Reference no: EM131201057

Cable distribution giants such as Verizon (www.verizon.com), Time Warner Cable (www.timewarnercable.com), and Comcast (www. comcast.com) enjoy healthy profit margins on their Internet ser- vices. Verizon's (www.verizon.com) fiber-optic network, called FiOS, serves home subscribers in 16 states. FiOS offers a variety of plans ranging from 25 megabits per second (Mbps) upload and download (in all FiOS areas) to 500 Mbps upload and download (only in limited FiOS areas).

None of these companies, however, appears to have plans to extend these services to additional geographical areas. Rather, their business goal is to sign up more people in their existing ser- vice areas. Why have they adopted this strategy? The answer is that focusing on existing service areas adds the most revenue without increasing the companies' capital costs. Essentially, there are no compelling business incentives for the established cable companies to expand their service offerings. This policy is unfortu- nate because most Americans have no choice but to do business with their local cable company. To compound this problem, few outside companies have the money to compete with the existing, cash-heavy telecommunications companies who control existing cable networks. Given these realities, what would it take to imple- ment ultrafast fiber service throughout the United States?

One possible solution involves Google (www.google.com), which is installing and operating ultrafast fiber-optic cable service, known as Google Fiber, in several U.S. cities. Google has invited 34 cities in 9 metropolitan areas to collaborate with the company to explore strategies to bring gigabit-speed Google Fiber to their cities.

Google Fiber was first deployed to homes in Kansas City (Kan- sas and Missouri). Google secured guarantees from the Kansas City government that the company would receive rapid responses on matters such as city inspections, access to rights-of-way, and permission to place fiber in sewers.

Google's fiber and connections are off-the-shelf technologies, and Google's Fiber service is priced at just $70 per month, or $120 with bundled television. For the television service, Google made content deals that include some sports channels, although HBO is not yet part of Google's service content. Google Fiber comes with 2 terabytes of DVR storage, 1 additional terabyte of cloud storage, and an Android tablet for use as a remote control.

How can Google offer this level of service for such a low price? The answer is that Google appears to be willing to accept lower operating margins and profits for compelling business reasons. The company's long-term corporate fortunes are closely linked to heavy Web usage. Therefore, more Web traffic, and more people watching that traffic, translate to greater ad revenues for Google.

Kansas City families are pleased with Google Fiber. For instance, they are able to simultaneously stream four high- definition television shows, recording three of them on their DVR. That is two more shows than they could previously watch at once, with plenty of capacity to spare.

At one level, this project reflects Google's policy of devel- oping new businesses by providing customers with ultrafast speeds and then offering them experimental services such as Google TV. However, if Google's business model for deploying fiber services works, then it may create a new era for privately built broadband.

By early 2015, Google's fiber service was operating in Kan- sas City; Austin, Texas; and Provo, Utah. In addition, the company is planning to expand this service to nine new markets: Atlanta, Georgia; Charlotte, North Carolina; Nashville, Tennessee; Phoenix, Arizona; Portland, Oregon; Raleigh-Durham, North Carolina; San Antonio, Texas; Salt Lake City, Utah; and San Jose, California.

Google's fundamental strategy is to identify profitable areas within a city, called "fiberhoods," in which to deploy its Fiber service. Google agrees to provide free (but lower performing) broadband services to low-income areas within its selected cities. Significantly, other ISPs are adopting Google's selective approach. For example, about seven months after Google announced its intentions to bring Fiber to Austin, AT&T announced it was introducing 1-Gbps service in the same city.

Interestingly, Los Angeles rejected Google's approach. Instead, it is soliciting contracts for citywide gigabit services. In addition, several municipal projects across the country are providing giga- bit Internet access; for example, Chanute, Kansas; Chattanooga, Tennessee; and Santa Monica, California.

There are many cities where it may not be feasible to deploy fiber; for example, cities that have areas that are not densely pop- ulated or where construction costs are too high. Furthermore, in California, the provisions for securing environmental permits might make such a project cost-prohibitive.

Google is not the only organization that is bringing ultrafast fiber services to underserved areas. Some cities are taking mat- ters into their own hands. For example, in 2010 the local power utility in Chattanooga, Tennessee, received $111 million in federal stimulus money to accelerate the build-out of a 1-gigabit per sec- ond (Gbps) network for a smart electric grid. In 2013, the utility began offering 1-Gbps Internet access for about $300 per month, depending on the television service the customer chooses.

Sources: Compiled from S. Mlot, "Salt Lake City Nabs Super-Fast Google Fiber," PC Magazine, March 24, 2015; "How Google Fiber Is Disrupting the Broadband Deployment Model," Network World, August 26, 2014; A. Barr, "Google Fiber Is Fast, But Is It Fair?" The Wall Street Journal, August 22, 2014; J. Gold, "Where's My Gigabit Internet, Anyway?" Network World, April 17, 2014; C. Neagle, "10 Cities That Provide 1-Gig Internet Services," Network World, February 26, 2014; "Gigabit Internet May Be Coming to 35 U.S. Cities," KurzweilAI.net, February 20, 2014; J. Sartain, "Google's Gigabit Internet: Not Coming to a Neighborhood Near You," Network World, November 19, 2013; D. Talbot, "Not So Fast: A Google Fiber One-Gigabit Mystery," MIT Technology Review, September 20, 2013; P. Olson, "The Google Effect," Forbes, May 27, 2013; D. Talbot, "Google Fiber's Ripple Effect," MIT Technology Review, April 26, 2013; J. Calacanis, "Google's Fiber Takeover Plan Expands, Will Kill Cable and Carriers," Pandodaily.com, April 19, 2013; https://fiber.google.com/about/, accessed March 25, 2015.

Questions

1. Why would a "search company" such as Google decided to enter the fiber services business? Describe the benefits that Google expects to obtain from this venture.

2. Describe the various outcomes that might occur in an area that receives ultrafast fiber, regardless of the provider.