Google looks for leverage with fiber for communities experiment

Google’s experimental fiber-to-the-home announcement to initially serve between 50,000 to 500,000 homes has generated lots of headlines. Google plans to serve these homes with a 1 Gb/s network. This announcement coupled with the National Broadband Plan’s proposal of 100 Mb/s broadband to 100 million homes by 2020 has once again highlighted the importance of broadband availability and quality in the U.S. Is Google now aiming to be an open-access network service provider? The answer is no.

A high-bandwidth network is essential for Google’s future survival and success against Apple and Microsoft. More than 95% of Google’s revenues come from search. For the ninth straight month in February 2010, Bing increased its share of the U.S. search market. While Bing’s gains have not come at the expense of Google, Google’s market share of search has started to plateau. In the next four to five years, the search market will likely end up being a duopoly between Google and Microsoft, which would hurt Google both financially and also in terms of its market leverage. Currently Microsoft has complete dominance in other markets like OS and Office, and it also has a diversified product portfolio — all of which generate a significant amount of revenues. Likely, Microsoft will try to commoditize search in order to erode Google’s main source of value.

To ensure its future success, Google also needs to diversify its portfolio of revenue streams. The company has begun by developing highly versatile proprietary technologies for YouTube. It is also developing proprietary infrastructure and technologies to deliver a thin-client, browser-based consumer cloud computing service, which, if successful, could hurt Microsoft’s core OS and Office business. The uniqueness of these technologies is akin to Google’s proprietary search algorithm. However, these technologies are significantly under-monetized. Currently YouTube generates less than 3% of Google’s revenues, even though online consumers spend a disproportionately large amount of their time on it. Google needs a robust platform that can enable it to deliver a seamless experience for its search, YouTube and cloud computing services across three main platforms: PC, mobile phone and TV. To deliver these services to the home on PC and TV, Google needs a high-bandwidth, low-latency and guaranteed quality of service (QOS) broadband network.

If the broadband network is so important, why will Google not become a network service provider? The main reason is business economics. Telcos and cable companies together have invested more than $140 billion in deploying broadband network to the homes. While telcos are deploying FTTx networks, cable companies are deploying the DOCSIS 3.0 service. By 2012, more than 40% of U.S. homes will likely be served by two broadband networks with capability to deliver at least 25 Mb/s. Except for Verizon’s FiOS network, telcos and cable companies do not currently have an ultra-high-bandwidth, low-latency, guaranteed QOS network that will deliver services Google wants to deliver from the cloud. Telcos and cable companies have been loath to further invest billions of dollars to upgrade their networks because the revenues from voice, broadband and video from households have not yet proven to support two high-bandwidth networks to the home. The impending deployment of multiple 4G wireless networks will worsen this situation. Further, Google’s planned FTTH will cost more than $1500 per home. The physical task of network deployment would be painstakingly slow, often involving right-of-way negotiation with utilities/municipalities and a significant amount of construction activity. To ultimately cover even 80% of the households in U.S., Google would have to spend more than $130 billion. Under these circumstances, the economics of deploying a third network is highly tenuous, even after including Google’s revenue from search and cloud computing.

That leaves us with one likely explanation and outcome for Google’s announcement. It seems that Google is trying to develop leverage as it deals with the network operators so critical to its future success. It will gain that leverage by developing some proprietary technologies and unique revenue models in its experimentation with the 500,000 homes. Google will then use its leverage to establish strong win-win business relationships with some network operators. This outcome would ensure sound economics for all involved parties while providing U.S. households access to next-generation-network-based services.