Google Fiber Is What Investors Should Be Celebrating After Earnings

Google shares are trading higher after earnings, but what's really exciting about the company's progress is an initiative that very few are talking about.

Jul 21, 2014 at 11:30AM

Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Fiber is a broadband initiative that might one day be the company's largest revenue source. Its development was a hot topic on the company's second-quarter conference call. Should competing companies like AT&T (NYSE:T) and Comcast (NASDAQ:CMCSA) be worried?

What's Google Fiber?
Google Fiber is an initiative to build a broadband network with speeds of one gigabit per second (Gbps), which is estimated at 100 times faster than average speeds. Google Fiber is already in three cities: Austin, TX, Provo, UT, and Kansas City.

Analysts initially estimated that Fiber could cost Google $20 to $28 billion over five to 10 years, respectively. Therefore, many have been skeptical as to whether the buildout would be beneficial for Google.

What was said on the conference call?
Naturally, with such a large investment and so much at stake, analysts were quite concerned with the progress and outlook for Google Fiber. Chief Financial Officer Patrick Pichette made sure to note that more announcements regarding Fiber would come later this year. However, Pichette also said that "the cost of construction is way down" and that the company has achieved major cost reductions throughout its expansion into 34 cities, all of which are at different stages in the development process.

Importantly, the tone of the conversation was exciting. Pichette and other executives talked about their checklist for cities which must be completed before Google will begin construction. The company's required "checklist" is one way that Google has set new industry rules as it applies to Fiber, which goes a long way toward lowering costs.

A checklist to rewrite the rule book
Google's "checklist" requires that customers in targeted cities pre-enroll in Fiber services before the network is actually built. Then, Google builds Fiber according to demand.

Goog Fiber

Source: Google

Google has already announced 34 cities where it intends to build Fiber, which are those with the utmost demand that are willing to adhere to the company's checklist. Also, as we saw in Austin, TX, this includes cities that are willing to license Google the use of their existing utility poles, the latest innovation on top of requiring subscribers to sign up in advance. For example, as consumers in Portland, OR demand Fiber, Google is waiting for licensing approval to use the city's utility poles before beginning construction.

Google first attempted using existing poles in Austin, many of which were owned by AT&T, which cuts down on costs. In many cases this allows Google to slap a Fiber box on the pole and route the service to homes. In other words, Google uses and improves an existing network, perhaps the first step in Google becoming a MVNO, or mobile virtual network operator.

An MVNO uses existing networks to provide service. Once Fiber is built, Google could theoretically offer phone, cable, and Internet, all from a beefed-up network owned by the likes of AT&T or Comcast. Therefore, as Google drastically cuts the costs of Fiber with this approach and is able to offer unprecedented speeds at near the same price as slower networks, it could essentially become the next Comcast or AT&T in addition to being North America's Internet search leader.

Broadband prepares for Fiber
Not all companies are going to wait around for Fiber to steal their broadband users. AT&T has elected to compete against Google with a revamped service that has speeds up to 300 megabits per second. However, with studies showing speeds that are 8% lower than advertised, many consumers remain skeptical that such an initiative will become a reality.

Att Slow Speeds

Source: BGR

AT&T's U-Verse remains its fastest-growing segment and now accounts for 10% of total revenue, yet the company's recent acquisition of DirecTV might insinuate that the company is unsure of how it will measure against Google Fiber long-term. It may be attempting to hedge its bet on broadband.

In regards to Comcast, following its acquisition of Time Warner Cable it'll have 30 million subscribers with more than 80% of total revenue coming from video and Internet. With much slower speeds of 30 megabits per second and a similar cost, however, Fiber's opportunity to steal market share and subscribers is grand.

Foolish thoughts
The bottom line is that Fiber remains one of the most exciting and potentially transformative initiatives at Google. The company continues to prove that it's innovating the business of broadband, and its conference call served as yet more proof. While Internet search, advertising, Android, self-driving cars, and other initiatives are all exciting, Fiber has all the makings of a project that can create significant upside for many years to come. It could also potentially cripple the existing broadband market with untouched speeds.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Google (A shares) and Google (C shares). The Motley Fool owns shares of Google (A shares) and 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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