Google may choose to expand its service, but there’s little incentive for established players to come up to speed.
Call it the miracle on Francis Street. Last year Ryan and Jenny Carpenter got a deal seemingly too good to be true in their Kansas City, Missouri, neighborhood: an installer from Google Fiber wired their bungalow to give them at least 50 times their previous Internet access speed and a substantially better TV service, all for only $125 a month, tax included—just a few dollars more than they’d been paying Time Warner Cable.
Ryan Carpenter still speaks in amazed tones of the December night when he simultaneously streamed four high-definition TV shows (two Christmas specials, an episode of The Office, and a Kansas University basketball game), recording three of them on the included two-terabyte DVR. That’s two more shows than he could previously watch at once, with plenty of capacity to spare. “It just blows my mind—we can be running video via Wi-Fi on two smartphones and on two laptops, and also be watching and recording TV shows all at the same time,” he says. “It’s a vastly superior service.” And that’s even without touching high-bandwidth Web apps that work seamlessly at superfast speeds, such as 3-D maps of cities that have imperceptible load times.
The question of how Google offered this value is a mystery to the couple—and to much of the rest of the nation. It’s not that the technology involved is groundbreaking; the fiber and connections are off-the-shelf technology. Yet Google’s supercharged service is priced at just $70 per month, or $120 with bundled television, plus tax (see “Google’s Internet Service Might Actually Bring the U.S. up to Speed”). For the TV service, Google struck content deals, including for some sports channels—though HBO is not yet part of the mix. And all of this comes with a Nexus 7 tablet remote and two terabytes of DVR storage plus another terabyte of cloud storage. And a Google spokeswoman says the company “expects to operate profitably” and that Google Fiber is neither a loss leader nor a PR stunt.
If that’s true, then why isn’t it being made available everywhere? The answer is that there are no compelling business incentives for the established players, says Blair Levin, a former U.S. Federal Communications Commission chief of staff, who helped write the National Broadband Plan and is now executive director of Gig.U, a consortium of universities trying to deploy very fast networks in local neighborhoods.
In parts of the country, slower-speed copper, fast-download cable, and a few fiber networks are already built out. The cable distribution giants like Time Warner Cable and Comcast are already making a 97 percent margin on their “almost comically profitable” Internet services, according to Craig Moffet, an analyst at the Wall Street firm Bernstein Research. As Levin points out, “If you are making that kind of margin, it’s hard to improve it.” And most Americans have no choice but to deal with their local cable company.
While Verizon operates the fiber network serving the largest number of home subscribers in the nation, the company is backing off from installing additional U.S. fiber connectivity. The company’s fiber service, called FiOS, offers basic service starting at 15 megabits per second (which can be upgraded in some areas to as much as 300 megabits per second). As of last year, FiOS had about 5 million subscribers (most of whom also take the optional bundled television service)—or roughly one-third of the possible market where the company has strung fiber. But CFO Fran Shammo said in a conference call last fall that there are no plans to expand FiOS beyond those areas. “At this point we have to capitalize on what we have invested,” he said. The basic goal is to sign up more people in the existing service areas, which adds the most revenue without increasing capital costs.
The story is similar with other carriers: Comcast’s Xfinity Platinum offers 300 megabit-per-second download cable service in some locations (for about $300 a month), and Time Warner Cable is installing some fiber in New York City office buildings, but the companies are focused on capitalizing on existing cable infrastructure, not emulating Google Fiber by building out fiber connections to homes and businesses. In Kansas City, Time Warner Cable in late January (likely in response to Google Fiber’s presence) boosted speeds and lowered prices, offering download speeds of 100 megabits per second for $75 a month. For $199 users can get cable bundled with TV and phone service, with two DVRs.
In the United States, areas taking the one-gigabit plunge have benefited from some special circumstances. In Kansas City, Google has a good reason to experiment: its long-term corporate fortunes are closely tied to heavy Web usage. At the end of the day, more Web traffic—and more eyeballs on that traffic—means more ad revenue for Google.
All the same, Google is likely making a profit on fiber subscription sales alone, says Susan Crawford, a telecom policy expert who is a professor at the Benjamin N. Cardozo School of Law in New York and former special assistant for science, technology, and innovation policy in the Obama administration. “They are making money on sign-ups, and not counting on indirect effects,” she says.
