Google Fiber not responding to rumours, acquisitions the next step?

Tuesday 6 September 2016 | 17:19 CET | Background
Google Fiber is reportedly going through tough times. The number of subscribers is less than expected, at just 200,000, staff have been cut to around 500, and costs are expected to drop by 90 percent. Nevertheless, Google continues to roll out the fibre broadband service, including fighting in Nashville for a simplification of rules for using utility poles, a move opposed by the opposition in order to stymie the arrival of the newcomer. AT&T used the opportunity to dismiss Google Fiber in a blog post. How will Google Fiber continue? More acquisitions seem likely. 

Reports that Google is slowing the roll-out and looking to reduce the costs have appeared in several publications in recent weeks, but there has been no official response from Google Fiber. The project is actually no longer part of Google, but included in the Access & Energy group of the holding company Alphabet. This makes it one of the more important 'Other Bets' at Alphabet (alongside Nest, the maker of smart home equipment), which together generated revenues of USD 185 million in Q2 2016. Assuming an ARPU of USD 100, we estimate Google Fiber contributes quarterly revenues of around USD 60 million. 

Google Fiber offers a choice of 5 Mbps free (since dropped in Kansas City and replaced with a service at 25 Mbps for USD 15 per month), 100 Mbps for USD 50 per month, 1 Gbps for USD 70 and a double play with TV for USD 130 per month and a choice of unlimited calls in the US for USD 10 per month. It recently added SME plans at 100 Mbps for USD 70, 250 Mbps for USD 100 and 1 Gbps for USD 250.

Wireless alternative

Whether Google Fiber is really deciding to scale back, we cannot say. The disappointing subscriber numbers though have been reported by several sources and appear believable. It's clear also that the company is focused on cost reduction. The pole access mentioned above is part of this, as well as plans to use wireless technology for the 'last ten yards'. The latter follows Google's acquisition of Webpass and plans to test services in the 3.5 GHz band. Barclays noted recently that using existing dark fibre can help reduce costs, as envisaged in Huntsville.

Buying in

If there's a fatal flaw in the business plan of Google Fiber, it's trying to compete with two big rivals: telcos (AT&T and Verizon) and cable companies (such as Comcast and Time Warner Cable). The threat of new arrivals like Google Fiber has prompted these operators to step up their network investments, especially AT&T which is expanding its GigaPower FTTH network to 100 cities. Even Verizon, which had stopped expanding its Fios network as it steadily withdraws from the fixed market, is planning to resume its growth. Comcast is busy with the launch of Docsis 3.1, and any number of smaller players are also considering FTTH network projects (TDS, CenturyLink, Windstream, Consolidated Communications, Ting). This all makes Google Fiber far from new and different. 

Google Fiber is currently active in (parts of) 13 cities, including Kansas City, Austin, Atlanta and Salt Lake City. It's considering expansion to another 11 cities (e.g. Portland, Phoenix, San Jose and Los Angeles), and Webpass works in Miami and Boston.

For a newcomer on the market, buying an existing player can be a smart strategy. This provides a boost at the start, with existing operations already generating cash flow. At the same time you eliminate a competitor from the market. Examples of this include CIF in the Netherlands and CityFibre in the UK. Google Fiber has to date only acquired a few companies, such as iProvo in Utah. Its seems clear more acquisitions of this sort should be in the pipeline. There are plenty of small networks in the US, often owned by cities or utility companies, such as LUS Fiber (Lafayette), Greenlight (Wilson), EPB (Chattanooga), ECFiber (Vermont), UTOPIA (Utah) and the private company Sonic.net in California.

Finally, AT&T's negative response to Google Fiber is a strange reaction, practically un-American. From such a mammoth company you would expect approving words for a company that dares to take on the competition. Instead its blog post sounds more like fear of Google Fiber's next steps. 

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