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How Google Hopes to Liberate America From Cable Captivity

By Evan Niu, CFA - Apr 13, 2013 at 7:00PM

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American netizens are currently being held captive by the telecommunications industry. Google wants to set Americans free, even if it takes time. Enter Google Fiber.

Let's face it: America is being held captive. That's the case that law professor Susan P. Crawford makes in her book Captive Audience, which describes the current monopolistic state of the telecommunications industry.

When it comes to the Internet, a technology that has unarguably revolutionized the world and the global economy, America severely lags behind other countries. We're talking about a technology that America created, yet the average American is relegated to inferior speeds compared with other parts of the world, and many rural areas don't even have broadband service.

A sad status quo
In many ways, Internet access can be considered a necessary utility nowadays, much like electricity. Unfortunately, the people who can afford it are paying too much, while there's still a large chunk of the population that can't afford it at all.

One reason for this sad status quo is that the sector inherently requires an oligopoly structure. Not everyone can afford spending $19.7 billion on infrastructure, which is what AT&T (T 1.43%) dropped on capital expenditures last year, in addition to the $20.3 billion spent in 2011.

Along the way, the industry became segregated into wired and wireless sectors. Comcast (CMCSA 2.32%) and Time Warner Cable (NYSE: TWC) dominated the wired side, while AT&T and Verizon (VZ -0.20%) primarily call the shots in wireless.

With wired connections, most of the networks around the country are built with antiquated copper wires. Some companies have built high-speed fiber optic networks, but that's a costly upgrade. Verizon began building its FiOS network in 2006 but has since reversed course and won't expand beyond its current obligations. It simply wasn't worth it to invest in FiOS, since it would still be too hard to compete.

Barring a consumer uprising, there's little incentive for wired incumbents to invest heavily in fiber optic networks when they can hinder competition in other ways.

Enter Google (GOOGL 1.77%) Fiber.

The search giant's gigabit fiber optic service promises Internet speeds up to 100 times what the average American has and represents a truly disruptive threat to the wired telecom sector.

Source: Google.

Thus far, the company's big push into becoming an Internet service provider, or ISP, has mostly been relegated in Kansas City, which straddles the state line between Kansas and Missouri. Kansas City has a little over 600,000 people, combining both sides. The company just announced its plans to expand Google Fiber deep in the heart of Texas, bringing the service to Austin. The Live Music Capital of the World boasts a population of more than 820,000.

For fortunate residents within Google Fiber's growing footprint, the decision is a no-brainer compared with current offerings. Google hasn't finished pricing in Austin yet, where I live, but I'm currently paying about $60 per month before taxes and fees for a 20 Mbps connection from Time Warner Cable. The Kansas City pricing is $70 per month for a Gigabit (1,000 Mbps) connection. Boost my speed by 50 times for an extra $10 per month, or 17%? Do you even have to ask?

As soon as Google Fiber is available to me in mid-2014, I'll be promptly dropping Time Warner, and I imagine armies of my fellow Austinites will follow suit.

At a minimum, incumbents will be forced into action to respond to the new competitive threat. Literally hours after Google's announcement, AT&T announced intent to build up its own gigabit fiber optic network in the city. Hours. Ma Bell said nothing of pricing or timing, but clearly it's concerned, as it should be. AT&T will expand if it can get the same terms and incentives as Google.

AT&T currently operates a hybrid U-verse network in Austin; it runs fiber optic cables through neighborhoods but then runs copper from the main line to the house. I switched from U-verse to Time Warner Cable years ago because of some performance issues I was experiencing. Two weeks ago, the company sent someone to try to win me back to U-verse. My response? "Come back when you build a full fiber network, and I'd switch." This is a true story; maybe I should prepare for another visit.

The net result of the competition will be that consumers eventually get much faster connections, and monthly bills will only moderately increase. Any way you slice it, the consumer wins.

Patience is a virtue
Still, Google's liberation is going to take time. Between Kansas City and Austin, that's only 1.4 million people in those metropolitan areas, or less than 0.5% of the 315 million Americans in the United States. Even within those cities, not everyone is covered, and the rollout is slow and expensive.

Analysts estimate that Google's first wave of network investment will run $84 million to reach almost 150,000 homes in Kansas City this year. A larger-scale expansion to 300,000 homes could double costs to around $170 million. A nationwide rollout could cost up to $11 billion. Google didn't specify where it would start in Austin but said it would begin gauging interest and start with high-interest neighborhoods.

It's now been more than two years since Google's first Google Fiber announcement. With only two areas on the list, perhaps wired cable providers don't think the threat is imminent. Perhaps they're right. Consumers need to start speaking out against slow speeds and high prices in order to catalyze change.

Give me liberty, or give me gigabit fiber optic service.

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