In the wake of Google Access CEO Craig Barratt’s ‘Goodbye Access’ post on the Google Fiber blog, there are pundits left, right and centre predicting the end of Google Fiber. Barratt’s post tries to sound upbeat, but in essence he’s announcing that Google Fiber won’t be expanding further (pending a strategic re-evaluation), that people will be made redundant, and that he’s leaving. I don’t know Craig and can’t really comment on his tenure as Access CEO, but that doesn’t exactly sound like good news.
For analysts like me this is a complicated topic for a very simple reason: for anyone other than Google, an infrastructure venture on the scale of Google Fiber as currently announced would have had to disclose numbers by now. Wall Street would have asked for take rates and average revenues per user (ARPUs) and all kinds of other metrics to evaluate the validity of the investment. Before the Alphabet reorganisation however, this was just another Google project. Now that Access is its own company, we might have expected these numbers to come out. The problem is, Google isn’t talking.
So we’re left to speculate. I’ve been thinking about this not just for the last few weeks but for a couple of years at least, and now that Google Fiber seems to be at a turning point, I finally want to share these thoughts. So just to be clear: this is not me sharing information, this is me analysing and speculating on what little we know, and trying to think how what’s been achieved might be salvaged and expanded upon.
A schizophrenic project
Without going too far back, my impression has always been that Google Fiber was a schizophrenic project. At the very beginning, it felt like those Google decision-makers who were more interested in achieving important policy goals wanted Google Fiber to be a catalyst, something that would shift the market with a bang and then be a shared experience for others (public or private) to take over. The idea of a blueprint was floated in the early days.
But there were also those who seemed to think that Google Fiber could become a new business for the company, something not just aimed at shifting market perceptions and shaking the complacency of telco and cable incumbents, but a profitable business in its own right. That has always seemed to me to be an unlikely proposition. I am confronted on a daily basis with the paradox of short-term focused telecom operators considering long-term fibre investment efforts, but their short term is longer than Google’s core business short term by an order of magnitude. Unless there was a long game plan to view this as the ‘pension fund’ arm of Google’s finances, it didn’t really make sense to me.
To be honest, I didn’t much care about that second proposition anyway. The US market is already plagued by a lack of competition in fixed broadband. Replacing one closed monopoly with another (no matter how sexy) didn’t seem to me like a particularly desirable goal. So, while I fully wanted to believe in the potential for Google Fiber kicking the telecom anthill, I wasn’t convinced by the relevance and likelihood of this becoming a fibre business like every other.
Now it looks like there’s some serious soul searching around the second proposition, I think it’s time to consider whether the first has worked and how things could go from there.
Google’s mindset
My take is that there was one fundamental flaw going into this, one that’s probably still floating around: Google believed they could revolutionise the laying of fibre. They didn’t just think they could offer a kickass service, they thought they could deploy much cheaper and much faster than anybody else had ever done. That’s fully in line with the Google mindset, but unfortunately it ignores the fact that hundreds of companies have been deploying wireline access infrastructure for years by the time Google Fiber decided to give it a go.
I would suggest that we’re now seeing the fall-out from that misguided assumption: Google is finally admitting (in a roundabout way) that, despite all the clever people they have on hand, they haven’t revolutionised fibre deployment. It still takes time to do the planning properly, to work with local authorities effectively, to do the outside plant layout efficiently. Did Google manage to do things cheaper than others did? Probably, but not by a wide margin. As it decided to scale beyond Kansas City, Google realised that the efficiencies it found there didn’t translate easily to other locations because a lot of those things are down to local specifics and relationships.
So Google is deploying fibre in the access, they’re doing it well, but they’re not doing it so well that it’s hugely more profitable for them than it would be for anyone else. In other words, the cost side of the equation is roughly on a par with industry norms (again, my speculation).
