New Revelations on Google Fiber Spell More Bad News for AT&T and Verizon

Google's new Fiber plan may be worse for AT&T and Verizon than originally thought.

Apr 5, 2014 at 9:00AM

Many have wondered what Google (NASDAQ:GOOG) (NASDAQ:GOOGL) was thinking when it set out to build Fiber, a high-speed broadband Internet service that's 100 times faster than the average broadband. The estimated cost of this service has been figured at $20 billion-$28 billion over the next 10 years. It will provide direct competition for AT&T (NYSE:T) and Verizon (NYSE:VZ), and leaves Google possibly needing to acquire a company with significant fiber mileage like Level 3 (NYSE:LVLT).

However, following news last week, the plan for Fiber has become much clearer and could now mean even more bad news for every company that stands in its way.

Building a network beyond Fiber
Google might be the first company to build a broadband network and ask customers to sign up before it's built. In true Google fashion, the company has also been able to use the utility poles of its peers, like AT&T, which has saved on costs in its first two build-outs. Therefore, in obtaining these unprecedented special privileges, it's no wonder that Google has announced an expansion plan into 34 new cities.

Still, it would take many years for Google to match the size of AT&T's U-Verse, which has nearly 11 million customers and more than $12 billion in annual revenue, with growth of 25%. With Internet alone, Fiber is not a make-or-break project for Google, although AT&T's effort is a major growth driver for that company.

With that said, there have always been a lot of questions regarding Google's plan for Fiber, as the company notoriously has a way of surprising consumers and being one step ahead of the competition. Already, Fiber is transcendent with its speeds, but as some might expect, there are now reports that Google Fiber will be the company's entrance into becoming an all-around wireless provider, including Internet, TV, and maybe even mobile -- something that should be costing AT&T and Verizon executives many sleepless nights.

How could Google achieve such a feat? It could continue to build the network, or in a real case of irony, it could act as a mobile virtual network operator, which basically means Google would use an existing network. However, by bundling the best Internet service the world has ever seen with mobile and TV, it's likely that Google would thrive.

For those who believe the FCC would never allow Google to use another provider's network, just remember the fuss being made with Softbank trying to acquire T-Mobile, and the fact that the FCC's biggest argument centers around there being just four current nationwide telecoms, meaning the FCC would likely welcome Google with open arms.

What could Google become?
So, how significant is this news, and how much revenue could Google earn? The answer to this question lies in AT&T and Verizon, as Google would offer services that go toe-to-toe with these companies. In the last year, AT&T has brought in revenue of nearly $130 billion and has an operating margin of 23.6%, two metrics that are likely very attractive to Google. Verizon brought in $120 billion in revenue and has an operating margin of 26%. But remember, Verizon previously only owned 50% of its wireless segment. It now owns 100%, implying a larger business than the fundamentals reflect.

All pieces are in place for Google to make a serious run at becoming relevant in this space, possibly adding another $100 billion in revenue, one day, to its existing business. However, Google is going to have to spend money, or make acquisitions, and investors should find it very convenient that on the day of this news, Google introduced new non-voting, class-C shares, which will provide the company more currency for acquisitions. Where might Google make moves?

Level 3, a telecom equipment company with $6.3 billion in annual revenue and 35,000 route miles of undersea fiber-optic cables worldwide, would give Google what it needs: fiber and the ability to eventually expand this business worldwide. While Level 3 is one possibility, there are countless moves that Google may make.

Final thoughts
Regardless of what moves Google makes, one thing is for certain: Google is making moves to becoming a best-in-class Internet provider and major threat to large telecom companies. For investors, this could eventually mean adding the value of a Verizon or AT&T to Google's market cap, and that's on top of the many growth segments this company has in play. Overall, Google looks incredibly well-positioned for the next decade as a rather safe, ambitious, and fast-growing juggernaut.

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Brian Nichols owns shares of Verizon Communications. The Motley Fool recommends Google (C shares). The Motley Fool owns shares of Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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