With Google (Nasdaq: GOOG) now officially in the video distribution business, the company's growing investment in IP backbone infrastructure will soon pay off, Google watchers say.

Google's new Internet video service was announced Friday at the Consumer Electronics Show (CES) in Las Vegas, and it went live Monday night. (See Google Plans Video Service.)

Google observers have been speculating for months over why the company has been buying up networking infrastructure. Light Reading reported last September that Google has already procured large chunks of carrier hotel space and fiber optic cable, and has issued large RFPs for DWDM and Ethernet-based telecom equipment. (See Google's Own Private Internet.)

Google video may be first of the company's services that really gets a bang out of those investments. (See Google Gotcha.)

Google will use its fiber and other transport infrastructure to distribute the storage of its video content over the 65 or so data centers it owns, says Peter York of Vulcan Ventures in Seattle.

York says housing the video assets at all those locations improves the overall performance of the network: "They've got large-scale storage areas in each one of their facilities, and then it's just a matter of tuning locations based on the actual content demand."

Google is trying to rapidly increase the number of its data centers into the hundreds, York says.Google is also likely to use those data centers to house video content localized to a given market. The local content (like high school football games) can then be "injected" with local advertisements. As Google collects data on the viewing habits of individual IP addresses, ads will soon be targeted on a household-by-household basis, says Michael Hoch of RampRate, a Los Angeles-based analyst and consulting firm for digital content owners and distrubutors. Google declined to say if it is also buying wholesale transport from IP backbone providers like Level 3 Communications Inc. (NYSE: LVLT). (See Google Passes on PCs.)

York believes Google has been buying up the transport infrastructure at very reasonable rates. Network operators invested heavily in IP backbone networks during the telecom boom, he explains, but were forced to hold fire sales after the sector soured in 2000 and 2001.

The Google video store now sells content from the NBA, Sony Corp. (NYSE: SNE)/BMG, CBS, and others. Google says it intends to add more paid content soon and often.

Video distributors like Google typically negotiate a revenue sharing agreement with the owner of the content, RampRate's Hoch says. Content owners like CBS can demand anywhere from 10 to 80 percent of the download price, depending on the newness or popularity of the content.

Google spokesman Nate Tyler told Light Reading the software used to store, manage, and serve video was all developed in-house, leveraging the company's sizeable war chest and engineering force. (See Intel Teams With Google, AOL.)

"They used existing infrastructure -- nothing too far out and freaky for what Google does,” Vulcan's York says. "There's nothing in there that's really like a ground-breaking video-on-demand server, for example."

— Mark Sullivan, Reporter, Light Reading