Google Is Serious About Fiber

by: Quinn Foley

Summary

Alphabet acquired Webpass, a provider of wireless high speed internet, to bolster the Fiber business.

There is still a lot of debate regarding Alphabet's true intentions for developing Fiber.

Alphabet is in Fiber for the long-haul.

For years Google has directed most of its efforts to refining the search platform but these days Alphabet (GOOG, GOOGL) is increasingly focused on discovering new ways to unlock growth. The company is involved in a number of "moonshot" projects, ranging from self-driving cars to smart home technologies, with varying probabilities of success and commercial viability.

One such project, Google Fiber, has been in development for a few years now, and has shaken things up in the cable industry. With Google Fiber, Alphabet is attempting to create an ultra high-speed broadband network capable of taking on the national cable and telecom giants.

Alphabet just announced a deal to acquire Webpass, a provider of wireless high speed Internet, to bolster its Fiber business. There is still a lot of debate regarding Alphabet's true intentions for building Fiber, but we view the Webpass acquisition as evidence that Google is in broadband for the long-haul.

Fiber delivers broadband Internet and television at a connection speed of 1,000 megabits, allowing for quicker download times, less buffering, and higher streaming quality. It offers over 150 channels and thousands of movies and shows on demand. While it is currently available in only five US cities where infrastructure costs are relatively low, Google plans to expand into twenty in the near future.

Numerous analysts and commentators have questioned Alphabet's true motivations for creating Fiber. Many believe that Alphabet, frustrated with the lack of innovation occurring in the broadband oligopoly, chose to develop Fiber to force the larger players to improve their services. This in turn, would translate into faster Internet searches on Google, greater engagement on digital video platforms such as Alphabet's YouTube, and attract advertising dollars.

Analysts of this camp postulate that the competitive advantages of existing players would make it too difficult for Google to mount a serious challenge. In the worst-case scenario, Google would exit the industry, having achieved its goal of speeding up nationwide broadband networks.

Fiber has indeed disrupted the industry. It sold broadband to roughly 30% of the homes it had hooked up for service, and raked in $100 million last year. The likes of Verizon, AT&T, Comcast, and others have responded by introducing their own ultra-speed services.

Many would consider this "mission accomplished" for Google, but we believe the incentives are big enough for Google to stay in broadband for the long haul. There will always be demand for faster Internet, particularly as consumers shift away from television to digital media. And, broadband is one of those industries where outsiders with enough financial clout and technological expertise can break in and create new demand through innovation. Google has the potential to indirectly boost ad revenues on its own terms by speeding up Internet connectivity. Of course, there is still a lot of uncertainty surrounding Fiber's long-term prospects. Large entrenched competitors who operate at efficient scale can make it difficult for newcomers to reach critical mass, and price is an important factor for broadband customers. Fiber's lack of infrastructure does put it at a disadvantage, but the acquisition of Webpass, who offers wireless services, suggests Google is on track to alter this competitive dynamic.

According to Mark Bergen of recode.net, wireless would allow Google to "deliver broadband without having to build out or buy fiber networks… so its network can swell much more, much faster." Through wireless, Fiber could overcome the challenges posed by a lack of scale and compete more effectively.

Google Fiber is still a "moonshot" project whose long-term viability is far from a guarantee. But early signs indicate the potential for staying power, and the acquisition of Webpass suggests Google believes it can mount a sustainable challenge.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.