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 Google.com. 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.
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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