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Google: Is Fiber Its Next Disruptive Technology?

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Google (NASDAQ: GOOGL  ) is one of the most disruptive technology companies in recent history. And while many still associate Google with advertising, it's making necessary investments to solidify its future as a player in hardware, software, and other less-discussed industries like biotechnology and high-speed Internet. It's in these under-the-radar projects where further upside may be found, and where Google's disruptive nature could cause headaches for the likes of AT&T (NYSE: T  ) and Comcast (NASDAQ: CMCSA  ) , and create opportunity for companies like Level 3 Communications (NYSE: LVLT  ) .

What's going on?
A couple years ago, Google presented an idea: It wanted to enter the high-speed broadband market with Internet speeds of one gigabit per second, or Gbps, with something called Google Fiber, which is essentially 100 times faster than the average broadband speed. It was a nice goal, but no one really thought it was likely, or that Google would spend the billions needed to roll out such a service.

Now, fast-forward. Google Fiber has already entered Kansas City and Austin, Texas. But more importantly, it recently announced an expansion plan into 34 new cities. In unprecedented fashion, Google builds its infrastructure based on the demand of communities, and is even allowed to use utility poles to attach fiber cables, which slaps owners of the poles like AT&T and Comcast in the face.

As a result, Google is keeping costs in check on a project that was originally estimated to cost $20 billion-$28 billion over five to 10 years. But data usage is growing, especially with the Internet being used for daily living needs, and a service with these speeds has yet to be created. That implies that Google will continue to see great demand as the service rolls out.

What's this mean for Google and its competitors?
It's really hard to put a number on just how disruptive and lucrative Google Fiber could be for the company. However, it's worth noting that two-thirds of Google's revenue still comes from Given the broadband businesses AT&T and Comcast have built, one has to assume that Google Fiber could spark the next round of significant year-over-year growth.

AT&T's U-verse GigaPower is the company's newest service to compete with Google Fiber, which is also being rolled out into new areas slowly. GigaPower currently has download speeds of only 300 Mbps, and while fast, it is not near the speed of Google Fiber. Obviously, AT&T views this upgrade as imperative, due to the speeds at which it will be competing against Google. AT&T's U-verse has become its leading segment of growth.

U-verse finished 2013 with 10.7 million customers. It grew at a rate of more than 25% and accounted for roughly 10% of AT&T's $128.7 billion in annual revenue. There is a lot to gain for Google, and a lot to lose for AT&T.

AT&T is not the only company that stands to lose a lot of its business to Google Fiber. Comcast could also feel the pressure, as it recently acquired Time Warner to become the largest broadband provider in the U.S. Combined, Comcast now has more than 30 million customers, and more than 80% of its of last year's $65 billion in revenue came from video and high-speed Internet.

Lastly, it's worth mentioning that Comcast does not have speeds that come close to matching that of AT&T or Google Fiber. It is the quintessential example of the "average broadband speed" that Google says it is 100 times faster than. Comcast will need to make enormous investments just to catch up.

What about fiber optics?
In gauging Comcast and AT&T's total revenue per subscriber, you can see how large such a service could become for Google. With Google's history -- and with it being the best service -- common sense implies that this will remain a very popular service. It will force competitors to beef up their networks with big-time investments in fiber-optic cables. AT&T has already begun to make large investments in fiber to boost speeds.

As previously mentioned, analysts predict up to $28 billion in total costs for Google, depending on the size of its subscription base. This does not include investments from the likes of AT&T, Comcast, CenturyLink, Frontier, etc. Telecom equipment companies could also thrive in this environment -- but only those with large fiber networks and knowledge of integrating such technology to boost speeds and cut costs.

This leads us to Level 3 Communications, which, following the acquisition of Global Crossing, now owns more than 35,000 route miles of undersea fiber-optic cables worldwide, by far the highest of any company. The bulk of Level 3's business revolves around this network, and while Google Fiber's technology has most recently involved the attachment of fiber cables to existing poles, such a network might come in handy as it grows and expands into new regions.

As of now, to imply an acquisition or partnership with Level 3 would be very speculative. But as this race, competition, and expansion heats up, companies will look for such networks as a way to save on costs and gain expertise. Naturally, the likes of Level 3 are the companies to benefit the most.

Final thoughts
Google has the most to gain. AT&T could lose its true growth engine. Comcast might have to spend many billions just to remain relevant and compete once Google Fiber is in full swing.

Google's disruption of the broadband space will likely spark mergers and acquisitions, company conflicts, and maybe even regulatory reviews. But one thing it will definitely create is growth -- and if competitors are smart, it will also spark a willingness to innovate.

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Read/Post Comments (12) | Recommend This Article (3)

Comments from our Foolish Readers

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  • Report this Comment On March 12, 2014, at 12:44 PM, Gridlocked wrote:

    So what was Google Fiber's customer numbers for 2013 or does that not matter?

  • Report this Comment On March 12, 2014, at 4:59 PM, easlicka wrote:

    "Which slaps owners of the poles like AT&T and Comcast in the face."

