Alphabet Slows Its Fiber Roll

Image Source: Alphabet

Fiber has been the biggest driver of capital expenditures in Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) "Other Bets" segment. Other Bets capex totaled $324 million last quarter, up 20% year over year, reflecting ongoing investments in Fiber. The high-speed internet service expanded to four new cities last quarter.

But Fiber is pressing pause on further expansion. Craig Barratt, the head of the Access unit that includes Fiber, is reportedly leaving the company, along with about 9% of Access' staff.

The move indicates a growing focus on financial discipline within Fiber and the rest of Other Bets. Fiber, in particular, is focusing on technologies that will help reduce costs and eventually enable it to expand to more markets.

The bigger picture

During Alphabet's third-quarter earnings call, CFO Ruth Porat clarified that moves within Fiber are to improve the long-term viability of the business. Specifically, the company is focusing on developing technology such as point-to-point wireless connections to effectively and efficiently roll it out to new cities.

Access earlier this year acquired WebPass, which specializes in high-speed internet access delivered wirelessly to apartment buildings. It's now focused on improving the technology behind WebPass and covering more stand-alone households. The wireless technology delivers gigabit internet from an antenna connected to a fiber line using an in-home receiver. It reduces the amount of construction needed to bring fiber to new neighborhoods.

Part of the problem Fiber faces is that the economics of broad deployment in some major cities doesn't make sense. In its early days, Fiber piggybacked on existing fiber networks or construction projects. That took a lot of the capital expenses out of the equation. Scaling to more households, however, becomes increasingly expensive without any pre-existing infrastructure or pre-existing plans to dig up roads.

The impact on Alphabet's financials

Focusing on developing the technology needed to remain cost-efficient will slow capex growth in Alphabet's Other Bets, but it will also slow its revenue growth. Porat points out that the majority of Alphabet's Other Bets revenue comes from three businesses: Nest, Verily, and Fiber.

Fiber remains committed to the 12 cities it currently operates in, so it should be able to maintain its revenue. Fiber currently has around half a million internet customers and fewer than 100,000 television subscribers.

Importantly, Other Bets is still a very small part of Alphabet's revenue base. Google generated 99% of the company's revenue in the third quarter, and it's still growing at a strong pace. The pause on Fiber shouldn't have any major impact on the short-term results, but it could eventually have 10 times the revenue and profit of the rest of Other Bets when it's ready to press play again.

The clock is ticking

Alphabet isn't the only company working on deploying wireless high-speed internet. Wireless carriers Verizon (NYSE: VZ) and AT&T (NYSE: T) are also working on the same problem, calling it a 5G wireless network.

Both telecom companies have suspended their fiber-to-the-home ambitions. Verizon's FiOS expansion is virtually complete. AT&T is using its DirecTV acquisition to support its television service ambitions, and it's focusing its fiber internet network in select cities. Both faced similar economic problems as Fiber in building out fiber networks.

Verizon plans to start commercially testing fixed 5G wireless connections next year, and AT&T is on a similar timeline.

The opportunity for Fiber is huge, as demand for faster internet connections continues to grow. But the business faces some challenges, and it's making a smart move to take the time and focus on improving the technology before continuing its deployment. It needs to work quickly, however, to beat the telecom giants with huge budgets and ambitions beyond 5G to the home (i.e., wireless connectivity). If it can succeed, Fiber may be the first Other Bet to prove its worth.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Verizon Communications. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool recommends Verizon Communications. 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.