On the revenue side, the two key metrics are take-up and ARPU. The first of these is much more important than the second. Google understood this and went with a, frankly, very cool product at an affordable price point. I’ve never been really convinced by the need to have a linear TV-play, but that’s beside the point: if they wanted the chance of a high take-up, they needed a low price point and a kickass product. That’s not always enough though: incumbents respond by lowering their prices locally, and migration is a painful process for customers. There are many reasons for inertia in customer acquisition, even with a good product, a fantastic brand and a collaborative local community.
My bet is that Google’s take-up is not that great in the markets they’ve started commercialising. It may be good by industry norms, but remember that Google expected to blow away industry norms from the get-go. If I had to guess a number, I’d say Google Fiber is in the 30–40 per cent take-up range in areas that have been open for service for three years. The industry average is about seven per cent per year, so that’s very good, but probably not enough by Google standards.
Keep in mind also, that the pre-sales in Kansas City were astounding. When that data was still publicly available, we scraped the website and analysed it. Some areas had more than 100 per cent pre-subscription rate and, as I recall, the average pre-subscription rate was already in that 30–40 per cent bracket even before Google had started deploying. The problem is that these people want to be connected now, and in fact it’s going to take months, if not years, to get to them. By the time Google actually gets there, they may have moved out, they may have finally had a good offer from their cable operator, or they may just be upset that it’s taking so long to serve them.
And that (in my opinion) is what’s happening at Google Access right now: costs are higher than planned (even though lower than industry norms would suggest) and take-up is lower than expected (even though higher than industry norms would suggest). Since Google isn’t really looking at this as an infrastructure player would, it’s time to reconsider.
Wireless substitution
In parallel to this, wireless is starting to look like a potential solution to some of the problems. Don’t believe the hype about residential fixed service being substituted by wireless access anytime soon, at least not in most urban geographies. There are promising technologies ahead, but they’re far from mature yet.
Google’s acquisition of Webpass is interesting, however. Few journalists took the time to try and understand what Webpass does, but it uses wireless solutions for urban aggregation, not access. In other words, it doesn’t connect homes wirelessly, it connects multi-tenant buildings wirelessly and uses existing in-building wiring to connect the homes to the rooftop antenna. It’s a clever approach that solves two fundamental deployment issues.
First, it eliminates the need to string fibre from street poles or bury ducts in the pavement to pull fibre along the streets, which are both costly and time consuming; and second, it eliminates the need to deploy fibre inside the homes, which is also expensive and time-consuming, by reusing the existing wiring.
However, this approach does not seem to me to be so universal as to be usable in any deployment scenario. There are a number of potential issues with it.
First, you need to target multi-tenant buildings to make the economics work. I suspect (again, not knowing the exact costs of their solution) that the equipment necessary to install this on single homes would make the price point too high. Furthermore, you need line of sight between rooftops, which is comparatively easy when people live in high downtown apartment blocks, but not so easy when they live in detached homes.
Second, you need to be able to reuse the existing cabling in the house. I haven’t had time to look into the regulatory aspects of this (and particularly to see if this varies from state to state or county to county in the US) but my bet is that you can’t always count on being able to reuse the cabling, especially if it’s been deployed by an incumbent or a cable operator. I may be wrong, and I will be doing my homework on this, but I’m flagging it as a risk.
This doesn’t mean that Webpass doesn’t open up opportunities. I don’t think the service would be as good and stable as you’d get with FTTH, but you might get a service that’s good enough for most customers’ needs. Would it be good enough to compete with AT&T’s broadband service based on fibre to the cabinet? Most likely. Would it be good enough to compete with cable’s DOCSIS 3.1 technology as it gets deployed? Less likely.
So, what should Google do about it? Here are several, non-mutually-exclusive, scenarios that I think would be beneficial to the US and to US customers as well as to Google. Keep in mind that I see a lot more value in the ‘catalyst for change’ goal outlined earlier than in the ‘Google as another broadband operator’ goal.
On the deployment side, the equation has changed from Google Fiber’s early days. Because Google made very targeted deployments and phased them over time, it’s now easy for AT&T and cable operators to respond in kind locally, with a combination of price lowering and infrastructure deployment (or at least announcements) in the markets that Google targets publicly. The only way around that would be for Google to announce and undertake deployment in, say, 30 markets at the same time. It’s now clear that they don’t have the stomach for that.
