Google Fiber and Network Effects
Google surprised the world (once again) when it announced in 2010 that it planned to provide its own internet service that would be 1000 times faster than the basic broadband connections being offered by major ISP’s like AT&T and Comcast. Called Google Fiber, the service was supposed to provide a gigabit internet connection to home users; a speed normally reserved to businesses and universities. There was an application process for municipalities to apply to be the first city the fiber would be deployed in as an initial test. Over 1100 communities applied for this opportunity, delaying the announcement of the final selection, but in 2011 Google announced that Kansas City, Kansas would be the first community to receive the service. The first home gigabit connections in Kansas City have been installed and used just this month.
The technology behind Google Fiber is impressive, and leads many to wonder: how/why can Google afford to give people internet that is 1000 times faster for a similar cost to what they were paying for before? Later in this post, I will discuss some of the motivations Google might have to provide this service and how their pricing scheme for it shows it is entering a market with strong network effects.
A little more history, Google has been buying up so called ‘dark fiber’ since as early as 2005. Dark fiber is fiber optic cabling that has been installed but is not actively being used (no data is being transferred over it, so it is ‘dark’). During the Dot-com and Telecom booms of the late 1990’s, many telecommunications companies built out extensive networks of fiber, expecting the market to keep growing at an exponential rate. With the burst of the dot-com bubble and new technology that increased the amount of bandwidth that could be transferred on a single wire, the market for fiber collapsed (along with some large companies like Global Crossing and Worldcom declaring bankruptcy). Much of it lay dormant for years before Google started buying it in large quantities. Until Google Fiber was announced in 2010, the public was unaware of what they planned to do with massive amounts of high speed infrastructure (with a company like Google, there were a lot of possibilities and speculations).
Some people question if Google plans to make Google Fiber a loss leader until it can gain a greater market share. Many question that Google plans to offer gigabit internet for only $70 a month. Even more surprising, is that they plan to offer a basic internet service that is as fast as current broadband internet offerings form other providers for free. There is still a $300 installation fee, but they say those speeds are guaranteed for at least 7 years!
This announcement has led many to question if Google Fiber is profitable, which the company claims it is. The low cost of entry, and especially the entry level basically free service, strongly implies that they have a strong desire to take a significant portion of the market, and are willing to lose money in the beginning to do so. I believe they are doing this, and there are multiple reasons I will discuss.
One main reason is that the super-fast internet experience is even better when other people in your social network it have it as well. Two Google Fiber users can video chat in high definition and share files extremely fast. An internet connection is also only as fast as the slowest side: many websites today don’t serve content at speeds that Google Fiber users can now handle. Google wants to get a large enough market of people using the fiber service so that web application and content providers will want to cater to people on gigabit connections. This will make the service even more valuable to the people using it.
The other reason is the huge infrastructure cost of being an internet service provider. It is an industry that historically has very few new players. Google could only attempt to take on this market because it had an enormous amount of capital to invest to make it possible. They were able to buy up much of the dark fiber in the country years before they announced the service. Now that they are starting to offer it, they need a large amount of people to use their infrastructure for it to ever be profitable. A gradual growth that would come with pricing it at a level that was profitable in 2012 would probably prevent them from having as large of a market share half a decade from now.
There is also a locality to the infrastructure costs. Google actually split Kansas City into a group of what they called ‘Fiberhoods:’ neighborhoods in the city with Google Fiber. They are rolling the service out to a few square miles at a time. This also helped spur community involvement and excitement in the service, as Google had people pre-register for the service and prioritized which Fiberhoods they lit up first based on how many households signed up for the service in that area. Bringing a fiber connection to a few homes is costly; they want to have many houses share the same cabling so that the installation is more cost effective.
There are probably more motivations, however. One has to ask, why would Google want to get into the internet business in the first place? There is an opportunity to profit off the monthly fees alone, but I think that the main motivation for Google is to have the Fiber service as part of the larger picture of their company. They want to provide a great web experience to their users and increase the amount that their users use Google products so that they can show them more ads and have a larger/better profile of each Google user so that they can tailor ads to them specifically. If Google provided internet, they know where every packet of every customer was heading. Though traditional ISP’s probably ignore most of this information, I highly doubt Google would. Having access to their users as the source of all their internet connectivity is something that would allow them to both have a more complete picture of a person’s internet habits, as well as a better ability to tie an internet identity to a person (especially over long periods of time).
Though the last paragraph exposed the possibility of ulterior motives, Google Fiber is overall still a great thing. It is providing an amazing service to the people who are lucky enough to have access to it. In addition, it is putting a lot of pressure on traditional internet service providers to increase the speed and decrease the cost of their internet services. This is very valuable to all internet users as internet connection speeds have hardly increased in the last decade, even as the technology to provide fast internet has made great progress. Google Fiber, if successful, will likely improve the speeds of most internet users a few years down the road. I just want to know: when can I sign up!
References:
http://gizmodo.com/5929554/how-google-plans-to-turn-a-profit-on-kick-ass-gigabit-fibermaybe
http://gigaom.com/2010/02/11/google-fiber-network-cost/
http://bits.blogs.nytimes.com/2012/07/26/google-unveils-superfast-internet-in-kansas-city-mo/
http://en.wikipedia.org/wiki/Google_Fiber
http://fiber.google.com/about/
http://business.time.com/2012/09/14/with-google-fiber-search-giant-issues-public-challenge-get-up-to-speed/
http://en.wikipedia.org/wiki/Dark_fibre
http://firstmonday.org/htbin/cgiwrap/bin/ojs/index.php/fm/article/viewArticle/3142/2603#p3