Google Gagging on the Fiber Diet

There may be some projects that not even Google can afford – rewiring America might top that list.

The Wall Street Journal is reporting that six years into its gambit to become a provider of high speed Internet service, Google’s parent Alphabet may be rethinking the overall business plan for its Google Fiber unit. In lieu of digging a trench up to every house in America the new plan is moving towards a hybrid fiber-wireless architecture. Those of us who have been involved in digging holes to lay fiber know how quickly the bill for that can escalate, particularly if you start hitting water and electric lines.

According to its web site, Google Fiber is currently available in Atlanta, Austin, Charlotte, Kansas City (KS and MO), Nashville and Provo, UT; there are also 17 additional cities on the “planned” list. The Journal is reporting Google has suspended deployments in two of those planned cities, San Jose and Portland.

Google fiber offers 100 Mbps Internet service for $50/month and 1 Gbps service for $70 – voice service, which they call Fiber Phone, is an additional $10 per month. Adding cable TV on top of the 1 Gbps Internet boosts the monthly charge to $130.

It’s hard to tell how badly Google is doing in the fiber business, as its results are rolled up in the “Other Bets” unit (now that’s an optimistic title). That entire unit, which also includes the Nest home automation business, posted a loss of $859 million for the latest quarter on sales of $185 million. Of course, you can probably find that much in loose change in the couches at any Google office.

Analysts are estimating it costs Google $500 to connect each home to the service, and if you count in what they will have to pay for the content, they will be looking at a payback measured in years. The investment seems to be predicated on the assumption Google will be able to wring a lot of those lucrative paid clicks out of the new subscribers. Faced with the prospect of a very slow slog forward, Google seems to warming to the idea of incorporating wireless technology in their local distribution.

In June of this year, Google acquired Webpass, a company that sells a wireless Internet offering in five cities and is connected to 820 buildings. Each building is equipped with a rooftop antenna and service distribution within the building is done via switched Ethernet. In Webpass’ plan the in-building cabling is the responsibility of the building owner, and the company estimates a cost of $350 to $500 per unit. At the high-end, that’s on par with analysts’ estimates for what it takes to drop fiber into a single-family home. Webpass issues one bill to the building management, so the deal appears to be an “all-or-nothing” proposition.

To address the single-family home problem, Google appears to be looking at a hybrid fiber-wireless architecture. To that end, the company petitioned the FCC to test a new wireless technology that operates in the 3.4 GHz to 3.8 GHz band in up to 24 cities. Clearly, taking fiber out of the last mile is going to result in an offering that is far cheaper to deploy. The plan is somewhat reminiscent of the WiMax gambit about a decade ago where carriers looked at the possibility of using fixed wireless as an option to deliver high speed Internet. However, where a WiMax base station would serve an area roughly the size of a cellular base station, Google seems to be looking at neighborhood scale distribution hubs.

However, the plan to deliver high-speed Internet seems to be drawing Google inexorably into a full triple-play offering, which would entail mastering two additional businesses, residential telephony and pay TV – the latter would present a far greater challenge. The cable TV operators demonstrated that they could expand fairly painlessly into the telephone business. To offer pay TV service Google would need to master the process of negotiating with content providers. Google’s Premium Package in Kansas City lists for $40 per month and includes most of your standard cable fare and you can add Showtime, Starz or Cinemax for $10 per month or HBO for $20 per month.

Verizon and AT&T have already found how difficult it is to break into the cable game, and AT&T decided to buy a subscriber base. After years of trying Verizon’s FiOS and AT&T’s U-Verse each had about 5 million subscribers compared with 22 million for Comcast and 11 million for Time Warner. Satellite is clearly the easier path and DirectTV and DISH networks had 20 million and 14 million, respectively. With AT&T’s $48.5 million acquisition of DirectTV in July, the combination of those subscribers with its U-Verse customers made AT&T the largest pay TV provider in the US. By acquiring an existing operator, AT&T also acquired that all-important expertise in dealing with content providers.

There is still a question as to whether Google is serious about getting into the carrier space given the steepness of the learning curve. Building an Internet backbone is one thing, but when you get into the local distribution business and have to extend that to millions of home, the degree of difficulty goes up by orders of magnitude. Ever since the launch of Google Fiber, some have voiced the opinion that Google is really just trying to prod the established carriers into investing more heavily into their networks.

Google will face tough competition from the existing cable companies for a number of reasons: 1) they have the expertise in dealing with content providers, 2) their networks are built, 3) with their hybrid fiber-coax (HFC) networks they have a 1 GHz pipe running into people’s homes, and 4) with the new DOCSIS 3.1 cable modem standard from CableLabs they will be able to deliver 10 Gbps download and 2 Gbps upload speeds through a combination of more bandwidth efficient OFDM modulation and channels wider than the traditional 6 MHz (8 MHz in Europe) TV channels. The major challenge will be the amplified portions of the coax plant that restricts the upstream band to the 5 MHz to 42 MHz region (i.e. 37 MHz of upstream bandwidth).

It is encouraging that Google (along with Facebook) is investing in new network technologies. Of course when you look at their amazingly lucrative advertising and pay-per-click services, those network investments add up to little more than chump change.

In the end, developing search algorithms and selling ads is about as far from the grunty business of delivering retail communications services as you can get. Further, Google’s penchant for sending customers to web pages to diagnose and fix their own problems will not satisfy most customers. Verizon has been running a new FiOS ad during the Olympics with tennis great John McEnroe touting their mobile app that allows their technicians to see the same thing the customer is seeing. Sure, it’s a technology-based solution, but there is a live human being on the other end of the line.

It’s great that Google wants to shake up the broadband industry, but their plan seems heavy on gee-whiz and light on real commitment.