new way of doing business, not an old-school approach of just bundling TV and Internet services. In the spring, Medin said, "We're trying to build a business for the next 10 years, not the last 10 years."

Disruption is good -- if you're on the right side 
Google Fiber offers a superior product at a fraction of current high-speed costs, and pits it up against companies that rank among the worst in customer-service satisfaction. It almost doesn't seem fair when you put it that way.

While Google investors may be happy to see the company roll out its fiber network in new cities, telecom investors may need to look a little closer at how the companies they invest in stack up to potential Google competition. If the analysts' estimates come true, Google could start significantly encroaching on several Internet providers' territory less than 10 years from now. Considering that Android became the dominant worldwide smartphone platform in just a few years, I wouldn't put it past Google to move faster than the estimates and transform an industry that's ripe for change. Investors would be wise to keep an eye on its progression as well.

More than just one reason to invest in Google
Google has its hand in a lot of new ventures, making it difficult to know which ones are most important to the company's future. Most of the company's secrets -- the ones that make savvy market watchers rich -- often fly below the radar. If you want an edge on other Google investors, be sure to check out "5 Secrets to Google's Future" from The Motley Fool. This 100% FREE guide includes actionable advice that you can put to use right now! Click here now for instant access.

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  • Report this Comment On October 01, 2013, at 7:30 PM, peteysa wrote:

    1 GigaBIT per second speeds

    1 gigaBYTE per second = 8 gigabits per second

    b = bits

    B = Bytes

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