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The economics of Google Fiber and what it means for U.S. broadband

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Google (s goog) launched its fiber-to-the-home gigabit network Thursday in Kansas City, KansasMo. and it wants everyone to know that this network isn’t a charity case. Several Google executives at the event were very clear that delivering gigabit internet access over fiber for $70 a month (and even free 5 Mbps fiber) is a business that will not only help advance Google’s consumer goals, but also make it money.

“There’s no sense selling a product at a loss,” said Google CFO Patrick Pichette (just look at Google’s Nexus 7 tablet). “But it’s not only about profits, it’s about changing the access costs.” His goal and Google’s goal is to bring the same efficiencies that have helped create cheaper, smaller and more powerful computers and create a cost and improvement curve for broadband access that resembles the curves for compute storage, as the chart below illustrates.

And Google may have a found a way to do that — both in terms of constructing and operating a fiber to the home network — by using its engineering team, existing consumer technologies such as QR codes and social engineering to influence how users sign up for access. Existing ISPs should take note — what Google has done here has fundamentally lowered the cost of building and deploying a network. It was cagey about if and when it would take its fiber-to-the-home show on the road, but if it does, it will pummel existing ISPs on price and service, have repercussions throughout the carrier equipment industry and entice a lot of end consumers to take on a more active role in marketing Google’s broadband.

How Google cuts costs

Delivering broadband is a capital-intensive business, with Verizon spending $23 billion to spread its fiber to the home service to 17 million homes. Analysts estimate that it cost Verizon roughly $670 to run fiber past each home in its footprint. That cost varies depending on a huge number of factors, ranging from how far apart homes are to whether or not Verizon could string fiber from telephone poles rather than bury it. Google doesn’t give its costs, and so far vendors are mum, but here’s what we do know.

It makes its own gear: From the infrastructure on the back end to the TV and Wi-Fi routers in the home, Google has built its own stuff. Most carriers rely on outside vendors to sell them networking gear and even set-top boxes. However, like Iliad, the operator in France that provides the Free mobile and wireline network, Google has built its own equipment. Several sources have told me that Google has ordered fiber gear from companies such as Ciena, asked them how the boxes work and then sent the optical engineers on their way.

Kevin Lo, the general manager of the Google Fiber business, told me that from the time the Google Fiber project was announced in February 2010, engineers have been working on the gear. There are two advantages Google gains here. The first is that it’s not shelling out hundreds of thousands of dollars on specialty equipment built for ISPs, but rather taking the most basic elements of a network and assembling them into custom gear, much like it does on the data center side. The second is that it can control all of the physical infrastructure that its network relies on — updating and tweaking it as needed.

It uses social engineering: It’s accepted that one of the most costly elements of building out a fiber network is the physical labor associated with strong cable, digging trenches and hiring people to terminate the fiber into the home. Google has already strung cable on power lines throughout Kansas City and lowered those costs by working with the local utility and AT&T to get access to the utility poles without having to pay high fees.

But to reduce the cost of the actual last mile to users’ homes it’s telling people in Kansas City that if they want to be the first to get fiber, they’ll have to convince their neighbors to sign up. The goal is to get a critical mass of between 5 percent and 25 percent of the homes in a given neighborhood (Google calls it a fiberhood) committed to signing up for Google Fiber before ever sending out technicians. Residents have until Sept. 9 to get their fiberhood on the leaderboard before Google starts rolling out its fiber.

Google’s Milo Medin and a Google fiber product manager.

Milo Medin, the VP of access services at Google, explained that with this model the folks in the first fiberhood will have their access within a week. This is also why the free service is so important to Google. If people buy into that process, it can get homes attached in those initial bulk deployments and reduce the number of times Google has to send out trucks and technicians. Medin says the $300 initial connection fee will cover the costs associated with the deployments — it’s not doing that at a loss either.

It will use QR codes and the Google Play store to change your relationship with set-top boxes and routers : I’ve already covered the cost savings at the core network and the last mile access, but the final place Google is shaking things up is in the home. Customer premise equipment is the bane of the ISP industry. Those boxes are expensive so many cable providers and telcos rent them to users, which drives users nuts. Users also are slow to update the devices, which can limit the type of services ISPs can offer and in many cases force a technician to come out and install them.

Google has built its own hard drive to act as a DVR, a TV box to provide channels and a network box that acts as a modem and provides Wi-Fi connectivity in the home — cutting out traditional providers such as Arris, Scientific Atlanta (Cisco) (s csco) and others that make such gear. Medin says that those boxes will have a QR code that a technician will scan. The box then sends its activation information to the cloud and the box is now provisioned and activated for that customer. Eventually consumers will be able to do this for themselves, perhaps after they order a box on Google’s Play store.

