What Would it Take for Google Fiber to Attract Investors Formerly Funding Cable and Telco Networks?

A reasonable argument can be made that the actual primary and intended purpose of Google Fiber is to cause other major ISPs to vastly increase their own investment in access networks.

But there could be other eventual outcomes. Google Fiber might become something else, namely a sustainable business. You might argue that Google would not want the huge distraction of creating a huge new ISP business.

But it might not have to. Google Fiber could conceivably become so successful that it could attract the same sorts of investors that traditionally have invested in telco or cable TV networks.

Google Fiber potential hinges on penetration rates, one might argue. In other words, if Google Fiber does only as well as the best traditional “overbuilders,” getting possibly 20 percent of homes as customers, it might be a sustainable business, but just barely.

But if Google Fiber were to reach much higher levels of adoption, up to perhaps 50 percent, it would have financial prospects vastly better than any other overbuilder has achieved.

Google Fiber's core network will cost between $674 and $500 per passing, the former representing Kansas City, Kan. costs, the latter Kansas City, Mo. costs.

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.

The key variable is degree of customer penetration, not so much cost of infrastructure.

Assume it costs $600 to build the network passing every location, and then about $450 to connect each actual customer.

At 20 percent penetration, the cost per customer is $450 plus the value of the capital invested to build of the rest of the network that is not serving actual customers. At 20 percent penetration, that means the cost of the network per customer is $3,000. So the cost of serving each customer is $3,450.

For simplicity, ignore the potential value of customers who opt for the “free” access option, and the potential value to Google Fiber if each of those “free” nodes includes a public Wi-Fi element.

At 50 percent penetration, the cost per customer (including both network and customer premises capital) is $1650. At 50 percent adoption, revenue is more than twice as high as at 20 percent penetration and capital investment per customer is nearly 50 percent lower.

Were Google Fiber to reach 50 percent penetration, profit margin might also improve by as much as 100 percent over the 20-percent penetration level.

That might make Google Fiber something that can be replicated on a wide scale, attracting the same sorts of investors that previously might have funded telco and cable TV networks.