Alphabet Could Become A Dominant ISP

| About: Alphabet Inc. (GOOG)

Summary

Google is spending billions over building cable and phone companies in select markets.

It is now talking of using radios to deliver its service less expensively than those rivals.

This revenue scales well into a $75 billion revenue balance sheet.

Over the last week I've been amused by a man standing in front of my house, with what looks like a surveyor's outfit, pointed at the phone pole on the other side of my street.

He explained that he's with Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Fiber, which will run a line down the street later this year, competing with a line run by AT&T (NYSE:T) at the end of the block and Comcast (NASDAQ:CMCSA) under the sidewalk. Fiber is the F in Alphabet.

But as my strange friend indicates, this fiber may be quite different. Instead of stringing a wire from that pole to a router in my home, Google may instead put a directional radio on the pole, tapping it into the fiber, and use millimeter waves to deliver Gigabit Internet services.

Google's not alone in seeing the possibilities in millimeter waves, which are shorter than the waves used by WiFi (more like those used by satellites) and thus dissipate more quickly but can run in much-fatter, less-crowded ranges of bandwidth. Facebook (NASDAQ:FB) is also testing it, under the name Terragraph, and a former Aereo executive is showing off a device called Starry that acts as a wireless router for such a service.

But in order for those other systems to work, you need backhaul infrastructure. You need to get that signal into a very fast wire with very direct connections to the global Internet. That's where Google Fiber comes in. By running the service on poles and using radios to get from poles to customers, Google could deliver this fast data service for less than Comcast, which chooses to lower its long-term maintenance costs by burying its fiber in the ground.

Alphabet is trying to manage a transition from a company relying mainly on advertising revenue into one with more diverse revenue streams. YouTube began offering a $10/month, ad-free subscription service last fall, but that will require content to be compelling. The company has invested in robots, in self-driving cars, in cloud services and in financial services. It has sought to gain greater control over Android, originally an open source project, and access more of that revenue as well.

But while it has backed off in some areas - it's reportedly selling the robots, the company seems serious as a heart attack about Google Fiber. Google Fiber is under construction in Austin and Nashville as well as Atlanta, and it has plans to enter 16 more markets. In some cases, like Provo, UT, it will piggyback on existing community fiber infrastructure. In other areas, like southern California, it is just said to be "exploring."

But this "overbuilding," as it's called in the business, is ferociously expensive. It can cost thousands of dollars per line to run fiber down a street, even after right-of-way and government approvals are obtained. And it can cost several thousand more per customer to run a line from the fiber to a residence. But if this last bit can be done wirelessly, with radios, the cost to service customers falls dramatically and Google Fiber becomes far more competitive.

The cash that can come with success is impressive. Google plans to charge $130/month for its top tier of service, offering 220 HD cable channels as well as Gigabit Internet. Comcast is now charging me twice that for about 100 HD channels and 50 MBps Internet. Still, it means over $1,500 per customer per year, which scales pretty well, even against a $20 billion/quarter advertising company.

This seems to be Google's next act, to get ahead of cable rivals using radios and become a dominant ISP. The guy outside said they'll be offering this to me next spring. I can't wait.

Disclosure: I am/we are long GOOGL, CMCSA.

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.