The reason some long-time observers of the cable industry might be skeptical about Google Fiber is the history of “overbuilders.” As competitive local exchange carriers compete with incumbent telcos, overbuilders competed with cable operators, around the the turn of the century.
Modest success was obtained, but it turns out that it is tough to support three or more triple-play providers in a market.
Some are more hopeful for Google Fiber, though, in part because its value proposition is so disruptive. Overbuilders typically offered a triple play menu (voice, video, data) with some savings. But few overbuilders were able to replicate success consistently, over wider geographic areas.
What Google Fiber does is completely destroy the existing value-price relationship for Internet access. Simply, Google Fiber offers two orders of magnitude more bandwidth for the same price as a 15-Mbps or 20-Mbps service. And it seems people might understand that.
A Sanford Bernstein Research door-to-door survey of 204 residents of Kansas City residents found both "extremely high" awareness of Google's new fiber offering (98 percent).
Some 52 percent said they would "definitely or probably" buy Google Fiber, while another 25 percent said they may purchase the service.
About 19 percent said they definitely or probably wouldn't buy it. Most of those said they planned to sign up for bundled broadband and pay TV.
Of the 160 residents (77 percent) who said they were considering the service, 60 percent said they were extremely or very likely to buy it.
"These very high purchase intent numbers do not allow us to rule out the possibility that Google will indeed achieve very high penetration of homes passed, well in excess of the typical 20 percent to 30 percent that overbuilders have achieved historically in their most successful markets,"
The big difference from past “overbuilder” efforts, should that happen, is the degree of penetration. In the past, some overbuilders (typically competing against both a telco and a cable company) have managed to get 20 percent penetration.
Though rare, a few overbuilders such as the former RCN in the early 2000s was able to get penetration rates in Waltham, Mass. of about 35 percent for voice, 28 percent for cable TV, and 11.5 percent for Internet service. But bankruptcies have arguably been as common as successes.
With the caveat that Google’s objective still is to prod other major ISPs into their own disruptive upgrades, many will wonder whether Google Fiber could be a sustainable business for Google on a wider scale.
Google Fiber's core network will cost about $84 million, Sanford Bernstein analysts Carlos Kirjner and Ram Parameswaran have estimated, representing coverage of 149,000 homes.
Some $38 million will go into Kansas City, Kan., and $46 million into Kansas City, Mo., with the cost per home respectively at $674 and $500. That’s roughly in line with other estimates for urban and suburban construction where much of the plant is aerial. As a point of comparison, it was estimated that it cost Verizon, before it halted FiOS buildout, about $4,000 per home to connect it to its fiber network.
It will cost Google $464 to actually connect an Internet access customer, and $794 to connect a customer buying both video and Internet access. Those figures are roughly in line with what other telcos might expect to invest in a similar market.
Kirjner and Parameswaran estimate that if Google built out a fiber network to serve 20 million homes over a period of five years, “the annual capex investment is required to be in the order of $11 billion to pass the homes, before acquiring or connecting a single customer.”
Still, the analysts say they now are "substantially more positive on the prospects of Google Fiber to be an economically attractive business for Google on a stand-alone basis," based on the apparent willingness to buy.
Observers have questioned whether Google wants to invest scores of billions just to prod other ISPs into action. But there are other alternatives. If Google Fiber really manages to achieve adoption rates much higher than other overbuilders, Google Fiber could suggest it is a sustainable opportunity with reasonable earnings and profit margins.
If so, it then is possible Google could attract investors that otherwise might have invested in cable, telco or satellite networks.
And watch out below if that happens. Telco and cable equities would be hammered.
It seems doubtful Google would want the distraction of such a business, you might argue.
But maybe Google spins it out as a separate entity.
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