Google wouldn’t grant an interview about Google Fiber—or even give the number of installations (though neighborhood sizes suggest it can’t be more than a few thousand). But during an earnings call earlier this month, Google CFO Patrick Pichette said the company plans to finish building out the whole city, on both the Kansas and Missouri sides of the state line, and added that the effort “is not a hobby: we really think that we should be making good business with this opportunity, and we are going to continue to look at the possibility of expanding.”
Other special circumstances favoring one-gigabit construction can be found around universities, which themselves have skin in the fast-Internet-access game. Universities supporting the Gig.U initiative want to make sure they stay attractive to students and researchers who might want to access data and computing resources, and competitive with other institutions around the world that have such speeds. Their efforts include a deal with a private company, Gigabit Squared, to deliver one-gigabit service in Seattle and Chicago in collaboration with local governments and universities. A similar effort is taking shape among several universities and communities in North Carolina.
A final kind of special case is cities that are taking matters into their own hands. One example is Chattanooga, Tennessee. There, the local power utility in 2010 managed to score $111 million in federal stimulus money to speed up the build-out of a one-gigabit network for a smart electric grid (see “City with Superfast Internet Invites Innovators to Play”). It is now offering one-gigabit Internet access, albeit for about $300 a month, depending what TV service you get with it.
But overall, the United States languishes in the middle of the pack of the world’s developed nations in Internet access speeds, with average download speeds of just 11.6 megabits per second. In many Asian and European countries, customers can commonly get affordable service providing hundreds of megabits or more.
So what would it take to get Google Fiber–like service everywhere else in the United States? Not everyone has the ambition and the deep pockets to wage long-term, labor-intensive, block-by-block warfare with existing, well-heeled telecom companies. “Other startups trying to disrupt the Comcasts, Verizons, and Time Warners of the world will need similar access to capital” as can be found in Google’s deep pockets, Crawford says.
Crawford says broader access to low-interest financing would help, as would federal legislation to supersede state laws that make it hard for local governments to build networks. For example, in 2011, after the city of Wilson, North Carolina, built its own fast network—competing with existing carriers—the North Carolina legislature, amid industry lobbying, passed a law that made it harder for local governments to build networks and prevented Wilson from expanding its network beyond a county line, she said.
But even if costs and legal barriers are lowered, fiber economics won’t work for private companies everywhere—not even for Google. After all, as Levin points out, 80 percent of the cost of running fiber is in the labor, not the fiber and equipment, and not all houses are as closely spaced as the tidy bungalows on Francis Street, where the Carpenters live. “There are a lot of cities where the math wouldn’t work—areas not densely built enough or where construction costs are too high. In California, the environmental permitting provisions make it cost-prohibitive,” Levin added.
The FCC says it wants to help. Last month, at a U.S. Conference of Mayors meeting, FCC Chairman Julius Genachowski called for broadband providers and state and city officials to build out at least one “gigabit community” in all 50 states by 2015. And the FCC plans to hold workshops in which broadband providers and state and municipal leaders can find and remove barriers, lower costs, and boost incentives for getting it done. Requests to the FCC for interviews went unanswered last week.
At any such meetings, it’s likely that Google’s strategy and example will be a central topic. To help keep labor costs as low as possible, Google secured guarantees from the Kansas City government that it would get rapid responses on mundane but important matters like city inspections, access to rights-of-way, and even free rein to run fiber in sewers. Kansas City says it will provide the same breaks to other companies willing to provide similar service. Google also adopted a novel preregistration scheme, which had it start stringing fiber in a given neighborhood only after a certain percentage of residents—5 to 25 percent—committed to the service.
It’s a good start, but the United States has a long road ahead to achieve widespread one-gigabit service. Not every town has a university. Not every mayor can get his or her hands on low-interest financing. The FCC’s efforts may fall short, and it’s possible that Congress and the FCC won’t make it easier for upstarts to compete with major carriers.
That might well leave Google or other aggressive companies to do the job. Crawford and Levin say they expect Google to expand to other cities. If that happens, then Google, with its long-term sights on Web advertising dollars, might wind up giving an entirely new meaning to the term “sponsored link.”