Bull Vs. Bear - Google Will Be The Next Big Internet Provider

By Will Ashworth | November 29, 2012 AAA

Question: Is Google the next big Internet provider?

Bull's Response
It used to be that Google (Nasdaq:GOOG) was a search engine. Now, of course, it's so much more. Whether it be through acquisition or organic growth, the fact remains that Google's got its hands in many pots. These days, Google is in Kansas City testing Fiber, an Internet connection Google says is 100 times faster than broadband. Google, like Apple (Nasdaq:AAPL), wants to control the android-user experience through vertical integration. Well, will it work? The $46 billion in cash Google currently has says yes, yes it will.

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Why Fiber Is Special
Google's ISP killer went live November 26 and the response has been overwhelming. Mike Demarais, a Kansas City-based Internet startup entrepreneur tested Fiber with both an ethernet connection and through Wi-Fi. According to Demarais, the former consistently delivered 600 to 700 megabits per second (Mbps) and the latter went as high as 200 Mbps. Both are speeds I will likely never see in my household despite the fact I pay $70 a month for my Internet and $75 per month for my TV. With Google Fiber I can pay $120 for both services saving myself $300 a year while getting a much faster, superior service. Time Warner Cable (NYSE:TWC), the biggest broadband provider in the Kansas City area has to be worried about the latest development.

Analysts Rich Greenfield and Walter Piecyk of BTIG Research actually went out to Kansas City to give Fiber a spin. Their report, which you can access by registering at BTIG's website, gives you a pretty good idea about the pros and cons of Google's offering. Highlights include Internet service that's 75 to 100 times faster than Time Warner's, subscribers receive a Nexus 7 tablet to use as the remote control, three different formats to pick your TV programs, two terabytes of DVR storage, a terabyte of cloud storage and most importantly, no data caps on the Internet connection. On that issue alone I'd be eager to sign up. Although it doesn't offer a business plan at the moment, it does indicate in the frequently asked questions section that a small business offering will be available shortly; that's good news for small businesses in the Kansas City area.

Why Is Google Entering the Fray
Everything Google offers is designed to improve the way we connect with information. Can you say the same about Verizon (NYSE:VZ) and AT&T (NYSE:T)? I don't think so. Having said this, please don't think for a minute that I'm naive about the reason why Google does this. It's not about some sense of community spirit but rather just another way to add to the many ways Google makes money, and from a desire to sell as much advertising as is humanly possible. The way you do that is by getting people online more frequently and then keeping them online for longer periods of time. This combination fuels increased advertising. In the case of Fiber, Google's decided to put in place the customer service and technology infrastructure necessary to take on the cable companies and all other Internet service providers in the Kansas City area. Whether it can afford to roll out the service beyond this test location is a discussion for another day. I hope they do because the establishment isn't doing enough to justify what they're charging for cable and Internet access.

Missing from many of the media articles covering Google Fiber is the fact it is offering "free Internet" service for at least seven years. You pay $300 for the setup and then receive up to 5Mbps of download speed and 1Mbps of upload speed with no data caps - all for free. For anyone who uses their computer a lot, it probably doesn't seem like much, but according to the Federal Communications Commission there are 100 million Americans with access to broadband who currently don't subscribe. That's an awful lot of eyeballs worth going after. The beauty of Google's offer is that once a non-broadband user signs up for the free service, they'll eventually want to move up to a higher price plan. Ultimately, though, Google simply wants to generate more ad revenue. Time Warner, Verizon, AT&T and all the other ISPs it's competing against don't have the same option. They'll have to cut their prices in order to compete; with nothing to fall back on the cable companies and telecommunications risk losing an entire swath of customers.

The Bottom Line
The bear argument against Google becoming the next big Internet provider rests solely on the time and cost involved in rolling a network clear across the United States. It's possible that by the time Google has finished the job something else will have come along to replace fiber optic cable. That's a risk I believe Google is willing to take. Unlike the big telecommunications and cable companies that only want to sell you pre-packaged content; Google is generally agnostic when it comes to your viewing choices, interested only in providing advertisers with an ever increasing number of eyeballs.

Google Fiber will bring those eyeballs and then some.

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

Don't forget to read the Bear side of this debate and weigh in with your opinion below.

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