Google Is Not Just An Ad Company

Jul.31.12 | About: Alphabet Inc. (GOOG)

The first thing everyone says when Google (GOOG) reports earnings is "it's an advertising company."

Not any more. With the acquisition of Motorola Mobility, Google becomes a products company as well. With the launch of Google Cloud, it's also a cloud company, competing directly with Amazon.Com. With Google Play, it's also selling digital goods in direct competition with Amazon.Com (AMZN) and Apple (AAPL).

And here's something else interesting. It could, if it wished, become a telecom company. Google has lit its fiber in Kansas City, Kansas, offering speeds of 1GB/second for just $70/month. Compare that with $1,000/month for similar speeds in New York. Or the prices offered by other gigabit carriers around the country.

Business Insider says that the program is not relevant to investors, saying it would cost Google $400 billion to launch it nationwide. True, if Google were interested in a cable overbuild. But Google has been actively acquiring patents in the area of fiber networking, and is hiring 30 more people to work in the area, including a WiFi Manager.

Lots of smoke. Where's the fire?

A few years ago many U.S. cities were talking about the idea of city-wide WiFi, and London actually built one before these Olympics. Most of those deals collapsed on the issue of backhaul, the cost of running that data on the larger Internet. Since AT&T (T) and Verizon (VZ), the major incumbent wireless carriers, are also the largest companies in the Internet core, you can see how hard it would have been to get decent pricing. Google could solve that problem.

Why would Google want to do this? Create a host of WiFi networks through affiliation agreements, launch interconnects throughout major cities, and you have a Google wireless network that can compete head-to-head with licensed carriers in many markets. That could provide cash flow that would enable a wider roll-out of fiber connections - first to businesses, then to high-density residential, then cherry-picking other residential areas.

AT&T and Verizon have used government to create a shared monopoly covering both wireless and wireline service. But there's a cloud on their profitable horizon.

The Google Cloud.

Disclosure: I am long GOOG, AAPL.