Why Google Wants to Wire You With Fiber

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It's a sales come-on that's difficult to resist. Google (GOOG) (GOOGL), through its expanding fiber-optic network, will bring Internet at blazing speeds into your home or business. The company's Google Fiber unit promises service at speeds of up to 1 gigabit per second -- many times higher than the current broadband standards.

Customers can pay $70 plus taxes and fees for Internet only (which includes 1 terabyte of cloud storage) or add $50 or $60 to get TV service with over 150 channels. Those on a budget can opt for the slower "Basic Internet" deal, which requires only a onetime $300 "construction fee."

Google Fiber is a strong move into the Internet service provider space for Google; the catch is that very few customers can get it at the moment. But that's almost beside the point -- it's already starting to have a beneficial impact on the broader market for quick Internet.

Need for Speed

Fiber-optic cable, with its high data capacity and cost-effectiveness versus traditional copper wire, has always been a technology ripe with promise. But this potential has never been fulfilled, despite the billions of dollars spent on building out fiber networks by ambitious telecom companies in the 1990s and early 2000s.

For a variety of reasons, many of these companies went out of business or were absorbed by larger operators. The surviving entities became bigger and the market less crowded as a result. So the survivors had much less of a need to compete by plowing capital into such networks.

Which is why today, the U.S. is still wired together largely by old-fashioned copper. As a result, our speed standards are below those of many other countries. According to a recent study by the Organisation for Economic Co-operation and Development, we are No. 21 on the planet in terms of median speed.

For speeds exceeding this low threshold, the costs can be prohibitive. The top tier of Verizon's (VZ) extensive FiOS network, for example, runs $144.99 per month for only 75 Mbps speed -- well short of the 1 Gbps of Google Fiber (although the FiOS package includes voice telephony along with over 420 channels of TV).

A Network of Synergies

So there's a fine opportunity here for a party willing to start plugging that gap. Enter Google, which at the end of its last reported quarter had $18.3 billion on its books.

It also has a vested interest in cranking up the nation's average speed. After all, its business depends on Web searching and surfing; the higher this activity, the more clicks on the ads it sells.

But to make a bundle, you have to spend a bundle. There's a lot of real estate in this country, and although fiber is a comparatively cheap technology, it still needs to be freshly installed in areas where the infrastructure is lacking. That's the key reason that Google Fiber isn't available in every U.S. home or business, and won't be for some time (if at all). Goldman Sachs (GS) estimates that a full nationwide rollout would cost $140 billion.

At the moment, the service is live in only three metropolitan areas -- Austin, Texas; Kansas City (on both sides of the Kansas/Missouri border); and Provo, Utah. Google recently announced that it will start building out the service in another four (Atlanta; Nashville, Tennessee; and Charlotte and Raleigh-Durham, North Carolina).

Domination or Disruption?

Google hasn't yet shared any useful statistics for Fiber, such as customer uptake or how much it's spending on its build-outs.

In addition to being fairly tight-lipped about such things, the company hasn't revealed whether it means to become a giant in the Internet service provider market or simply rattle the existing order. If the latter, it seems that the strategy is starting to work.

Mere hours after Google's announcement that Fiber would be coming to Austin, AT&T (T) pronounced that it was planning to build a fiber-optic network that could deliver 1 Gbps of speed. Striving to catch up, Time Warner Cable (TWC) lifted its speed limit in the region from 50 Mbps to 300 Mbps.

Bye-Bye, Budget Busters

No matter how Google Fiber plays out -- as a limited offering for a lucky few, or a top choice for most of America -- it's already changing the market substantially. So in the near future, whether we connect with Google Fiber or sign up for Internet service with one of the company's rivals, we'll almost certainly get faster speeds at cheaper prices. The days of slow, pricey broadband look numbered.

Motley Fool contributor Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs, Google (A and C shares), and Verizon Communications. The Motley Fool owns shares of Google (A and C shares). Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.
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