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Nathan Newman

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Will Google Fiber Convulse Local Telecom Markets?

Posted: 10/24/2012 6:20 pm

Why is a software company like Google stringing cable in Kansas City for its Google Fiber initiative? Its Google Fiber announcement opens a lot of questions about where the company is going. But the details are interesting to anyone committed to seeing a high-speed broadband future for America:

  • The initiative will deliver 1 gigabit of Internet speed for $70 a month, throwing in dozens of high-definition television channels for another $50 a month.

  • For early subscribers, Google will even waive the $300 installation fee and deliver Internet speeds 500 times faster than the roughly 2-megabits-per-second that most Americans have in their homes.

  • Google Fiber will also allow consumers to record eight TV programs at a time.

  • Add in a Free Nexus 7 tablet as a remote control and a terabyte of storage.
With no data caps, that's a pretty compelling package.

But can Google compete with Verizon FIOS offering 530 channels and broadband speeds up to 150MPs at a price of $205 per month?  Or with AT&T, Time Warner or Comcast with their combo Internet/TV plans?

So far in Kansas City, Google seems to have demonstrated that it has the potential to become a presence in the industry, with 89 percent of neighborhood "fiberhoods" signing up for deployment of fiber in their communities. (The fact that the remaining neighborhoods seem to be disproportionately in low-income communities, however, indicates that Google's plans may just increase the digital divide between communities.)

Financially, Google has the advantage in Kansas City that it can monetize its build-out costs not just through subscriber fees but also through its online advertising arm on the (hopefully) increased Internet content users view. At one level, Kansas City may be just a test bed for Google to have a complete local ecosystem to observe how broadband subscribers use the Internet. Google's bread-and-butter is selling advertising online and the key to their dominance is collecting more and more data about people online, so they can deliver the exact slice of the online population to the exact slice of advertisers who can generate sales from those users.  Knowing users' television-viewing habits on a minute to minute basis and combining that with other data Google has on their online habits gives the company a whole new set of interconnected data to even more precisely target advertising -- and increase its revenue to justify the build out costs in Kansas City.

Will Google Take on the Telecom Industry? This may be just a one-off move by the company to collect a whole new kind of marketing data to assist its online advertising algorithms across the country, while reaping some good public relations. But it could be just a test for going big into a whole set of fiber markets around the country. In other sectors, Google has shown a desire to move from providing the content to controlling the underlying infrastructure.  Originally, few people expected Google to move into mobile phones in direct competition with its one-time corporate ally Apple, but it first created the Android mobile operating system, then more recently purchased Motorola to begin itself manufacturing its own phones. Without abandoning all alliances, the company shows a strong desire to control end-to-end environments for online commerce and advertising.

If Google can in just four years, move from no presence in the mobile phone market to Android phones having a 64.1 percent share of all phones sold, it would be a mistake to underestimate Google's willingness to take on whole new markets.

And television itself is an industry that Google is already moving to control end-to-end, with Google Fiber potentially being just one element of that plan. Google already controls 40 percent of all online advertising, but the company clearly wants to make inroads into the television advertising sector, which is presently still significantly larger than its online counterpart. Or as Robert Kyncl, a senior manager at Google's YouTube operation, said in a New Yorker interview last year, "[T]his industry [i.e. TV] is worth three hundred billion dollars, worldwide, and we hope to see value shifting hands," meaning into Google's hands.

Google as Content Creator: Which puts in perspective another big announcement by Google this past week that it was adding 50 new original online television channels to its YouTube service on top of the 100 it introduced last year, an attempt by the company to produce long-form online video content to compete head-to-head with cable. If the company can shift viewers from traditional television watching to its own online channels, where the company controls all advertising, or to competing online video sites where the company is a major player through its online advertising arm, that would be a game changer in the television industry. In fact, a Nielsen study found in a 50-country survey that more people are now watching online video that preprogrammed television shows.

That handy Nexus tablet remote Google is handing out in Kansas City then becomes a weapon to help steer customers to its own YouTube channels or other online video where the company is getting a slice of the advertising revenue. Google is already deploying its Google TV service -- a software standard embedded in televisions -- to make watching television on any set more like surfing the Net. The company has cut deals with a large number of television manufacturers such that Google's Eric Schmidt predicted this past December that a majority of televisions sold in stores would soon have Google TV embedded in the hardware.

Google's Comprehensive Television Game Plan: Take a step back and Google is pursuing an integrated strategy to control television content via its YouTube channels, access to video services via Google TV, potentially control of the physical infrastructure via Google Fiber, and control of video advertising revenue through its Google Ads to make the whole thing pay off financially.

Google would be in the unprecedented position to eavesdrop on the complete cycle of users video watching, seeing which online shows they choose to watch, which ads grab their attention, and which they click on -- a learning cycle of new data on users that would be priceless in making its ads more valuable to advertisers (and therefore generate more revenue for Google). And Google could then produce niche online channels to attract the exact mix of viewers desired by any particular set of advertisers.

Some analysts have argued that Google can't afford the tens of billions, even hundreds of billions, required to deploy fiber in markets across the country. But that cost, while substantial, could easily make clear economic sense for Google if it can grab tens of billions of dollars annually from current traditional television advertisers. Google doesn't have to make money on deploying fiber and could probably even afford to lose a bit, as long as it makes it up in its core advertising revenue source.

And if its deployment efforts just force existing cable companies to ramp up their own deployment of high-speed Internet options to fend off Google, Google still wins. Higher-speed Internet makes online video more viable as a competitor to existing broadcast and cable channels and Google then reaps more online advertising revenue without even having to deploy everywhere.

Whether Google goes national no doubt depends on what happens in Kansas City and whether Google sees a spike in useful user data and advertising revenue from the fiber deployment. If it does, we should expect new convulsions in the local cable-Internet franchise sectors.

This was also posted at SpeedMatters, the blog of the Communication Workers of America, for whom I do occasional consulting work.

 

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