Google (NASDAQ:GOOG) (NASDAQ:GOOGL) is known for its "moonshot" projects, allowing its developers to work on far-fetched side projects. Sometimes, those starry-eyed projects lead to real-world initiatives. Google Fiber is being rolled out in the real world, but how far will it go and what does it mean, for consumers and investors?
The cost of taking fiber optic cable to every household in the nation is estimated at a prohibitive $140 billion, so even Google won't be rolling it out tomorrow. But how far will the tech giant go, and how much pressure will it put on existing ISPs such as Comcast (NASDAQ:CMCSA), Verizon (NYSE:VZ), and AT&T (NYSE:T)? Tune in for some Foolish analysis.
A full transcript follows the video.
Sean O'Reilly: Want to stream eight Netflix (NASDAQ:NFLX) shows at once? Google Fiber has the answer, on this consumer goods edition of Industry Focus.
Greetings Fools, I am Sean O'Reilly here with the one and only Vincent Shen. How are you today, sir?
Vincent Shen: I am good Sean, how are you?
O'Reilly: Not too bad. Folks, if you're just joining us, we are here at Fool Headquarters in beautiful Alexandria, Virginia, where spring is finally here. I could not be happier! I went down to the waterfront over the weekend with my family, let my son run around. What did you do this weekend, Vince?
Shen: I was at home, seeing the folks.
O'Reilly: Very nice.
Shen: Yes, it was very nice.
O'Reilly: Did your mom cook for you?
Shen: No she didn't, but we had plenty of good food, ate out a lot.
Well, we're talking about Google Fiber today and we're trying to answer the eternal question, is it a crazy pet project or a real business by Google? They have been known to do crazy side projects.
Shen: Yes. A lot of people fondly refer to them as their "moonshot" projects.
O'Reilly: Yes. It's a moonshot! It could turn out to be awesome, it could be whatever.
First and foremost, how and when did this thing get its start? I seem to remember everybody starting to really, "What's Google up to?" back in 2009-10.
Shen: Yes, that's right. I think the official announcement was made in early 2010.
O'Reilly: Yes, February or something.
Shen: Basically saying, "We want to get something like this off the ground." They started taking applications.
O'Reilly: They had bids, like cities bid on the Olympics. They were like, "What city's going to get Google Fiber first?"
Shen: Some of these smaller cities jumped through a lot of hoops, did quirky little things to try and ...
O'Reilly: "We love you, Google!"
Shen: Exactly! I think the first few cities, like Kansas City, Provo, Austin ...
O'Reilly: Looking back, and this is the funny thing, I'm pretty darn sure I read somewhere that they picked Kansas City because Kansas City had a bunch of unused pipes in their grid; sewers or whatever.
Shen: I did not see that. Is that the case?
O'Reilly: And they could easily run cables through it. I'm sure you've noticed that a lot of the cities that they've chosen are newer, modern cities, that it's easier to build this kind of infrastructure.
You're running fiber optic cable throughout an entire city and that's not super easy in, I don't know, New York!
Shen: Yes, ultimately the service requires the fiber optic cables to run into people's homes, so you're absolutely right. There's a reason why it hasn't launched in some of our biggest metropolitan areas yet.
O'Reilly: We're talking about 34 cities now, aren't we?
Shen: Yes, it's definitely getting up there. Kansas City, Provo, Austin were the first wave. Now we have places like Atlanta, Charlotte, Nashville, Salt Lake City; so they're definitely expanding. As early as 2012, there were already people at the company saying, "This isn't just a pet project anymore necessarily. This could actually work as a viable business."
O'Reilly: It's a real business. How fast is it? I know we all complain about our cable, but I'm able to be on the Wi-Fi on my laptop and watch something on Netflix, and there's no lag. It's fine.
Shen: Yes but the thing is, Sean, you can't really complain about something you don't have, or you don't know.
The ultimate fact of the matter is that the U.S., for Internet speeds globally, ranks pretty poorly considering the fact that our history with the Internet runs so deep, since we were involved so much in its development. We're like 17th in the world for speed.
O'Reilly: Who's the fastest? Isn't it South Korea?
Shen: The top four are all in Asia. Hong Kong is technically the fastest, but keep in mind that's pretty much a single city so it's a much different rollout of infrastructure there than it is in the United States.
