A recent Forbes column pointed out that Google's (Nasdaq: GOOG) FTTP build in Kansas City was ambitious, expensive, and potentially a money-loser for the Internet search giant. The author felt that there were plenty of existing ways to boost broadband speeds in the area at a fraction of the cost of building out fiber.
"(C)onsumers can get similar network speeds through DSL and WiFi--with a much lower investment," Peter Cohan wrote, citing John Cioffi, CEO of ASSIA, who explained that up to 1 Gbps could be made available by exploiting "all the DSLs and associated overlapping WiFi's on different WiFi channels."
While getting all your neighbors to open up their WiFi connections and link them together would be kind of awesome, DSL isn't the answer to the broadband speed question. Fiber is.
It's true that existing copper and coax networks have seen technological advances that allow them to provide competitive Internet speeds at competitive subscription rates. Likewise, wireless broadband shows promise as a means of bringing faster Internet speeds to rural areas that due to geography and profitability won't see anything close to the 3 Mbps minimum speed the federal government wants to achieve nationwide.
In the business sevices market, traditional DSL is morphing into Ethernet over Copper (EoC), a technological leap that has breathed new life into legacy copper networks. But EoC is only extending the inevitable long enough for carriers to fund better network builds.
And cable operators have long given wireline providers a run for their money by offering Internet services over their established coaxial cable networks. The advent of DOCSIS 3 has meant a subscriber-boosting jump in available broadband speeds: customers in most cable operators' footprints can get up to 54 Mbps, and Comcast (Nasdaq: CMCSA) is promising to debut a 300 Mbps package to compete head-to-head with Verizon's (NYSE: VZ) FiOS offering in certain areas.
However, fiber offers two much more important facets to the high-speed game: a true, high-speed backbone for all these other types of networks, be they coax, broadband wireless, or DSL; and essential future-proofing for high-speed transport. If you want fast and reliable data transport, the speed of light is the way to go.
Let's look at wireless broadband. This technology takes the web up into the towers and delivers Mbps speeds to subscribers. In rural areas like Vermont--with what the industry calls "diverse geography" (and anyone who's accidentally gone four-wheeling during mud season in that lovely state after their GPS led them astray can attest to its diversity)--wireless broadband is taking hold. Right now, VTel, an operator based in Springfield, is building towers in the southern part of the state to deliver wireless broadband to subscribers in that area. Raising a tower in that mountainous area is much more cost effective than laying fiber plant.
But ultimately, to get the best out of those towers, wireline has to come into the game, providing backhaul service to transport signals to and from those towers. The better the backhaul, the better the wireless component will be. EoC does a great job in the interim, but backhaul is where fiber really shines, and it's what carriers and service providers eventually will use exclusively. The timeline of when legacy networks will be completely replaced by fiber as the backbone of IP service is certainly not clear, but it's going to happen.
Let's get back to the profitability issue, which was the original columnist's worry. Will Google see a profit from its $28 million investment in Kansas City? In my opinion, yes – maybe not at the hockey-stick graph level an investor wants to see, but longer term, yes.
There are two examples of why Google will succeed: first, Verizon's failure to make FiOS profitable, and second, the city of Chattanooga's very profitable 1 Gbps fiber build,
In February, Chattanooga's EPB Fiber reported it had brought in $57.3 million, well ahead of its third-year revenue projections, and boasted 35,000 customers, 9,000 more than its third-year goal.
Meantime, Verizon announced that it would stop building out its FiOS network.
Why would the inability of Verizon to profit from fiber be a boost for Google? Simple: lessons learned. Cheri Beranek, CEO of Clearfield, pointed out in a recent interview that Verizon was a pioneer in fiber buildout, and Google has been paying attention.
"FiOS is extremely capital intensive. Half the cost is building it; half is actually connecting it to the home," Beranek told FierceTelecom. "What we've seen, and that Verizon did unfortunately, is they put in all the fiber to pass those homes and all the fiber to connect those homes before they ever (needed) to scale that environment. They were pioneers in that area. But if they had it to do over today, 10 years later, they would build out those networks differently. And wouldn't invest so much cash up front."
She sees other big infrastructure builds in the future happening, "but they'll do it in a different way." For builds like Google Fiber, "I don't think it will be like Verizon, it will be much more incremental. As will future FTTH networks."
Google's first incremental move was to install fiber in just one location, Kansas City. (And that happened only after a 1 Gbps test in a Stanford University neighborhood.) It's now progressing with a model that gauges customer interest in its product, requesting "pre-registrations" from residents of targeted neighborhoods (or "fiberhoods") through Sept. 9. As of Aug. 20, FierceCable reported, pre-registrations topped 30 percent in those fiberhoods. Areas with the highest interest will get 1 Gbps first.
Is that a model for financial success? There are no guarantees. It's not necessarily a model for instant financial success, to be sure. It's already well established that fiber has a very high up-front cost, one that few, if any, Tier 1 providers have been able to recoup completely. (In fact there's are some pretty good-sized fiber graveyards across the United States that tell a silent story of what happened to the first wave of fiber investors.)
Again, Google can and probably has learned from past mistakes. I don't believe they're taking a foolish step here—whether Google Fiber sees a profit or not, its potential in the long term, not just in profit but in meeting future technological needs, is almost limitless.--Sam