Here's Why Google Fiber Could Be Virtually Uncontested in the Fiber Internet Market

Google (NASDAQ: GOOG  ) (NASDAQ: GOOGL  )  Fiber... What an awesome concept. An Internet connection speed that is up to 100 times faster than today's average broadband.

Google Fiber is pretty awesome -- but it is by no means the only fiber optic Internet service available. Verizon (NYSE: VZ  ) has FiOS, Comcast offers fiber optic Internet to businesses, and AT&T (NYSE: T  )  offers a fiber optic based Internet called U-verse with Gigapower. But there is a big difference between Google and traditional Internet service providers, and the difference could serve as a springboard for Google to dominate the fiber optic Internet market in the future.

What separates Google from its fiber competitors?
Let's think about the difference between Google and the big names in the telecom industry. First of all, Google is just entering the Internet service providing (ISP) industry: its first connection was made in 2011. That means the fiber optic cables that were laid down to connect Google Fiber to homes and businesses were on fresh soil untouched by Google.

In contrast, the big players in the ISP industry have huge networks of twisted copper wire sprawling across the country that connect their customers with broadband and DSL. So to build a network of fiber optic Internet, the seasoned ISPs will often drive in equipment, tear up streets, and lay down fresh fiber optic cables right next to their existing network of twisted copper wires. 

Lack of ROI for the big ISP players
Obviously, tearing up neighborhoods to install thousands of miles of fiber is an expensive endeavor, an investment that many ISPs are not capable of funding. And in many cases, installing fiber could cannibalize their existing market share. Needless to say, the ROI of a fiber network would be slim to nil for most ISPs.

The ROI conundrum faced by normal ISP's is the reason Verizon shelved its FiOS expansion plans in 2010. And also why Verizon's CFO said "I am not going to build beyond the current LSAs that we have built out" at the Deutsche Bank Media, Internet and Telecom Conference this year.  

Unlike Verizon, Google doesn't have a network of twisted copper wires. And Google doesn't have an existing stream of revenue from broadband or DSL. When Google lays down fiber, it doesn't have to worry about cannibalizing its own business. Each new connection results in new revenue -- a sound investment that will generate free cash flow it can use to organically expand its fiber network. 

Why ISP investors should pay heed
Google has made some serious headway in the four years it has operated its Fiber service. Google Fiber is currently available in the Kansas City Metro Area, Austin, TX, and Provo, UT. And Google plans to expand its Fiber service to eight new metropolitan areas within the next few years.

Credit: Google Maps

Goldman Sachs projects that Google Fiber could connect 830,000 homes per year and could reach nearly 8 million homes by 2022.

If ISPs aren't careful, Google could dominate the fiber market and take away their existing broadband and DSL subscribers.

Investors' takeaway
The bottom line is, if you're a Google investor, you should be pleased with the Fiber project. It has serious potential to create a large stream of revenue for Google and boost its advertising and merchandise sales. If you're a traditional ISP investor, you should pay attention to what Google does next. Google Fiber truly has the potential to change everything in the ISP market. 

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  • Report this Comment On July 17, 2014, at 7:28 PM, murphyslaww wrote:

    Just something quick. While infrastructure has undoubtedly been installed, Google fiber is not selling services in Austin yet, and their contractor-based installation teams are still in the process of being hired.

    As someone that was working for a competitor and left due to lack of innovation, I long ago warned my fellow employees about the lack of ROI on the installation of infrastructure to compete with Google. Google has already set the price, and it's lower than the current company's. Not only will there be a lack of ROI, but there will likely be a net loss.

    I worked for a small over-builder that was competing with the major MSO's a long time ago and was on the front lines of construction and was stopped almost daily while in the field and told how much people appreciated our being there, and our product was only slightly better than the incumbents. With Googles product, almost everything about the install is better from the Set Top box, to the remote, to the service. Don't discount that. When Investment advisers were asking why Google would enter this market, I was asking "why not?" They have the cash, and once it's built, it just keeps on giving. With flattening revenue growth from search, they had to go somewhere and there are obvious links to infrastructure and search, and once the fiber is installed, they'll have access to SMBusiness and all the big data sales which that will open up.

    Look out AMAZON!!!

  • Report this Comment On July 17, 2014, at 9:12 PM, normcf wrote:

    Where is google going to go next? They're going to go where local government wants them because the incumbent service is so poor for the amount paid. For example, if comcast starts upgrading, and customers get a better product, then google will probably go somewhere else. The competition should be on between the carriers to "not be the worst". They don't need to improve much to overcome that hurdle.

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Michael Nielsen

Michael is a full-time MBA student and certified stock market junkie. For the Fool, he writes articles about the telecom industry. To see some of his market-beating investment ideas, follow him on twitter

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