You can see that here too, in the fact that certain areas, rural areas, are going to have super-slow speeds, but Delaware, Connecticut, Massachusetts, D.C., can boast some pretty good speeds that are actually comparable with some of the places in Asia. It just depends on what kind of investments are made.
O'Reilly: Part of the U.S.'s problem is just our size.
Shen: Yes, exactly. It's difficult to roll out that kind of investment for such a large country. But in terms of speed, Google Fiber goes up to about 1 gigabit per second, and that is said to be ...
O'Reilly: A thousand times faster than some.
Shen: Yes, than some. On average I think it's a good 20 times faster, at least. That gives you the ability to, for example, download a full-length movie in two minutes.
O'Reilly: That's fantastic.
O'Reilly: Good stuff! We were talking about this a little bit before the show. It's kind of disappointing to me that we don't know if Google is making any money at this.
I look at the increasing profitability of the other ISPs, like Comcast and Time Warner Cable (NYSE:TWC). We of course don't know what Verizon is doing profitability wise for just their cable division because you can't parse that out.
Comcast, back in 2009 their returns on equity were 8-9%, and they've just steadily gone up to 16%. The company they're trying to buy right now has gone from 8% in 2009 to a return on equity for the fiscal year 2014 of a whopping 27%.
The average company in America gets like 12%, so this is a very, very profitable business. Is Google trying to get a piece of that, or are they just saying, "Hey guys, pick up your game. We're an Internet company and we want faster speeds," or what?
Shen: Sure. Ultimately, Google's offering a very competitive service.
O'Reilly: What was going on in, was it Austin, with AT&T?
Shen: Yes. Basically the current rate structure for Google Fiber is you can get it for free if you're willing to go with the slower speeds. It's like 5 megabits for download.
O'Reilly: Which is fine. I could probably function with that!
Shen: Especially because it doesn't cost you anything but the initial installation fee of $300. The actual Google Fiber Gigabit service is $70 a month. If you sign up for a year, they don't even charge you the installation fee of $300.
O'Reilly: Which is what a cheap cable Internet package is right now.
Shen: Exactly. Consider the fact that right now I think for Comcast, they are rolling out a comparable service to Google Fiber. There aren't any pricing details out for that right now, but just their 500 megabit services costs $400, and that's half the speed.
O'Reilly: That's absurd.
Shen: The only other option for Google Fiber is if you add the TV service, it's about $120-130. They give you a Nexus tablet to serve as your remote. You get a really nice DVR with tons of features.
O'Reilly: What were you telling me about the space storage on the DVR?
Shen: Terabytes and terabytes of data for shows that you can store. They also give you Google Drive space; more terabytes of data that you can store up there. It's definitely a very compelling service.
I think that ultimately -- something I want to touch on later, definitely -- is how this has been a kick in the pants for some of the companies you mentioned. They're taking those really good profits, but I think public awareness is starting to realize, "We are lacking in the service that we're getting and what we're paying for, and Google Fiber is offering something really nice here."
I'm certainly envious! In the D.C. area we don't have access to anything like that. If it was rolled out here, I'd sign up in a heartbeat.
O'Reilly: I'd be the first in line. This would be awesome.
It's not all sunshine and roses, though. I actually found an article recently about the rollout in Austin. They're in the process of getting ramped up in Austin.
I brought up Kansas City first and foremost because one of the reasons they picked it was because it was so easy to install this fiber optic cable, because the city had all these unused pipes, throughout the whole thing.
Apparently in Austin, it's trickier. Mark Strama, who's the head of Google Fiber in Austin is like, "So far, most of our installs are in apartments. We'll be rolling out. We sent an email to the initial sign-ups" in the neighborhoods like Lady Bird Lake and fiberhoods and everything.
They're still getting ramped up there. It's just trickier. What was it, they've invested $7 billion, and it costs like $140 billion to get Google Fiber to everybody?
Shen: Yes, exactly. Like you said, in Austin they've had some of those delays because they didn't have that same convenience with the infrastructure already being in place in some of the areas. Ultimately, this is very capital intensive.
For Google Fiber to reach 8 million homes in the next seven years, by 2022 ...
O'Reilly: There are 100 million homes in America, right?
Shen: They project that would cost $7 billion, so for Google Fiber to truly roll out ...
O'Reilly: That's what it would cost to get to 8 million homes.
Shen: To be nationwide coverage, it's forecast to be maybe $140 billion, if not more than that. Definitely a major investment.
