What Seems to Have Been Key Business Model Issue for Google Fiber?

To the extent that Google Fiber has found its business model unattractive, the issue remains “why?” Any number of issues could have been contributors, ranging from take rates to construction cost. But take rates are the most-likely source of trouble for the business model, both for the core internet access product and video services.

Expectations for Google Fiber once were much higher. A 2013 survey found that about a third of households had subscribed . A 2014 survey commissioned by Bernstein Research conducted a door-to-door survey of five Kansas City neighborhoods where Google Fiber was being sold, finding  take rates as high as 75 percent, in some neighborhoods.

In Wornall Homestead, the highest household median income neighborhood ($116,000 annual income) Bernstein surveyed in 2014, it found that 83.1 percent of respondents were taking Google Fiber service. About 15 percent were subscribing for the “no charge” 5-Mbps service, but all the rest were buying the gigabit service.

That is a historically-unprecedented take rate for an “overbuilder.” In the Community College, the neighborhood with the lowest median income neighborhood ($24,000 annually) 27 percent of respondents were taking Google Fiber service.

Some 26 percent actually bought the gigabit service, while seven percent subscribed for the “free” 5-Mbps service. That level of adoption, in the first year, would be in line with take rates seen when firms such as Verizon began offering FiOS, for example, and better than most overbuilders
have achieved in the first year.

Obviously such take rates were not widely replicated in other markets and neighborhoods. In fact, it appears take rates might have reached 20 percent in Kansas City, but far less than that in the additional markets Google Fiber entered. That is based on the assumption that

Assume Google Fiber had about 70,000 to 75,000 video subscribers by the end of 2016. Then assume those video accounts represented about 15 percent of total revenue-generating accounts.

That might imply that as many as 467,000 revenue-generating accounts, and perhaps 70,000 “free” accounts in service, for a total of 537,000 accounts in service. Some have estimated Google Fiber has about 450,000 internet access subscribers, for example.

At a 20-percent take rate, that implies Google Fiber passes some 2.68 million homes. Varying assumptions about video take rates as a percentage of total, one could derive paid accounts ranging from 318,000 to 638,000, or homes passed between 1.6 million and 3.2 million.

It’s guesswork, as Google Fiber never has released any information about either subscribers or homes passed.

One has to assume that adoption rates were less than 20 percent, or that costs were much higher than forecast, with the single most-significant sensitivity being the take rate.

A take rate of 20 percent in the first year would be considered a success by virtually any other internet service provider entering the market for the first time, and there is no particular reason to believe Google’s network and construction costs were too much different from any other ISP doing a new build.

While make-ready costs conceivably were lower, the business case is not so sensitive to those costs. Construction costs, and then materials (cable, customer premises gear) and drop activation are the dominant drivers of expense.
Post a Comment

Popular posts from this blog

Voice Usage and Texting Trends Headed in Opposite Directions

Who Are the Key Telco Competitors?

Jio is Succeeding at "Destroying" the India Mobile Market