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July 27, 2012

Can Google Reshape the Fiber Business Case?



By Gary Kim
Contributing Editor



Ignore for the moment the issue of Google (News - Alert) acting as a direct competitor to cable operators and telcos in Kansas City, Kan. and Kansas City, Mp.

Look only at whether Google can significantly lower the cost of fixed network fiber to home deployments. Of all the questions posed by the Google Fiber initiative, this might be the most-important question Google could answer.

The issue is that Google claims it aims to make a profit selling 1-Gbps broadband connections at $70 a month.

“There’s no sense selling a product at a loss,” says Google CFO Patrick Pichette. “But it’s not only about profits, it’s about changing the access costs,” Pichette also has said.

Assuming you believe that Google is serious about "making money" selling symmetrical 1-Gbps connections at $70 a month, and video service starting at $50 a month, the issue is what Google can do that cable operators or telcos have not been able to do to get capital investment and construction and other costs down to a point where retail prices at such levels still turn a profit.

Assume for the moment that Google is not “hiding costs” by the way it is allocating indirect costs related to the project.

As a rough comparison, Verizon (News - Alert) has been spending about $1,000 per home to deploy its FiOS network. Assume the most-recent costs have dropped to about $750 per passing. Google might arguably have to get those costs even lower, to have a shot at making an actual profit from its fiber network, in part because it will operate with less volume, and will have to amortize a certain amount of effort it has expended to create the customer premises equipment it will use. 

Some would argue that Verizon has been spending as much as $500, in addition to core network costs, to provide service to an actual end user location. That would include the drop and network interface unit installation, plus labor, plus the in-home terminal gear. 

Even if Google subcontracts all such labor to firms highly skilled at doing so, how much savings can Google actually find?

Google has been quoting $300 connection fees, so assume that is the drop installation part of the equation. But that fee seems also to include three new consumer terminals, for a consumer buying TV service as well as the 1-Gbps broadband access. 

Assume that Google can hit the $500 per home core network cost and the the $300 drop and terminal cost. Then the issue becomes customer take rate.

Assume Google Fiber signs up one customer out of every three homes passes, a reasonable expectation for a telco attacking a cable competitor. At $500 per passing in network costs, and 33 percent take rates, with $300 in customer activation costs, Google would invest $800 for the customer, and have spent another $1,000 to pass the two homes that are not customers.

That is a total investment of $1,800 for the three homes, giving Google Fiber a per-customer capital investment of that amount. That does not seem to be too dissimilar to what Verizon often sees. 

The business case gets better with adoption higher than 33 percent, worse with any penetration levels below that figure.

What percentage of homes passed will Google actually sign up? Assume a 15 percent initial take rate. That implies network investment of about $5,000 for every 10 homes, and an additional investment of $450 for the 1.5 customers out of every 10 homes passed. 

That adds up to $5,450 investment to serve 1.5 homes, for a per-customer investment of $3,633. That is exclusive of marketing, other operating costs or overhead. 

It is hard to see how Google Fiber could make money at such levels, just from a capital investment perspective. 

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Edited by Allison Boccamazzo
 
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