Google May Have an Unexpected Hiccup With Fiber

Source: Google via Wikimedia.

The initial consumer reception of  Google's (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) high-speed Internet service Fiber has been beyond what any analyst had expected, with Fiber seemingly taking over every market it enters. Nonetheless, as competitors like AT&T (NYSE: T  ) , CenturyLink (NYSE: CTL  ) , and Comcast (NASDAQ: CMCSA  ) scramble for solutions, Google might find itself with an unanticipated problem.

The Fiber initiative steamrolls ahead
Google Fiber was created as a solution to the ongoing U.S. problem of Internet service providers being unwilling to invest in infrastructure and boost speeds for consumers, despite the fact that higher loads of data have created a need for faster services. For years, leading Internet providers like Comcast, CenturyLink, and Frontier have told consumers that there is no need for faster services. Yet Google's Fiber service has seen an incredible amount of demand among customers who want to download 100 pictures or songs in three seconds, or an HD movie in just seven seconds.

Essentially, these speeds, 1 gigabit per second (Gbps), are 100 times faster than the traditional networks that are found in residential homes. While Fiber is only present in three cities, Austin, Texas, Provo, Utah, and Kansas City, the company has plans to enter 34 new cities in the near future, as these targeted cities race to complete Google's checklist so they too can enjoy Fiber's lightning-fast speeds.

Source: Google.

This checklist involves favorable permits for construction, the use of existing telephone poles to lower costs, and most importantly, a build-to-demand approach that's never before been seen within this industry. Essentially, Google requires customers to pay a $10 registration fee to basically say that they will use Fiber if it is built in their neighborhood. Then, if enough customers subscriber, Google will build Fiber, and cities will rejoice because of the ongoing belief that faster Internet will boost local economies and sway businesses to build in their area.

According to The Wall Street Journal, Google has conducted preregistration in 364 neighborhoods, and all except 16 have met the company's requirement for service, further illustrating the demand for Fiber.

The unexpected problem for Google
Up until this point, consumers throughout the country have had two and in some cases three service providers in their area. Therefore, Internet providers didn't have the competitive incentive to build faster networks. But, with the rise of Fiber, we've already witnessed several of the largest providers begin to build their own high-speed networks, many in areas where Fiber is already present.

AT&T is building U-Verse Gigapower, already in Dallas and Austin, Texas, with plans to expand to another 100 cities. Like Google, it's using the build-to-demand approach. CenturyLink is launching 1 Gbps services in Portland, Oregon, then, based on usage patterns, will launch the service in 15 other cities. Lastly, Comcast is giving all customers a 100% or more boost to their network speeds, so 50 megabits per second become 105, in certain areas, as a way to combat Fiber.

The point is, competition is beginning to show up, and Fiber is no longer a one-of-a-kind service. Currently, Google's $70-a-month service is cheaper than competing 1 Gbps services, but as these networks are built, investors and consumers could very well see a price war, much like in the telecom and retail industries.

Not to mention, 1 Gbps speeds might be new in the U.S., but in other countries like China and Japan, consumers aren't strangers to this kind of service. While these areas have much more dense populations, and infrastructure costs are not as high to reach more people, there are service providers that charge only $20 a month.  

Naturally, when there are two or more competing services that are equal in terms of performance, pricing becomes the key deciding factor among consumers. In the past, Internet service providers were required by cities to cover broad areas, thus increasing the construction prices and the investment itself. However, with this new build-to-demand approach, the price for service can be lowered significantly, as there will no longer be unused service areas.

Foolish final thoughts
Initially, Fiber was seen as a project that could cost north of $25 billion to complete. However, Google has lowered the price with build-to-demand. Moreover, because of the success of Fiber, many have considered the possibility of Google owning the Internet provider industry, creating tens of billions annually in revenue from Fiber alone. Recently, there has been speculation that Google would try and become a mobile virtual network operator, offering video and wireless phone services by using the existing networks of competitors, which is possible thanks to Fiber. 

In other words, some investors have speculated that Fiber could be a gateway for Google to become the next AT&T, in addition to being an Internet search giant. If so, the investment upside would be enormous. However, if several of the nation's existing large Internet providers upgrade to 1 Gbps with a build-to-demand business model and create pricing competition, Google's upside, margins, and hopes as the next AT&T may diminish. Albeit, the concern of a pricing war might just be a hiccup in an otherwise largely successful Fiber rollout, but it's definitely something to monitor amid exceptionally high expectations.

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  • Report this Comment On August 30, 2014, at 10:55 AM, JeanDavid wrote:

    I have 20 Megabit/second download speed with Verizon FiOS. And I get it. Sort-of. But much of the time, the Internet backbone, or the servers at the far end, do not deliver. So going up to 50 Megabit/second does not make sense. My NICs will go up to a Gigabit/second, and I have a 2-channel NIC that runs at 10 Gigabit/second. It even has its own little fan blowing on its main heat sink. So I could upgrade quite a lot. I probably will not, because of the Internet backbone throttlling (either intentional or accidental), and that the current speeds are enough for my current needs. 56.6 Kilobit/second (dial-up) is not fast enough, however.

  • Report this Comment On August 30, 2014, at 4:26 PM, exyosar wrote:

    I would gladly pay Google more that what ever Comcast charged. The ONLY reason Comcast is even considering increasing their speeds is because Google is coming to town. I would love to tell comcast off for good.

  • Report this Comment On August 30, 2014, at 6:58 PM, SilntDeth wrote:

    I live in Kansas City and have been anxiously waiting for them to roll out in my neighborhood. They finally laid the underground pipes, but have yet to run to my house. This is normal, so I am not upset. Bottom line, TWC has had a strangle hold on this area for many years now, with no competition to be seen. Amazingly, since Google announced in my area, TWC has come out with many special new offers just for their existing customers. Sadly though, they have yet to fix their shoddy internet which will ultimately kill them in this area.

    Once Google gets installed in my house, I will gladly be switching. Could very well be telling TWC exactly what I think about them when I return all of their equipment.

    Question for the fool. Had I invested $1000 when Google was first an IPO, where would that be now?

  • Report this Comment On August 30, 2014, at 10:14 PM, bendriver wrote:

    With the exception of Kansas City, why is there no love for the mid-west, Google? Chicago is completely dominated by Comcast and I would gladly switch to Google Fiber....

  • Report this Comment On August 31, 2014, at 12:20 AM, spinod wrote:

    Not really a hiccup at all. One google did this because these companies refused to do it themselves, now they suddenly are doing it, Google wins.

    Second, the whole great thing about Google Fiber is price. $70 in my area won't even get you the lowest speed.... 1gig speeds are looking to be 150-200 dollars from these companies.

  • Report this Comment On August 31, 2014, at 1:38 AM, BrianNichols wrote:

    Google Fiber started as an idea, then as it became a reality analysts were bearish because of costs, that is until Google figured out build-to-demand.

    However, if $70 prices become $30 over the next few years (like in China), Fiber can never become profitable

  • Report this Comment On August 31, 2014, at 2:28 AM, Hanzzy wrote:

    Once google eventually comes to my area I'll be dropping my current ISP regardless of how awesome they've made their internet. I'll do it just on principal....these ISP's have taken advantage of the American people for far too long and they need to disappear into obscurity.

  • Report this Comment On August 31, 2014, at 2:46 AM, atmorewilliam wrote:

    I wouldn't worry about the incumbent internet providers building out fiber anytime soon. I know many of them have made press announcements stating that they have or will, but the actual deployment so far is tiny.

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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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