Google’s secret strategy with the Kansas City Fiber project
From: Bill St. Arnaud
Date: Thu, Jul 12, 2012
Subject: Google’s secret strategy with the Kansas City Fiber project
[I have long been perplexed at how Google plans to make a profit with
their Kansas City Fiber project. Originally the project was touted as
an altruistic move by Google to really understand the underlying costs
of deploying fiber in a large municipality. But as anyone who has been
in the trenches can tell you, it is not the technology that determines
the cost of a fiber deployment, but the tyranny of the take-up. If you
only have an initial 10% subscription rate then the initial cost,
regardless if the fiber is on poles or buried, can be as much as $6000
per home. If the take-up is closer to 50% the initial cost drops to
around $1500 per home and if the take-up is close to 100% then the
cost can be as low as $500 per home. The elbow in the curve for
deploying fiber to the home is around 40% take up, at which it might,
just might, be conceivable to make a return in your investment.
But Google is competing head on with the local cable and telephone
incumbents who are not going to sit on their hands and watch Google
take away 40% of their market. Since their infrastructure has been
paid for many times over through regulated rate of return on their
basic service of cable TV and telephone, they can discount their
prices to next to zero to prevent Google from making anywhere close to
a 40% take up. So how is Google going to make a profit?
In addition Google has announced that they plan to be a facilities
based competitor rather than an open network provider. Many people may
remember about 10 years ago in the .dot com boom a number of over
builders announced plans to build fiber networks in competition with
telecos and cablecos. Almost all of them went bust.
An intriguing hint on Google’s strategy is their plans to deploy
fiber above the neutral wire on the poles. Although far less cluttered
than being below the neutral wire, this means that specially trained
or electrical utility crews must install the fiber. It means that any
moves adds, or changes to the fiber splice boxes etc will require
these same expensive, unionized crews. Generally when deploying a FTTH
network, drops to individual homes are installed when a customer
subscribes to the service, but with fiber installed above the neutral
wire, it probably makes more sense to deploy all drops and splice
boxes during the initial build out. This also drives up front costs.
The only way for this type of strategy makes sense is if Google plans
to fiber up every home from day one. Google has a habit of shaking up
the world. Remember when it first offered free Gmail with one gigabyte
storage? The critics claimed it could not be done or Google would go
bust. But Google proved them all wrong.
I suspect the same story is about to happen in Kansas City. Google
will offer a basic free high speed Internet to each and every home,
perhaps bundled with Google TV using their new set top box. A variety
of premium services will also be offered for additional fees. I would
not be surprised that Google decided to offer a basic 1 Gbps service
to every home. This would clearly differentiate Google from the
cableco or telco and make it almost impossible for them to compete
without undertaking a massive investment themselves.
Those who elected for the free service would have a Google side bar
or screen splash on their TV or computers that are hooked to the
Google set top box. Google would then hope to make money by extending
its current business model largely through Google TV. Google may make
extra money by also making their set top boxes WiFi 2.0 compatible so
they can offer a city wide wireless network as well – much like Free
is doing in France.
France’s Free network is probably the closest model that Google
plans to emulate. However even with Google TV I think Google is going
to have a tough time making money. To pay for the fiber alone, they
will need to earn $10-$20 per month from each household over the next
5 years. I don’t think highly selective advertising via Google TV
will be enough. Negotiating all the TV rights and channel offerings
will also be a challenge.
The other potential area for Google to make money is operating as an
ESCO (Energy Services Company). Google, as well as Microsoft and many
other companies have tried to interest customers with tools to monitor
their energy consumption. But customers are not interested in saving
energy – if they did everyone would drive at 30 miles per hour, as
everyone knows gasoline consumption climbs significantly the faster
you drive. Energy prices are also likely to drop because of abundance
of gas and a surplus of electrical grid power. So rather than enticing
customers to monitor their energy Google, in partnership with the
local utility, could offer to peak manage the customer’s power
usage, by briefly turning off air conditioners and hot water tanks.
They could also install smart thermostats and other devices to further
reduce energy consumption. The money in the energy savings would use
to pay for the fiber or premium services, rather than being returned
to the customer as piffling amount of energy savings.
Bundling broadband with energy is the huge revenue opportunity for
Google. The energy market has virtually remained unchanged since the
19th century. The energy market is many, many orders magnitude larger
than the advertising market. Rather than trying to save customers a
few dollars a month in energy, it would be far more effective to offer
consumer something more tangible and with a higher perceived value
such as free high speed Internet.
For more background information please see my blog on Free Fiber to
R&E Network and Green Internet Consultant.