Google Fiber And The Future Of The Internet

| About: Alphabet Inc. (GOOG)
This article is now exclusive for PRO subscribers.

On Thursday, Google (NASDAQ:GOOG) announced Google Fiber, its new ultra-fast internet service. It will soon become available to residents in Kansas City and provide them with either regular-speed internet at no monthly cost or paid 1 Gigabit / second internet, which will come with 1 TB (1024 Gigabytes) of Google Cloud storage. Google is also offering a more expensive option which will provide TV channels too.

Google isn't doing this because it wants to get into the national Internet Service Provider (ISP) business, but because it wants to increase the quality of the internet. Google's company strategy is based around the cloud, so many of its products depend on improving people's internet connections. In many locations, there isn't real choice when it comes to getting high-speed internet, so many of the ISPs have become complacent and have failed to improve their services.

In addition, prices have stayed high, and Google pointed out that "Americans pay more per megabit than any other major world economy". This lower internet quality could impede Google's goals of moving many products to the cloud. By showing the potential of what speeds can be offered, Google hopes to encourage other companies to improve the quality of their own services.

Microsoft (NASDAQ:MSFT) currently dominates the market for desktop operating systems and office suite software. As discussed in previous articles, Google hopes to get users to switch to Google's cloud-focused offerings, Chrome OS and Google Docs/Apps. Currently, many people will not switch, because their internet connection isn't reliable enough and cloud-based software is often slower than the desktop equivalent. However, if ultra-fast internet spreads to more places, this will not be as big of an issue. Google's throwing in one TB of online storage helps emphasize this point. There is no need to keep files locally, because you can store as much as you want and access them just as fast from the cloud. This makes Google's Chrome OS computers look more attractive, and the company is promoting it along with its internet service.

Google is always concerned that other companies and platforms will get in the way between Google and the user. It created Chrome and Android in part to prevent other companies from having too much control. Google has a similar fear with regards to the ISPs. Google is afraid that ISPs like Comcast (CMCSA‎) or Time Warner Cable (TWC) will charge companies more to deliver higher-speed internet for their services. For example, they could make Google pay more to deliver YouTube videos faster. Google is lobbying for laws that would make such practices illegal, but the company is also making sure it has other options. If the ISPs start favoring certain companies, Google could get around such issues by expanding its own superior internet service. This could serve as more of an implicit threat to the ISPs than an actual plan to expand to too many areas. This means the ISPs will be prevented from getting revenue from the web companies, even as they are being pressured to improve the quality of their internet. This will likely cut into some of their profit margins.

One issue remains with Google's high-speed push. It may help increase the speeds of the internet at home or work, but what about when people are traveling? Currently, people often have slow and expensive mobile internet, making mobile the "weak-link" in Google's cloud plan. However, Google Fiber may help in this area too. If there are cables for ultra-fast internet everywhere, it will be easy to start offering public wifi access. Google already provides free WiFi in its hometown, and it may consider offering WiFi elsewhere. City-wide WiFi often faces certain technical issues that slow it down, but it is something that Google may be able to help fix. Greater WiFi availability will also help Google escape from some of the control that the cellphone carriers currently have. If faster WiFi becomes accessible in more areas, people may not even need expensive data plans to go with their phones.

Companies like At&T(NYSE:T) and Verizon (NYSE:VZ) are both ISPs and cell phone carriers. Google Fiber may encourage them to roll out more of their own fiber-optic networks to keep their land-based customers. But they also face potential threats in the future if the availability of high-speed internet everywhere lets some people stop using cellular data plans. Google Fiber is good for web companies, but it is potentially threatening to the ISPs and possibly the cellphone carriers.

Disclosure: I am long GOOG.