    At&T and Comcast almost never own the poles, they are owned by local utilities and in most regulated states, anyone can rent space on the poles, Google just like AT&T or Comcast.

  • Report this Comment On March 12, 2014, at 5:06 PM, fredthefred wrote:

    Brilliant. An article on fiber networks that does not mention Verizon Fios--the largest fiber network in theUS

  • Report this Comment On March 12, 2014, at 8:02 PM, jnffarrell1 wrote:

    Say telcos overestimated Google's costs and deployment speed by 2.5. What if Google's margin is 60%, starting two years after installation; What if Google reinvests all that profit to build out fiber to every homeowner who has a high need, future use and willingness to pay in the eight years. What if Google locks up every customer worth having and not just 3M in eight years?

  • Report this Comment On March 12, 2014, at 10:21 PM, smilingdon wrote:

    PLEASE come to the Jacksonville area!!!

    I regret that day I signed up with AT&T. I've had so many techs out trying to fix problems with internet speed that I have lost count of them!

    Poor performance. I've had techs that 6 months ago were working in Walmart and now they are out at my house as technicians?

  • Report this Comment On March 12, 2014, at 10:57 PM, PaulApp wrote:

    Google Fiber coming to the states where no one is living in it! Wow! Wow? wowhat?

  • Report this Comment On March 13, 2014, at 2:20 AM, emailnodata wrote:

    Okay, enough with the "disruptive" crap.

    Seriously, can you people NOT live and die by frickimg buzzwords?

    Here, "risk on, risk off" just for the helluvit.

  • Report this Comment On March 13, 2014, at 7:59 AM, Fiberguru wrote:

    In Florida Comcast has recently placed bids on at least 4 communities to lay Fiber To The Home. For years they (Comcast) have played down the significance of FTTH. Now they have finally given in. They are telling one property is isn't important and they are telling another they will do it to keep their business. Imagine the costs if they had to do this for everyone. At the end of the day it's all marketing for them because bandwidth still Cable Modem over Coax in the Home, not even close to Gigabit service is possible. If you have Fiber or you are putting in Fiber and you aren't getting Gigabit you aren't getting what Google and others are offering.

    Another thing to look out for is the big companies like ATT that are now installing Fiber at the new properties but not delivering anything better than over their older systems for fear of upsetting their new customer.

    Google and other new providers have the advantage of a customer base that is 100% fiber. No one to upset.

  • Report this Comment On March 13, 2014, at 12:26 PM, JRTENN wrote:

    RE: "... It is the quintessential example of the "average broadband speed" that Google says it is 100 times faster than. Comcast will need to make enormous investments just to catch up. >>

    Which means that Comcast's already stealing-us-blind rates and fees will likely double or triple as they make us pay for these higher speeds.

  • Report this Comment On March 13, 2014, at 12:45 PM, AbeFromTokyo wrote:

    My hunch is that Google's end game is about content control. Now that the courts of spoken internet providers no longer have their hands tied by the net-neutrality of the past. These if you want to access youtube and download a movie on Google-play then you will enjoy the lightning fast speeds of the fibre network - but if you want download from Amazon or iTunes then your connection will be throttled down to dial-up speeds. Websites that allow lots of Google adsense will appear on your device quicker than flipping a page and those that do not will arrive slightly fast than the pony express.

    Of course, I could be entirely wrong about this. However, if this the case it could very well end up being a very sad day for those who are heavy users of bitorrent and other peer-to-peer networks.Likewise it won't be so good for the people who use Microsoft's cloud service instead of Google's. However, if Google does it right, it really could provide the majority of users with a much better experience on the internet than the current "broadband" gives them.

  • Report this Comment On March 13, 2014, at 3:12 PM, symbolset wrote:

    Nobody moves bits cheaper than Google. Nobody. Last mile Internet is a must-have for them, as it blunts the threat of network non-neutrality on the part of a huge monopoly like ComWarner. Gigabit fiber is disruptive in all kinds of ways. Being a cableTV company gives Google more leverage with content prividers as well.

    Just look at how Google Fiber is accelerating and you will see that Google was surprised by how profitable this was. As they roll out more faster, they grow their teams and processes making them more efficient, the time to ROI shorter. The upside is huge - once a customer's line is "paid for" it is almost all profit out to the end of forever, as fiber has a lot of upside potential. Once they stop building, all those customers are theirs and almost all profit pretty much forever as the barrier to entry is impossibly high.

    In each urban center Google takes, watch for them to continue to expand around the edges out to places now thought too rural for high speed broadband, running trunks to the edge of town. They will leverage the revenues of paid-for subscribers to have a logarithmic adoption curve. Then comes micro-CDN huts to lease space to service sellers close to the end users.

    The legacy copper assets of incumbents will be left to rot on the poles.

  • Report this Comment On March 17, 2014, at 11:09 PM, BrianNichols wrote:

    easlika, such is the case in Texas, where AT&T owns the majority of its poles

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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