Assuming they still want to play the long game, Google could de-stabilise the incumbents by announcing a broad Webpass-type deployment scenario: target and quickly deploy in 30 markets, with a Webpass-like approach and the promise that if the demand is there, fibre may be installed down the line. This positions wireless broadband as a quick-to-market acquisition tool. It also forces AT&T to respond everywhere at the same time, something which (I suspect) they are incapable of and unwilling to do. This could be part of the catalyst, forcing AT&T and cable operators to really up their infrastructure game or (failing that) look at structural solutions to respond (assuming the Time Warner/AT&T merger goes forward, the scenario of AT&T spinning off telecom infrastructure altogether is not so unlikely anymore.)
Open up the experiment
Beyond that, I think the best bet to achieve the original goal – wanting to change the market by pushing existing players to deliver significantly better service – is to open up the Google Fiber experiment. Instead of keeping everything close to the vest, go public with it and tell everyone out there: ‘This is how we’ve done it, these are the challenges we have faced, this is how we’ve overcome them’. In other words, ‘here is the blueprint’. Google could even be the one to coordinate an open discussion about this, to organise and sponsor workshops to enable the sharing of experience for companies and municipalities looking to deploy decent infrastructure in many places in America. They could even build a consulting team to help these projects get in shape.
I think this would have two major impacts on the market. First, it would unleash private and municipal initiatives: many cities are on the fence about this, many private players are struggling with funding. They all want to do something about the state of broadband in their communities, but they’re afraid of doing it wrong, of biting off more than they can chew. Having a clear set of ‘instructions’, for lack of a better word, a clearer understanding of the ecosystem of deployment (Google could build and maintain a registry of subcontractors, for example), and a well-documented list of do’s and don’ts would be hugely beneficial.
Second, it would reassure potential investors, simply because of the association with the Google name. Remember that Google probably didn’t underperform by industry norms, just that it fell short of its own ambitions. As far as infrastructure investors go, I suspect Google’s performance would be seen as more than acceptable. Therefore, following the Google recipe would be a massive help for projects in attracting capital.
This may not be enough to generate the catalyst that Google should be looking for. It would have worked had it started doing this in 2011, but the situation has changed. The incumbents and cable operators have upped their game, and the early mover advantage no longer applies. There are two more things that Google could do that I think would clearly make a difference.
First, Google could start an infrastructure fund and look for worthy fibre to the home (or, to be slightly more technologically neutral, let’s say gigabit broadband) projects to back. Again, simply because of Google’s name being attached to a project, this would make capital raising incredibly easier for fibre projects. It would also allow Google to target markets where it genuinely thinks a difference can be made. Finally, it would position Google as a company that invests in access infrastructure when telcos are often hammering at it for being a ‘free rider’ of the access network. A win-win.
Second, Google could build a set of rules that would allow internet service providers to operate with a ‘Google Inside’ label. The idea would be for these ISPs, assuming they follow a set of standards established by Google (and maybe accept being transparently measured on performance) to use the Google label. Why would this be important? Because many customers sadly prefer lousy service from a brand they know and see on TV to a potentially better service from a brand they’ve never heard of that can’t afford TV ads. Associating Google’s brand with these competing gigabit broadband ISPs would go a long way towards compensating for this lack of recognition and reassure the potential customers. The risk to Google would be minimal, because as soon as an ISP stopped meeting the requirements, it would be dropped from the scheme.
These are just some of the ideas that have been floating around my head for the last few years about Google Fiber. I think it was a great idea, a massively ambitious project and while it has (in my view) partly lost its way, I still think it can make a difference going forward. I hope this article generates a conversation about that potential both outside and inside of Google.
● Benoît Felten is founder and chief research officer of Diffraction Analysis, an analyst firm focused on next-generation access. This analysis was originally published on the Diffraction Analysis website.
