Take one moribund broadband market, add a disruptive new entrant as rich as Croesus, watch the explosion in competition that occurs when the old players bang into the upstart and, hey presto, you have the US fixed broadband market today.
It may be a stretch to describe the US as entirely moribund, just as it's a gross exaggeration to say it's been transformed, but the entry of internet giant Google is clearly shaking up a sector that lacked much spark.
Using advanced fiber-to-the-home (FTTH) technology, Google (Nasdaq: GOOG) is claiming to provide connection speeds of 1 Gbit/s in cities where its Google Fiber Inc. service is up and running – that's 10 times faster than what used to be available -- and at knock-down rates. With AT&T Inc. (NYSE: T), in particular, racing to respond, the US may be set to gain a broadband rivalry critics have long complained is lacking.
Before anyone gets too carried away, it's worth remembering that Google Fiber is currently available in just two cities -- Kansas City, and Provo -- with Austin, Texas, soon to join them. (See Google Fiber Shifts Into High Gear.)
Google plans to extend the service to another 34 should they pass muster and meet its various requirements, but this could still represent a relatively limited deployment. Potential candidates include Atlanta, Charlotte, Nashville, Phoenix, Portland, Raleigh-Durham, San Antonio and San Jose.
What's striking is just how closely AT&T's plans for its own GigaPower-branded FTTH service mirror those of Google. Deny as it might that Google has spurred it to action, AT&T switched on a 300 Mbit/s service in Austin late last year, turning the speed dial up to 1 Gbit/s in July. It has already confirmed that rollouts will go ahead in Charlotte, Kansas City, Nashville, Raleigh-Durham, San Antonio and San Jose, besides several other locations, and is exploring the possibility of introducing services in Atlanta. In short, if Google Fiber has rocked up in your neighborhood, there's a good chance AT&T is lurking there too. (See AT&T's Austin GigaPower Debuts at 300 Mbit/s .)
Broadband charges already appear to be dropping. At $70 a month, Google's 1 Gbit/s service is cheaper than comparable offers, but AT&T has reportedly slashed the prices of its own services in a bid to retain customers where it faces competition from the Internet giant.
Great as all this may be for US broadband consumers, it's less clear whether the service providers themselves are set to benefit. No one is quite sure why Google has made the leap from search engine to broadband provider, although it probably wants to ensure that connection speeds improve sufficiently (and are available at affordable rates) to support a wave of forthcoming applications from which it can generate advertising bucks.
Google has also insisted, however, that it wants Google Fiber to be a profitable, standalone venture. "We'll always have profitability as one of the key criteria for this opportunity," said Patrick Pichette, Google's chief financial officer, during an earnings call last year, as quoted in a Seeking Alpha transcript. Yet as any broadband investor knows, the cost of building out a 'greenfield' FTTH network can be astronomical.
Analysts believe Google could spend up to $28 billion on its fiber rollout, with Goldman Sachs suggesting in 2012 that covering 830,000 homes each year would cost $1.25 billion. For many other companies, such an investment would be inconceivable, but for an organization that was sitting on cash reserves of $58.7 billion at the end of 2013, it is not such a gamble.
Even so, Google appears to be avoiding some of the biggest urban markets in the country because they do not tick all the boxes on its city checklist. In some cases, existing infrastructure may not be up to spec. Elsewhere, city authorities have probably been unable or unwilling to give the new operator access rights and permits as quickly as it demands.
But AT&T and the rest of the old school have cause to worry. AT&T lacks the financial heft of Google and its free cash flow has been shrinking over the past couple of years. With its base of 16.5 million broadband connections, it has a lot to lose to a gung-ho rival starting from scratch -- last year, investment firm Evercore Partners predicted Google Fiber would attract 3 million subscribers over seven to nine years -- and it will struggle to expand 1 Gbit/s services to a meaningful number of customers without increasing capital expenditure, which it expects to remain at the 2013 level of $21 billion this year. As its GigaPower deployment plans indicate, AT&T cannot afford to let Google leave it behind.
— Iain Morris, Site Editor, Ultra-Broadband