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Google and AT&T Look to Dominate High-Speed Internet While Crushing the Competition

Initially, it looked as though Google's (NASDAQ: GOOG  )   (NASDAQ: GOOGL  ) Fiber was going to be a runaway service, stealing market share and destroying all broadband and Internet service providers that stood in its way. However, AT&T (NYSE: T  ) has emerged, a company that refuses to roll over and play dead while Google steals its one true growth driver. As a result, that old saying, "two's company, three's a crowd" might definitely apply to this space. Or, in this case, big service providers like Comcast (NASDAQ: CMCSA  ) and Charter, along with small ones such as Cincinnati Bell (NYSE: CBB  ) , are part of the Google and AT&T crowd.

The makings of two great service providers
Google Fiber has been wildly successful in its infancy. The service provides Internet at one gigabit per second, Gbps, which is 100 times faster than average broadband. Initially, Google rolled out the service in Kansas City and Austin, Texas, but due to better-than-expected success, the company recently announced plans to launch Fiber in 34 cities. 

Initially, Google Fiber was seen as a major threat to AT&T; its U-Verse GigaPower has speeds of 300 megabits per second, Mbps. Therefore, Google's service was superior, and as a real slap in the face, Google has been using infrastructure owned by AT&T and other telecom companies to save on costs associated with Fiber by installing its hardware on existing utility poles. Also, The Information recently reported that Google is planning to offer voice and TV as a mobile virtual network operator, or MVNO, meaning it will use the infrastructure of peers to offer service.

In response to Google's aggressive plan, AT&T is making upgrades to its GigaPower, claiming that it, too, will offer speeds of up to 1 Gbps later this year. The estimated costs for both Google and AT&T to achieve this feat on a nationwide scale is believed to be north of $20 billion per company. However, Google has been able to save on costs by using both existing networks and requiring that customers sign up prior to the network being built, thus allowing the company to gauge demand.

The boosted speeds of AT&T's GigaPower would level the playing field, and on Monday, the company announced 100 cities in 21 metropolitan areas as candidates to launch its improved service. Therefore, like Google, AT&T is moving fast, showing a sense of urgency to protect its 20%-plus annualized growth in a segment that accounts for 10% of its total revenue.

What does this mean?
While some investors would like to believe that AT&T's response to Google is bad news for the technology juggernaut, history proves the market is more than big enough to support two heavy-hitters. To no surprise, this 1 Gbps speed was originally priced at a premium, but at $70 per month, and with two players in the game, pricing should stay competitive and on par with broadband services that are many times slower.

This means bad news, perhaps even a doomsday scenario, for the hundreds of small Internet, voice, and TV providers, along with large companies that offer such services at much slower speeds. Particularly, Comcast, Charter, and smaller players like Cincinnati Bell could be in trouble.

Comcast, following its recent acquisition, has approximately 30 million subscribers, making it the largest voice, Internet, and TV provider in the U.S. However, its Internet services range from 25 Mbps-50 Mbps for $40-$50. Therefore, service from Google and AT&T's is about 20 times faster for less than twice the price. With more than 80% of Comcast's revenue coming from voice, video, and Internet last year, it could be in trouble as Google, and now AT&T, begin to impose on its turf.

Charter is in the same boat; its $30 Internet package is usually bundled with phone or TV, but at 30 Mbps, it's far slower than services being offered by Google and AT&T. Then, there are countless small regional companies like Cincinnati Bell, which offers Internet service at speeds of 100 Mbps, a speed that has allowed the company to rapidly grow its fioptics division.

Cincinnati Bell's fioptics segment is its 100 Mbps Internet business, and in 2013, it finished with 79,900 customers for a growth rate of 40%. The company recently sold its wireless business for $210 million, and now plans to invest that money in fioptics in an attempt to grow its 29% network penetration. The problem is that Cincinnati is a city that has already been well-developed by AT&T, and a GigaPower or Fiber build out could put a wrench in Cincinnati Bell's plan.

Final thoughts
Comcast, Charter, and smaller companies like Cincinnati Bell are directly dependent on their Internet, TV, and phone services, so there is no hedge when investing in these companies against the tidal wave of AT&T and Google. With that said, there will be some consumers who won't care about the accelerated speeds, and will remain with their current provider.

However, with Internet-connected devices becoming a larger part of our daily lives, investors must realize that companies like Charter and Comcast will lose customers to their faster peers and will have a hard time attracting new subscribers if their services are not significantly discounted.

In regard to Cincinnati Bell, it too will likely struggle, but being built with fiber optics and a copper network, there might be some synergies for a company like Google, especially if Google tries to save on the costs of a fiber network via acquisitions, which could be a reality for smaller fiber-related companies like Cincinnati Bell.

Nonetheless, Google has the opportunity to build a massive multi-billion dollar business that's similar in size to Comcast, and by using existing networks. For AT&T, its GigaPower service ultimately means its 20%-plus growth is sustainable, and that it has a better edge against its peers. The bottom line is both companies look well-positioned for explosive growth in this arena, and the market is large enough for both to succeed.

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Read/Post Comments (5) | Recommend This Article (0)

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 23, 2014, at 4:11 PM, GaryDMN wrote:

    Too funny, Google owns one small cable provider in Utah and they are compared to AT&T, Comcast, TimeWarner, Verizon and 50 larger internet providers. Google leases fiber in Kansas City from AT&T and a couple other cities, but doesn't own any fiber themselves, other than the small cable franchise Utah. Google luck getting any new franchises, with are local government created monopolies, awarded many years ago.

  • Report this Comment On April 24, 2014, at 12:09 AM, jnffarrell1 wrote:

    ATT has much to lose in its market if it does not defend the 20% of its territory that produces 110% of its profits. ATT studied Google's Checklist,costed out the much lower last mile and connection to home costs for fiber and will defend its last mile and attack Verizon, Comcast and any other ISP with an idiot CEO who believes Gibt/sec fiber is too expensive to bring to its best customers.

  • Report this Comment On April 24, 2014, at 9:10 AM, hps0317 wrote:

    I think a few facts could be off in the article. AT&T does not compete with Cincinnati Bell as their territories for the most part do not overlap. Cincinnati Bell's largest competitor is Time Warner Cable.

  • Report this Comment On April 26, 2014, at 10:15 AM, milleriv wrote:

    Looks like Google's work is done in the cable industry now that ATT is finally off their ass.

    They wanted to motivate & set the pace, not runaway with the business.

  • Report this Comment On April 26, 2014, at 10:37 AM, simogone wrote:

    I think this is an amazing post. I absolutely love how interactive this site is!! Thanks so much!

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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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