All of these things will help Google deliver a gigabit per second to the home at a profit. Granted, that profit might not be as large as the broadband profits that Comcast or AT&T currently enjoy, but it’s a profit. And hopefully regulators and average consumers will look at what Google is doing and ask themselves, “Why are the Comcasts and AT&Ts of the world complaining about how much it costs to serve up broadband when Google can deliver 100 times the traditional ISP’s top speeds for the same or a lower price.”

If they don’t ask, then let’s hope Google will continue its expansion. When I asked, Medin wasn’t direct, but said, “This is a beginning.”

67 Responses to “The economics of Google Fiber and what it means for U.S. broadband”

  1. Beaker's Bro

    Still a lot of questions here.

    Am I buying the tv and dvr boxes? How much?
    Are they using wifi to connect the tv/dvr boxes to the network boxes? Is there a wired non-Ethernet option? MOCA or HPAV or HPNA?

    If there is no IR remote control, do I have to buy a tablet per tv box or can I use a smartphone. Also, having to keep launching the app to change channels is a pain.

    Does the dvr box buffer live tv so that I can pause it or does it just record for later viewing?

    Buying Moto does give them access to good video encoder and stb people. It is unlikely that they can cost reduce iptv tv boxes much without reducing functionality – they are just a chip, ram, and network and tv I/o as it is.

    All the interesting technical questions- they will be using h.264- but what bitrate? Can they support true higher frame rate HD – p24, p30, and p60? How high do the btrates get? If they can do p30/p60, they have a feature that their competition doesn’t.

    What audio codec- he-AAC or something flashier? Do they have Dolby support?
    What drm? All iptv platforms are based around AES, but did they roll their own key distribution?

    Are they using ip multicast for live video? You almost have to to save core bandwidth.
    Are they doing normal pay VOD? It so, I assume they are using the YouTube infrastructure to delver this and just dropping enough servers in KC to handle the scale.
    The network topology questions- the edge is 1 gbps- is the core all 10 gbps? How big are the pipes to the metro network?

    Really, right now making the network edge 1 gbps will have very little impact on current network usage as residential ip networks are idle most if the time for most of the users, with the outliers using at lot of data a lot of the time.

    And all the regulatory things that come with being a tv provider. How are they handling emergency alerts? PEG ( local community) channels? The new CALM act to control the volume of commercials?

    And business things- how are they handling installs and service calls? Who pays for service calls when the home network can’t deliver video reliably?

    And even their core business – are they inserting ads into the live tv streams? If so, how close to the edge are they inserting? Metro? Network node? Tv box?

  2. This is how AT&T was run. They controlled everything from CPE to transmission to voice equipment. The model failed in 2 ways. Slow innovation and expensive for subscribers, People believe in the separation of equipment vendors, network providers and service aggregators/providers. In an increasing SW world this framework does not make total sense. Controlling all the parts of the service delivery chain may be necessary to achieve the desired service…. Until a new paradigm shift emerges.

  3. fgoodwin

    I’m not from Missouri but I will believe it when I see it. It will be very easy for google to run this demo project at a loss for 2-3 years then bail-out by selling its assets to AT&T or whichever cable company serves KC. Let’s see if google is still in business in 3-5 years before we all drink the kool-aid about how google has changed the economics of fiber deployments.

  4. John S. Wilson

    It’s interesting that in a notoriously low margin business Google is saying they can do it cheaper, faster, and make money yet haven’t said what they expect their margin to be. Let’s see some projections.

  5. I cannot wait to fire my cable company. There days are numbered and my $180/month cable bill is getting ridiculous. I pay over $400/month is data services (cable, internet, cell wireless). It’s beyond ridiculous.

  6. Actually, as it relates to the Google Fiber project, the official winner was “Kansas City, Kansas”. At some point, Google expanded the project to include Kansas City, Missouri as well. In fact, from what I understand of yesterday’s announcement, these “Fiberhoods” are in Kansas City, Kansas and PARTS OF Kansas City, Missouri.

  7. Marion

    With Google’s implementation of the Fiberhood, I certainly hopes this wakes up the Federal Government. The telecom industry is such a monopoly that there isn’t any real choices except for the service providers selected for a given area. In my area it is AT&T. They (AT&T) have been getting better at providing services, but the price per product and service is escalating. There is no other provider, other than Time Warner Cable, that can compete with AT&T and keep their prices down. Cox, Verizon, and Comcast are not available. The Federal Government needs to change the laws to allow more service providers to penetrate areas where it has been only one or two providers. Consumer choices and competition is not there, at least where I live.