O'Reilly: You can't see this, folks, but my jaw just dropped! Theoretically, they could afford it if they issued bonds and funded the project. They made $14.4 billion, I think, last year. Is that what Google wants, do you think, though?
Shen: That's a tough call. In my opinion, I really don't think that they ultimately want to be the primary ISP for the United States.
O'Reilly: Are they prodding the guys, like "Hurry up!"
Shen: Exactly. That's actually a really good way to look at it. I think at some point down the road we would have attained these speeds here in the U.S. What Google Fiber is doing is basically forcing it and saying, "We want this now. We want it overnight."
As a result, it worked. AT&T recently released their GigaPower service. That launched in places like Houston, San Jose, Austin, Winston Salem.
O'Reilly: They were saying that that's faster than Google Fiber, supposedly.
Shen: No, the Gigabit service from Comcast is.
O'Reilly: Oh, I'm sorry. Okay.
Shen: GigaPower has two options, and it does match Google Fiber. It has a 300 megabits per second service, which is $80 a month, and then their 1 gigabit per second, which is $110.
Keep in mind that there's a bit of controversy with that, because those prices include an opt-in, where AT&T can essentially track your Internet browsing history to serve you targeted ads.
O'Reilly: Oh, man.
Shen: If you want to opt out of that, if you value your privacy, they charge you an additional $29 a month, so they don't basically snoop in what you're looking at.
O'Reilly: Right. Bring it around, because obviously this is The Motley Fool and we care about investing.
They have not the world's greatest customer service practices, so I don't feel bad for them, but on the other hand the Internet service providers have invested, I don't know, hundreds of billions of dollars to get relatively fast Internet to all of us.
And now the new kid on the block, Google, comes around and it's like, "Okay, go faster now!" so they're having to reinvest more and more and more. Is there a bull case to be made for owning shares in Time Warner Cable and Comcast and everything?
On the one hand you've got the FCC breathing down their necks, from a competitive perspective. Then not only that, but you've got all this increasing competition. I'm kind of like, "I don't know that I would own any of these."
Shen: I think that companies like Comcast might be sweating a little bit as a result of the release of things like Google Fiber, this push in innovation, this extra competition. But ultimately, Comcast has I think a 57% market share for cable -- or for (unclear) in the U.S.
O'Reilly: Huge. Technically they have certain monopolies in certain regions, for now.
Shen: Exactly. Overall, when you have that kind of share you don't get unseated that easily, especially in a business like this where, like you said, it costs $140 billion to roll out fiber across the country.
O'Reilly: That's not going to happen tomorrow.
Shen: How many companies can realistically make that kind of investment?
Now that Comcast recently released their Gigabit service, going to launch in Atlanta to about 1.5 million potential customers, they're marketing it as being twice as fast as Google Fiber, at 2 gigabits per second.
They want to roll it out really aggressively. By year end, they want to have it available to 18 million homes. That gives you an idea of, ultimately, this just makes the companies offer better service, makes them continuously more competitive. I don't think that's a bad thing for companies like Comcast, companies like AT&T.
O'Reilly: Yes. I wish I was one of those homes!
Shen: Yes. Even on a local level in Austin, because Google Fiber is there as well and it's $70, AT&T is charging $70 there. But in other areas, where Google Fiber isn't available, they'll charge $110.
It's a really small-scale example where you can see how Google Fiber is forcing these companies to be competitive in both their offerings, and the price of their offerings.
O'Reilly: Obviously this is entirely speculative, but 10 years from now what does the landscape look like for consumers and investors in the cable industry?
Shen: 10 years from now?
Shen: For me, being optimistic myself, because I would like to have these speeds, I would like to think that a significant percentage of American households now have at least ...
O'Reilly: Something comparable to those speeds.
Shen: Exactly, that is available to them in their area. Think about it like, maybe not everybody needs 1 gigabit speeds right now, but in terms of our usage habits and innovations -- especially media consumption and everything -- we can grow into that. Having that extra leeway can't be a bad thing.
O'Reilly: Very good. Thanks for your thoughts, Vince.
Shen: Thank you, Sean.
O'Reilly: If you have any other questions or comments, feel free to email us at IndustryFocus@Fool.com.
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Sean O'Reilly has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool recommends Google (A shares), Google (C shares), Netflix, and Verizon Communications. The Motley Fool owns shares of Google (A shares), Google (C shares), and Netflix. 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.