Google far from finished with FTTH

Monday 15 April 2013 | 16:56 CET | Background

Google has announced plans to build a FTTH network in Austin, Texas, a city of around 800,000 residents. Services are expected to launch from mid-2014. In response AT&T announced that it will also build a FTTH network there, also offering speeds of 1Gbps, as part of its Project VIP (Velocity IP) started in November 2012, which covers investments in FTTC, FTTB, FTTO and LTE.

After Kansas City, Kansas (announced 30 March 2011), Kansas City, Missouri (17 May 2011) and Olathe, Kansas (19 March 2013), this is the fourth city where Google is rolling out fibre (not including the area around Stanford University in California). In total the plans cover around 1.5 million people. While it's unclear where this will end, it's certain that just in terms of the required economies of scale in telecom and its own business, Google is unlikely to be stopping soon with FTTH. 
Google has various intentions with the project:

1. Accumulating experience and expertise in FTTH roll-out.

Google is building (nearly unnoticed) a global network, consisting of long-haul fibre and data centres (reportedly around 40 at the moment). It also wants to accumulate expertise in the access segment. It has supported various Wi-Fi network projects around the world, has a stake in O3b Networks (other 3 billion: broadband over satellite in unconnected areas), is experimenting with mobile technology and offers on a small scale (Logan, Ohio and Cape Town) wireless broadband using TV spectrum. Fibre offers the most bandwidth and is the most future-proof, making it the most interesting part of the value chain where Google is active. 

2. Learning about open-access networks.

To date no other independent service providers have emerged, and Google is left to act as the only provider on its network. Traditional operators usually think in terms of vertical integration, and players such as AT&T and Time Warner Cable are reluctant to offer their services over third-party networks. It remains to be seen if this will develop in the US market; in the meantime any profit margin will be for Google alone.

3. Gaining knowledge over the use of FTTH.

Google profits from the migration of any services to internet and the related increase in advertising space. The very high bandwidth made possible by fibre is interesting for Google as it opens up new forms of internet use and business opportunities.

4. Challenging existing players' prices and speeds.

Operators such as AT&T and Time Warner Cable have a different business model, based on scarcity. Bandwidth is offered on a restricted basis in order to maintain a speed-based model in the market. This minimizes capex, helping maximize distributions to shareholders. Network investments are often based on what the competition are doing, with only incremental improvements (this is a risk for the consumer and the government, that can lead to a duopoly or oligopoly). In contrast Google earns its money from ads and so wants to maximise internet use, with no bandwidth limitations. By deploying FTTH, Google will stimulate considerably more usage, forcing the competition to also join the game. AT&T's response in Austin shows Google's strategy is not completely unsuccessful. Time Warner Cable is also apparently convinced, as it has joined a tender for a gigabit network in North Carolina (NCNGN).

5. A way to spend cash. 

The internet world has a high level of risk. Different than the telecom world, where every month the bills go out and are paid, internet companies can come and go quickly if they don't maintain a good reputation with customers. Users have very little loyalty and will quickly change if they find something even slightly better. In this kind of market a stronger balance sheet is needed than what normally passes in the telecom world. Google has almost zero debt and a big cash pile worth USD 48 billion. Every quarter it adds another couple billion to the pile. While the company does face some significant lawsuits and the technology risk remains high, this level of cash has likely inspired Google to think big over how it can create value. Rolling out FTTH is just one such project. How far Google is prepared to go is unclear. There is clearly work to do in the US. In countries such as the UK and Germany, where the incumbents are focusing on FTTC/VDSL, there are also chances for a newcomer to deploy FTTH. 

In short Google may have found a market in which to spend its excess cash. At the same time it can create a new cash cow, offering some protection if its core services (Google Search, AdWords and AdSense) ever start to weaken. Google will first seek out scale in FTTH, and once it's through the start-up losses, it will have created a new business. But where it will all end is far from certain. 

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