  8. This article leaves out the improved ad targeting Google will be able to achieve by data mining all of your Internet and television activity. Say a person watches the HBO series “Girls”, Google would then be able to target ads on web sites the person uses based on that television show. Such improved targeting will make Google a lot of money.

  9. ricdesan

    Say what you will about Google, but they are the only big tech company not only willing to say, ‘Hey dipshits, we can not only do this better’ and give the public what they want, but they can do it in such a way to show the obsolete incumbent that not only are they the pieces of crap that they deny they are, but that they cant even remotely compete with Google in meeting consumer demand.

    You give me true gigabit access Google and you have a customer for life and I laugh at a 1 year contract, or even a 2 tear or 5 year contract!

    Where do I sign?

  10. Thanks for the “business model” angle Stacy.

    There are a few other aspects you didn’t touch on – from the purely “profit” side of the equation.

    COMCAST carries lots of free on-demand content, but to T-W – on-demand means “you pay US.” This really sucks and makes the TV viewing experience a constant hazard of “be careful what you click on.”

    By baking in 10,000s of on-demand movies and clips – Google has disrupted the QOS aspect and upped the ante – to further hammer the nail in the cable industry coffin.

    Then there’s the multiple ‘kinds’ of video supported – ranging from local content and live TV, to integrated NetFlix and YouTube. And you can search for that content – at the same time! Try doing THAT on your AT&T, T-W or COMCAST cable box!

    But at the end of the day – the MST significant aspect of Google Fiber TV – is that it is the fulfillment of the 20+ year promise of Interactive TV. This is not a Triple-play. This is ONE play. The Internet and TV have finally merged. Lets see what Apple’s reply is – to that!

    BTW here’s my thoughts:

  11. Color me skeptical. Is Google counting the cost of putting together the team that built the CPE? If no, the numbers work out far differently. And remember that the whole project was delayed by the right of way issues; Google has the PR machine to pressure a municipality to play nice, but most most munis are in an adverse relationship with cable and telco ISPs and trying to wring as much $$ out of them as possible, which of course slows down deployment. I think there’s a lot under the hood going on that the story doesn’t touch.

    • You are undoubtedly right. There’s a lot here that I don’t cover, but Google is still being very innovative and savvy about cutting down its deployment and operational costs. Of course, once operational, maybe its gear suddenly breaks down and it determines that it needs the carrier class products sold by other vendors. That would change the economics again. But the point here is to outline what Google is doing to shake things up and lower costs.

  12. Michael Elling

    It’s good to see:
    a) they show a graph that bandwidth pricing has disconnected from moore’s and metcalfe’s laws over 10 years ago. Coincides with remonopolization of industry driven by Telecom Act of 1996, killing of special access competition 2002 and killing of equal access 2004.
    b) their pricing reflects marginal cost
    c) they have inverted the telecom model from vertical to horizontal to better understand and drive down the cost
    d) in the process open the door for 3rd party subsidization of access (aka the advertising model) down the road

    • They are doing the “free” service to get as many homes to connect to the network as possible, but if they make it too attractive people would elect to use that instead of the gig. But Google’s goal is to see what happens when people have a full gig.

  13. Wow! If only they would consider the consumers that live in rural areas of the country as well. We just like others have the desire for high speed internet services, however the ISP’s for some reason refuse to service these hard to get to areas. We pay our bills just as others do.

      • fgoodwin

        People who live in the country benefit from lower crime rates and less pollution, but they don’t have easy access to mega-hospitals or superhighways. So yes there are trade-offs. They don’t have a God-given “right” to high-speed Internet access, despite the U.N. making noises about such access being a “human” right . . .

  14. Is there any part of the infrastructure that Google didn’t build themselves? Who are their partners for things like fiber management, patch cables, etc?

  15. BUT “Kansas City” means the city in Missouri. People living there literally say “Kansas City, Kansas” or “KCK” when they want to say something like, “That restaurant’s over in KCK.”

    • John Abreau

      I can believe that residents of Kansas City, Missouri refer to their city as “Kansas City” and to the one in Kansas as “Kansas City, Kansas”. But it seems implausible to me that the residents of Kansas City, Kansas would refer to Kansas City, Missouri as “Kansas City” and their own city as “Kansas City, Kansas”. It seems more likely that the residents of Kansas City, Kansas would refer to their city as “Kansas City” and the one in Missouri as “Kansas City, Missouri”.

      • Actually, Kansas City MO is generally referred to as Kansas City, in conversation, by everyone. It is much bigger than than Kansas City KS, which is referred to as KCK.

        Most of the destinations you’d want to frequent are in Kansas City MO: museums, performing arts venues, professional baseball and football stadiums, multiple 4-year universities and the zoo.

