A few weeks ago, I wrote about how Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) was moving ahead with local Internet services and was told, confidently, that it's all a dodge, just a way to get others to move so it can sell out and go back to its real business.
That's getting harder all the time.
The company announced yesterday it is buying Webpass, which runs wireless Internet service off Ethernet connections, mainly in northern California, for an undisclosed price.
While Google considers San Francisco a fiber market, and is considering San Diego, most of the markets currently served by Webpass are in its sights. Google seems to be focusing on SunBelt cities where construction costs aren't extreme, avoiding the crowded northeast entirely. Trucks are already rolling in Atlanta and seven other Southeastern markets, and the company is signing up customers in Austin, Texas, with plans to add San Antonio and Dallas.
It's hard to square extensive building plans and the Webpass acquisition with the idea that this is just a passing fancy Google is anxious to sell. Running what amounts to a cable system is a different business from operating a Web service, and it's more likely that Alphabet, the holding company, could spin this business off when it becomes self-sustaining. But it's still in build-out mode, and it's not.
Webpass technology, under Google's direction, could quickly expand the footprint of Gigabit wireless services to wherever there are extensive Ethernet networks in place. Rather than building out fiber runs in these markets, in other words, Google could use Webpass to make financial agreements with current network operators and deliver service using its technology. In short, get into the northeast without the cost of construction.
What that would mean in terms of the company's top line could be substantial. The company's current run-rate, mostly driven by ads, is $80 billion. If a Gigabit customer is paying roughly $130/month for service, it still takes several million such customers to become a serious revenue driver. But here we're talking about service revenues, not ad revenues. As Google Cloud continues to expand, though, you start to see the picture change. Within two years, it's not hard to see non-advertising revenue representing 10% or more of the company's total.
In short, the artists formerly known as Google are changing. They're not going to be "just" an advertising company for much longer. They're betting heavily on infrastructure that is expensive to build, expensive to maintain but that delivers steady revenue.
Investors should be aware of that.
Disclosure: I am/we are long GOOGL.
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.