The Search could be Over – What’s next for Google and why it matters in Telecoms

If you follow the Telecoms sector you’ll know Google has been making some expensive and strategically interesting investments in comms infrastructure such as Google Fiber.

If you look at Google’s existing business model, and the opportunities created from a project like Fiber, it becomes apparent that Google’s opportunity in telecoms and related businesses could fundamentally alter Google’s footprint and change the telecoms landscape forever.

Google has become Google by building a $50 billion online advertising business. However, competitors such as Facebook Twitter and Amazon.com are upping their game, creating price and margin pressure. Google’s cost-per-click prices fell 3% year-over-year last quarter, exceeding the 2% drop in the previous quarter.

The Android revolution of course gives Google plenty of other strategic irons in red hot fires, but at less than $2 billion in fourth quarter revenue it remains a small slice of Google’s business model. Android already bosses the global mobile OS market, so where is the next wave coming from if advertising revenue tops out?

Google needs another $50 billion line of business, soon, and Telecoms could be where its at.

Lets take recent developments in the US market as an example. Google Fiber offers broadband internet and TV, a proposition not dissimilar to AT&T’s U-Verse service. The difference being that Fiber is far from universally available, offered only in three regional markets, with imminent plans to expand into four more.

AT&T’s 12 million plus U-Verse subscribers generate over $15 billion in revenue from U-verse. Although it would take significant amounts of money and time (see my previous post on Google’s ability to take the long view) , Google could replicate AT&T’s success simply by its offer of speeds of 1 Gbps, and the astonishing content access that offers.

However, that still wouldn’t double Google’s existing revenues, or transform it from internet search giant to telecoms contender.

The big impact arises via Google’s potential to become the next AT&T (or BT or Telefonica etc).

Google is nearing a deal to sell mobile voice and data in the US as an MVNO using T-Mobile and Sprint’s networks. This would give Google its own TV and internet services, plus mobile phone and data services. Yes – they have to pay T-Mobile and Sprint to use their network, BUT Google will duck the expense of building a mobile network or engaging in spectrum wars while doing what we know they excel at – collecting revenue from customers.

We have seen Google programs come and go before, and Fiber is still pretty immature, but Google has already redrawn the playing field for broadband provision. Pre-Fiber, telcos built networks in the hope that customers would come. With limited broadband choices available, this model suited the telcos, gaining them pricing power over users. However, in spite of only being in three markets today, Google is the first provider to publish clear and ambitious criteria for cities in which it chooses to build. The parallels with an earlier network – the railways – are remarkable.

Cities who want to play have to meet Google’s criteria. These have included fast-tracking permits for construction and the re-use of existing poles to radically reduce construction costs and speed time-to-service. Instead of having to build from the ground up, like an old-world telco, Google can screw a Fiber cabinet onto an existing pole and service a home or business. To compound the irony, many of the poles are owned by the existing telco!

So – the incumbent (AT&T in this case) is indirectly hastening Google’s Fiber deployment, at the same time as Google enters other choice telco segments as an MVNO using the competition’s network.

This implies that Google sees the U.S. telecom space as a major growth opportunity (and probably others internationally too). They certainly have a strong pull factor from the regions with many major US cities running public awareness campaigns for Fiber to try and accelerate its arrival – hence my earlier reference to the railways. In 1850’s America – if you weren’t campaigning hard to be on the network your town was facing a doubtful future.

Google’s momentum with Fiber, and complementary additional services as an MVNO is impressive. They may never become as large as an AT&T, but nor do they need to in order to generate the right returns.  A modest but attainable growth target in telecoms could represent 50% revenue growth over the next 10 years, bolstering Google’s existing (and somewhat uncertain) growth pattern.

Fiber will cost Google billions to deploy, but being characteristically ‘out of the box’ about the business model, they have a genuine opportunity to enter a new phase of growth as a service provider. Whether this can truly be replicated on an international basis remains to be seen, but their capacity for capital investment, risk and innovation is well proven and exceeds that of most of the established players put together.

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