Someone involved in trading the "pink sheets" pulled a fast one this morning, apparently putting out a phony press release that a WiFi operator called ICOA had been bought by Google (NASDAQ:GOOG) for $400 million.
The phony news quadrupled ICOA's stock price briefly, before it was knocked down, although we are talking of tiny fractions on a penny. But the question remains, why were we all gullible?
We were gullible because the deal made sense. Supposedly, it would give Google a branded footprint to go after the WiFi business with its fiber, aiming at malls, big hotels, even whole cities. Add this to Google's entry into Kansas City, an existing tie-up with Boingo, and you started to see a pattern, Google bypassing telcos, cable companies and wireless providers using a low-cost Internet business model.
Again, the story was false. But the motivation behind it makes perfect sense, and investors in both cable stocks like Comcast (NASDAQ:CMCSA) and Time Warner Cable (TWC), as well as telco stocks like AT&T (NYSE:T) and Verizon (NYSE:VZ), need to be taking this as seriously as a heart attack.
A new white paper from the OECD states the case bluntly. It says telcos are charging five orders of magnitude above cost for their services, that is, $10,000 for what should be costing $1. This is being done through a mix of political lobbying, ignorance among those in politics about the reality, and a public that frankly doesn't know what is going on.
Voice and data networks are structurally different. Their economics are completely different. While the cost of running wires for voice is fixed, the cost of running data over those wires can decrease, as fiber is driven closer to subscribers and as that fiber is improved through Wide Division Multiplexing (WDM), changing the equipment at either end of a link to recognize more colors and transmit data over each color.
By tying the ownership of the "last mile" to customer control, however, voice companies have obscured this reality, in the minds of policymakers and the public. The result is that prices have remained stable, there has been no incentive to improve the technology, and in fact progress on improvement has slowed to a crawl. The OECD report insists that, with more investment, this can change, and that society as a whole will benefit.
Despite starting in business only in 1998, and despite having no subsidy from any level of government, Google has in less than 15 years built an Internet network that is superior in every way to what the telcos have. Kansas City is simply a demonstration of this fact. Google's growth, and that of the Internet sector tied to it, is now being constrained by these telco business models and regulatory capture, and investors are anxiously awaiting Google's further efforts to bypass those business models.
For a decade the telcos have been pricing Internet-related services based on perceived value to the customer, rather than the costs of providing that service, and have been using government to maintain the fiction that the costs and price are related. They are not.
That's why the ICOA fraud was credible. The reality is that Google could move in this direction at any time. That should be your takeaway.
Disclosure: I am long GOOG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.