Google Fiber Forces AT&T's Hand

By Markets Fool.com

Continue Reading Below

Source: Google.

As one of the most innovative companies in business today, sprawling search giant Google is both lauded and loathed for its many big-ticket projects.

On one hand, ambitious "moonshot" programs such as disease-detecting nanoparticle platforms and Internet-beaming blimps offer potentially massive payoffs for mankind and Google, ideally in that order. On the other hand, critics' claims that Google spends recklessly to shareholders' detriment might have some merit.

Frustratingly, it's simply too early to tell whether many of Google's non-core business activities will prosper. However, according to one recent report, one of Google's most seemingly mundane new growth initiatives is already helping upend behavior within a multibillion dollar industry.

Google Fiber's pricing pressures
Google Fiber has always been confounding to investors, in no small part because Google itself hasn't been exactly forthright about its ultimate intentions for the project. Nonetheless, the ultra-high-speed Internet service appears to be having an observable effect on AT&T and other rivals.

Continue Reading Below

Recently, The Wall Street Journal noted that the pricing of AT&T's GigaPower Internet package, which offers one-gigabit-per-second speed -- similar to Google Fiber's -- differs dramatically between markets in which it competes with Google Fiber and those where it does not.

Per the Journal's reporting, GigaPower service costs $70 per month in Fiber-enabled cities Austin and Kansas City. However, the service often costs somewhere between $110 and $120 per month in markets without Google Fiber. The Journalalso noticed that AT&T's pricing behavior appears to be reactionary. Last month, AT&T lowered its GigaPower price in future Google Fiber market Raleigh-Durham, N.C., from $120 per month to $70 per month.

This amounts to some of the most compelling evidence yet that Google Fiber is at least increasing the competitive landscape in the U.S. telecom industry. But while Fiber appears to be a boon for consumers in the markets in which the service is offered, whether it is a win for Google shareholders is another question.

Is Fiber a money maker?
Although it has stopped short of breaking down the specific economics, Google has consistently said Fiber is neither a loss leader nor a gimmick to spur further investment by the likes of AT&T or Verizon Communications. However, plenty of questions remain.

Of particular importance is Google Fiber's cost structure. Connecting homes and businesses to a high-speed network requires a fair amount of fixed investment on the part of any Internet provider in return for a relatively steady stream of subscriber payments. This is an annuity-like business model. According to a 2010 Federal Communications Commission report, the average cost per subscriber of a "fiber to the home" program was $2,500. It's worth noting that there's likely a dramatic difference in the cost of connecting rural and urban subscribers, so it should come as no surprise that Google Fiber has thus far been rolled out in relatively large metropolitan areas.

Google claims it manages the costs of its Fiber rollout with great care. As Google Fiber spokeswoman Jenna Wandres commented, "This is not a beta program or an experiment. Efficiency is a huge focus for us as we build out Kansas City. And efficiency can cut costs."Google Chairman Eric Schmidt has also made similar comments.

However, Google Fiber's competitive potential will be limited if the service can only operate economically in relatively large urban centers. Taking Google's above comments at face value and accepting that Fiber is indeed meant to be profitable, it's important to remember that the service would provide other attractive benefits to Google's core business.

As a company that makes money from Internet use, Google would obviously prosper from creating a more efficient route for consumers to access its search engine and ancillary services. So even without hard numbers specific to the service, it's pretty clear Google benefits from Fiber.

When it comes to Google Fiber's effects on other industry players such as AT&T and Verizon, it all depends on the service's eventual reach, which is very much in question. As illustrated above, Fiber pretty clearly puts downward pressure on competitors' pricing in markets where the service is live.

However, if Fiber remains handcuffed to only certain sizable cities, other national Internet providers won't have much to worry about. Fiber is operational in just three cities in the U.S at the moment, with only five more cities listed as definite future locales. In this context, investors in both Google and the telecom industry more broadly would do well to focus intently on Google's long-term rollout strategy for this intriguing service.

The article Google Fiber Forces AT&T's Hand originally appeared on Fool.com.

Andrew Tonner has no position in any stocks mentioned. The Motley Fool recommends Google (A shares), Google (C shares), and Verizon Communications. The Motley Fool owns shares of Google (A shares) and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.