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Is Alphabet About To Get Serious With Google Fiber?

By Andrew Tonner - Feb 16, 2016 at 6:45AM

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Alphabet seems intent on challenging major cable distributors like Comcast, AT&T, and Time Warner Cable by expanding Google Fiber.

Source: Google Fiber

In a rather dismal earnings season for large-cap tech stocks, search and mobile leviathan Alphabet (GOOG -0.27%) (GOOGL -0.21%) is perhaps the lone bright spot.

What's more, Alphabet's first earnings report to break out its new reporting structure made for one of the more interesting reads this earnings season (for those of us who enjoy that kind of thing).

After driving few headlines in 2015, Alphabet's Google Fiber initiative featured prominently in the company's results, though it proved quite the drag. But if recent machinations are any indication, Alphabet's Google Fiber could be preparing to ramp up its long-rumored onslaught on the cable industry.

Google Fiber on the move
Promising to push the entire industry one giant leap forward, Google Fiber burst on the scene in 2012 to much fanfare and soaring expectations. Fast forward to early 2016 and Fiber has arguably underperformed expectations that it would shift the paradigm. That might be about to change, for a few reasons.

For starters, Alphabet's expansion plans for Google Fiber involve more than doubling the number of cities in which the service operates, from three today to eight total approved locations. All told, Alphabet could bring Fiber to as many as 19 municipalities.

Source: Google Fiber

Beyond simply expanding its geographic footprint, Alphabet is toiling behind the scenes to augment the service's features. According to reports from The Washington Post, Alphabet has begun testing a land-based version of its Google Voice product. What's more, Alphabet's lobbying to overhaul set-top box standards with the FCC could set the stage for the company to expand its current cable offerings, raising the specter of a broader attack on the cable industry than has been expected.

Alphabet to oust AT&T, Comcast, and Time Warner Cable?
The prospect of Google Fiber upending the competitive balance of the cable distribution industry isn't new. What's changed is the mounting evidence that Alphabet intends to supplant traditional cable and TV distributors like AT&T (T 1.67%), Comcast (CMCSA 2.68%), and Time Warner Cable (NYSE: TWC). Investors in any of these names, but especially more distribution-oriented firms like Comcast and Time Warner Cable, should view Alphabet's looming presence with trepidation.

All told, cable, Internet, and phone services yield sales just south of $80 billion annually for AT&T, Time Warner Cable, and Comcast. And though Alphabet will require years to develop a Fiber network with the reach to appreciably dent the results of AT&T, Comcast, or Time Warner Cable, current prices suggest Alphabet might enjoy a competitive advantage as it expands. As recently as last summer, Comcast's 2GB Internet service cost a whopping $299/month, with over $1,000 in installation and activation fees. Contrast this to Google Fiber's basic service costing only $74/month in Kansas City, and Fiber looks like a potential game-changer.

We already know Alphabet plans to allocate the bulk of its capex for its Other Bets reporting segment toward Fiber in 2016. Seen through this lens, it appears a justified investment, especially if you consider that driving faster connection speeds through the industry benefits Alphabet's profit centers in search and services. So as it continues to pressure industry incumbents like AT&T, Comcast, and Time Warner Cable, Alphabet's Google Fiber could take on an increasingly important role at the search giant, this year and beyond.

Editor's note: This article has been corrected to reflect that Comcast's Gigabit Pro is a 2GB service.

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Stocks Mentioned

Alphabet Inc. Stock Quote
Alphabet Inc.
$2,174.75 (-0.21%) $-4.51
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,181.62 (-0.27%) $-5.83
AT&T Inc. Stock Quote
AT&T Inc.
$21.31 (1.67%) $0.35
Comcast Corporation Stock Quote
Comcast Corporation
$40.29 (2.68%) $1.05

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