Question: Is Google the next big Internet provider?

Bear's Response
Sometimes big companies can get ahead of themselves. Internet firm Google (Nasdaq:GOOG) is one prime example. What started out as a simple search and advertising firm ballooned into an interesting mix of businesses. That core search business is still there and it still keeps the lights on, but the Mountain View, California firm now has its hands in everything from mobile device hardware to original web content. Some analysts seriously wonder what Google is thinking when it comes to new projects - for example, the company is plowing more than $1 billion into wind farms and green power installations.

Its latest endeavor could also be considered a head scratcher. Google hopes to become the latest Internet service provider (ISP).

While initial tests for its "Fiber" service have been good, by going up against some of the largest telecommunications firms in the nation, Google may have bitten off more than it can chew.

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The Tech Capital of the World - Kansas City?
This past week, Google finally unveiled its new Fiber ISP service for residents in Kansas City, Missouri. So far, the service is allegedly 100 times faster than the average Internet connection, which is currently available through a fiber optic cable network that has been set up like telephone lines, and would make Kansas City one of the cities with the fastest Internet. The service for residents costs $70 a month with television service costing an additional $50 more per month. That's after an initial construction/set up fee of $300.

Preliminary reviews for the service have been positive and some analysts have called the speeds of the service - along with the digital integration - a game changer for the industry. So should big time Internet operators like AT&T (NYSE:T) or Time Warner Cable (NYSE:TWC) be worried? Not exactly.

Some Big Issues
First, Google is moving into unchartered territory against operators like Verizon (NYSE:VZ). It was only this past February that the firm even petitioned the FCC to even begin selling paid TV service. That gives its competitors a huge leg up as the Dish's (Nasdaq:DISH) of the world have a long history of dealing with FCC regulations and bureaucracy.

As for those channels, many favorites are missing despite having a large list to choose from. Tech news site reports that while users get Showtime and Encore, there's no Disney channel or HBO. Additionally, channels from rival service providers - like Time Warner or Comcast (Nasdaq:CMCSA) - are also absent. It'll be interesting to see if more media companies with ISP and cable service offerings do the same if Fiber really catches on.

Also absent from Google's new service is VoIP phone access, which consumers will still have to use a traditional telecommunication for - unless they use a cell phone. Although, a scorned AT&T and Verizon could suddenly stop offering Android-based phones, if Google is too successful at the ISP game.

Then there is the infrastructure to consider. Fiber isn't available to everyone and may not be. In order to justify the spending - which analysts estimate will cost $500 million for just Kansas City alone - Google is using a build-by-demand model. Essentially, neighborhoods will have to demonstrate that they're really interested in having the high-speed package. If there aren't enough subscribers in a "Fiberhood," then the entire community won't have access to the high-speed service. This model puts Google at an unfair advantage considering they will be using existing telecommunications infrastructure from traditional providers to facilitate their upgrading to higher speeds.

Even if consumers can and want to switch to Fiber, they still may have to wait as most ISP and cable contracts are now set up for multi-year periods. Breaking the contract can come with stiff penalties of upwards to $200 - which may make switching to Google's service not as cost effective for users.

Finally, Google may have to deal with innovation from the telecoms themselves. Sensing a threat, various industry leaders in the cable industry have banned together to create a think tank to share and create new technologies to take on the Google's and Netflix's (Nasdaq:NFLX) of the new Internet age. The group hopes to integrate more mobile solutions into the cable experience.

The Bottom Line
So, is Google Fiber a "game-changer" for the ISP and cable industry? The answer is it's too early to tell. While the speeds are impressive, the new service does face a series of setbacks before it can be called a success. For investors in the traditional telecom space, I wouldn't worry too much about the service just yet.

At the time of writing, Aaron Levitt did not own any shares in any company mentioned in this article.

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