Google Fiber Rethink Its Strategy

Image source: Google Fiber.

In the nearly four years since Google brought its gigabit internet service, Google Fiber, to Kansas City, it's expanded to just five other metro areas. The internet and television service is now part of Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) "other bets" segment, which overall had $185 million in revenue in Q2 and an operating loss of $859 million.

Despite hundreds of millions invested in the acquisition and buildout of its fiber network, it's still slow going for Fiber. The task of surveying neighborhoods to determine their viability and then physically digging up roads and providing fiber to the home is very time- and capital-intensive. That's why Fiber is rethinking its strategy, and it recently made an acquisition to potentially decrease the time and capital expenditures required to expand its service.

The company in June bought WebPass, which is a small, high-speed internet service provider. What makes WebPass interesting is its wireless technology, which allows it to beam internet into apartment buildings, for example, using an antenna connected to a fiber line. That technology reduces the amount of fiber it needs to lay before serving a community, and it's something Google Fiber itself has been working on since the beginning of the year.

This stuff gets expensive

Before diving into how WebPass can help Google Fiber grow, let's take a look at its current expenses and the issues it could have scaling.

Alphabet doesn't break out Fiber's financials on its own, instead lumping them in with the rest of the other bets segment. Other bets' capital expenditures totaled $280 million last quarter, up from $232 million the year before. Last year, Alphabet spent $869 million on other bets' capital expenditures. During Alphabet's second-quarter earnings call, CFO Ruth Porat said the other bets' capex "primarily reflect[s] ongoing investment in our Fiber business."

It's no surprise Fiber is expensive. Both Verizon (NYSE: VZ) and AT&T (NYSE: T) invested a significant amount to rapidly expand their broadband networks before pulling back over the last couple of years.

Verizon's wireline capital expenditures increased from $8.27 billion in 2005 to $10.96 billion in 2007 as it aggressively built out its FiOS business. Last year, AT&T said it had spent more than $140 billion over the previous six years building out a fiber network. It had launched in 20 metro areas at that point.

Cutting costs

Verizon has cut back on building out its FiOS network, and AT&T is now focusing only on gigabit internet. The latter is relying on DirecTV to continue growing its pay-TV business, while Verizon is more focused on digital video.

But both may soon find themselves competing with Google Fiber in an area called fixed wireless broadband. Verizon plans to use its upcoming 5G network to provide high-speed internet service in customers' homes. Google Fiber might use WebPass' antenna technology to do something very similar.

The biggest advantage of using a 5G cell tower or an antenna connected to a fiber line is that the cost of connecting a neighborhood is dramatically reduced. The service provider simply needs to build a signal site on a street corner (it could be connected to an existing structure, like a street light), then customers place a receiver in their window.

That solution would reduce the amount of fiber cable Google needs to lay and the number of streets it needs to dig up. As Alphabet's Executive Chairman Eric Schmidt said at its annual shareholders meeting, "these point-to-point solutions are cheaper than digging up your garden."

The question is, will Fiber be able to overcome the massive budget and expenditures of AT&T and the deployment of both its and Verizon's 5G networks? Fiber could eventually compete, and it certainly has the capability to undercut both on pricing considering its sister company, but Alphabet wants to show that its moonshots can eventually become profitable businesses, so being able to make money after investing billions would be nice, too.

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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 and C shares) and 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.