Bet on it: Austin, Texas is Getting Google Fiber

It seems virtually certain that Google Fiber is going to be built in Austin, Texas.  In fact, the news apparently was mistakenly posted on the Google Fiber website. 

Speculation has been building since Google and the city of Austin are holding a press conference on April 9, 2012 to announce something.

And though there are other possible explanations, the big rumor is that Austin will be the next community to get 1-Gbps Google Fiber.

So once again observers will speculate on what Google might ultimately intend, aside from prodding big ISPs to invest faster in gigabit broadband access networks. Maybe Google is not even so sure itself.

If Google can leverage a few such 1-Gbps networks to get major ISPs to invest their own capital to match, Google wins. It gets the faster networks that support its business without having to invest capital better spent elsewhere.

And though some of us might doubt that Google can dramatically change the economics of gigabit fixed network access, does it matter if Google ultimately can eke out a capex cost reduction?

It might, though not because of any 30-percent theoretical cost savings. The bigger issue is whether the overall business cases is a positive number, after revenue, capex and opex expenses are tallied.

It might be a stretch, but there is some combination of subscriber adoption, monthly recurring revenue and then amortized capex and operating expense that would allow Google Fiber to be a going concern, on a sustainable basis.

The challenge is simply that the assumptions are formidable.

When Verizon launched FIOS almost a decade ago, it estimated a cost of about $1,350 per home passed. But Verizon now says costs are far lower, possibly in the $700 range.

If Google can set new standards for marketing and operating cost, and if it can get high penetration, perhaps it can demonstrate that 1-Gbps networks are feasible on a wider scale.

That is a big “if,” some might say. Consider a business case where Google Fiber costs 30 percent less than what Verizon paid for FiOS. Actually, that is easily doable, some might argue. Assume 30 percent operating cash flow. 

As it turns out, adoption (subscriber penetration) then becomes the key variable. 

Even if one assumes 75 percent adoption, which is the biggest assumption of all, Google Fiber might not offer a payback. And 75 percent penetration would be a historic achievement in the era of competitive communications and video entertainment.

So Google Fiber would have to make history, overturning all prior assumptions about take rates, to prove financially viable, some would argue. Alternatively, Google Fiber might consider some other ways to generate more revenue per subscriber, thus lowering the breakeven level of penetration. But it is hard to see what additional services could materially lift average revenue per user.

Should Austin actually become a second Google Fiber site, and there now are many reasons to believe that will happen, the effectiveness of the prod to other ISPs will hinge, in part, on penetration. 

If Google Fiber upsets the typical market share structure of a competitive triple-play market, you will see investment increase almost across the board.

And that, for Google, is winning big.