        KCK has professional soccer and NASCAR.

    • Ben in KCK

      Kansas City means the metropolis, including both KCK and KCMO as well as all of their suburbs. I don’t understand why this is so unfamiliar to people. The Kansas City metro is larger than Las Vegas in terms of population (

    • Mate this is what happens when you have real competition..unlike the telstra monopoly that we have had all these years…Oz telcos have had no real incentive to do something like this because they were able to simply build profitable infrastructure in the capital cities and not worry about the rest of the country..and left up to them that’s the way it would have been forever with less than 10% of the population of the U.S and a similar sized land mass…they were happy to keep most rural customers using wireless…$100 per month for 15 gb of slow unreliable data..but who knows what will happen once the conservatives get in…our NBN should be a bipartisan nation building network but instead we have an opposition that will kill it…most likely to give tax concessions to mining magnates..

  16. If any Gigaom readers have friends/family in Kansas City, please encourage them to sign up for this service. It is important to make this a grand success so that similar networks spread across the US.

    Stacey wrote: “Several sources have told me that Google has ordered fiber gear from companies such as Ciena, asked them how the boxes work and then sent the optical engineers on their way.”

    I hope Google is careful here not to run into any patent issues.

    I don’t understand why the DVR box with 2 TB storage and the set top box should be two different boxes. Wouldn’t it be better to just combine them into a single box.

    Also, is the setup box a full fledged Google TV box? If not, why not? If yes, makes sense.

    • Mark Wilcox

      A single expensive DVR box (essentially a NAS with some TV tuners) can potentially run a house full of cheap set-top boxes. Economically that’s the best way to do it by far. I was working on a prototype for that setup (not Google’s) back in 2007 – TV industry is pretty slow with technological change though.

  17. Scan a barcode and “activate” the box? That was the single most stupid thing I’ve read. No wonder this business seems glacial over there.

    Look, your operator owns the active equipment in the network. When you pay they turn on your access port (which is the port in the switch closest to you labeled with your apartment or house number). Any box you plug in is provisioned by a server who determines by your which switch port houses you who you are and sends the right configuration data.

    How it works where I live is that whole neighborhoods were wired up in the early 00s when most people got broadband. By default you don’t have a contract so your port is flagged as such. When you plug in a computer and use a web browser you are redirected to a captive portal where you can order the data plan of your choice. Click the button, start using the service right away and your first bill is on its way. Total time maybe five seconds, no human involved. Prices are around what’s quoted here, $70 for gigabit but most people of for the 100 megabit plan for $30. It’s good to see Google shapes up this tanked market!

  18. Ian Littman

    My bet is that Google probably grabbed a few Motorola engineers to help design parts of its infrastructure. I’m sure that wasn’t a primary reason that the Moto purchase went through, but if the talent is there Google might as well use it.

    One result of “going it alone” on hardware is that the specs on the various devices are quite good, and they’re tailored to what customers might find useful. For example, a centralized HD-DVR is nothing new, but using it as a media hub for linear/on-demand TV and users’ own content…with 2TB of storage involved…is something that hasn’t been done, or done well anyway. Likewise, the router box doesn’t skimp on specs to get a lower price point, though I’m sure that buying components in bulk helps there…still, a router that can do 1000 Mbps of traffic in both directions, with onboard 3×3 MIMO 802.11n, is a pricey gadget.

    The Google STB is even more brilliant. Push most of the device smarts to the DVR box, but integrate an 802.11n access point, an Ethernet port and MoCa (or something like it) so that users don’t have to fool with third-party repeaters to get decent wireless coverage (where a TV is, there will be WiFi also), and they don’t have to do special cable runs to bring wired Internet to the game console that Google doesn’t intend to replace any time soon.

    • > a router that can do 1000 Mbps of traffic in both directions, with onboard 3×3 MIMO 802.11n, is a pricey gadget.

      No it isn’t. A Linksys E3200 costs ~$80, a similar TP-Link ~$45.

      • Except the ports that you plug PCs into runs at a gig but the port you plug the modem into isn’t, it only runs at a 100 meg. So the LAN side of that Linksys E3200 is a gig but the WAN side back to the ISP is capped at 100 meg. Besides this Google STB the only other routers with gigabit uplinks are in the enterprise and range from a couple thousand to hundreds of thousands.

      • Ron Rossman

        But you’ll be hard pressed to find a consumer router that can do those speeds between the LAN/WLAN segment And the WAN segment. It’s hats enough to find one that doesn’t bottle neck even with 100-150Mbps that Comcast offers now (DOCSIS 3.0 modems can handle the speeds, but add in a regular consumer router and you may create a bottle neck)