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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. Dave Kliman

    The only way that a high speed internet will get faster is if whoever lays the cables has nothing to do with any services. there should be ample competition at every level. When one company offers tv, phone, and internet, there is a conflict of interest that will eventually cause the provider to drag their feet when new faster speeds become possible that will hurt the phone or tv business.

    If the internet were allowed to grow naturally, phone and tv would be absorbed, along with all their extra profits.

  2. Joe Nickence

    “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.”

    One word: greed.

  3. Liddell

    I have just returned to live in the UK after 20+ years in the US and Asia telecom world. This article is a refreshing read after listening to a Radio 4 program this morning where Ed Vaizey (Minister for Culture, Communications and Creative Industries in the UK) and a completely irrelevant House of Lords Committee (Chaired by a Lord Inglewood) debated the future of broadband and whether coverage or speed are more important. Vaizey defended the current UK strategy with the comment that the BBC iPlayer only needs 1mbps and the country average speed is 7mbps ( … god knows how he calculated that). Here is a country truly living in the dark ages, where policymakers and politicians are clueless. Say what you might about Google but at least they plan to demonstrate the importance of high speed connectivity. Perhaps I should complain to my local MP (who happens to be the Prime Minister).

  4. StationStops

    Google isnt the first to lay consumer fiber, Verizon was, Ive had FIOS for 6 years and I think Ive had to call support maybe 3 times, and were impressed every time with the responsiveness and expertise. FIOS simply rocks.

    Meanwhile, the product has been rollout-frozen (no new neighborhoods) due to high cost and low demand since 2010? (couldnt find latest). Although Im a mobile developer and often wfh, to be honest I could make do with a cable connection at half the price and be fine…Id miss it, but its a luxury (dont tell my wife!)

    If I cant make a financial case for my $70/mo 25Mbps, I dont suppose many in Kansas City can do the same at 1Gbps.

    For web surfing its a quickly diminishing point of return – recently Ive seen much more impressive performance deltas from technologies like Google’s own SPDY then raw bandwidth.

    For streaming, either you can get an HD stream up and running in realtime or you cant, and that threshold is lower than what I have. Dropbox and mobile devices have really squashed my need for a lot of remote access. Its mostly just there to help an old guy kick some kids butts in COD4.

    its way, way too early for Google to be declaring this a revenue win. Also – are they figuring in the capital expense of all the original dark fiber purchases I assume are being leveraged for this?

    When Verizon froze FIOS rollout in 2010, they quoted $750 per household setup costs – you have to put a highly trained engineer in the house to do a significant head-end install, rolling your own isnt going to save on the real labor cost, Thats not even a break-even on a 1-yr at $70 (including ongoings like marketing, support, etc), never mind subsidizing the ‘realistic’ tiers.

    (not to mention growing competition from mobile for consumer internet dollars…Id rather pay $70/mo for better LTE coverage than faster fiber – and what will be the conflict when users are expected to kick down for a third mobile data account for thier Google Glass?)

    Dont get me wrong, I want the whole world to have Fiber, but this is the company who said Google TV would be built into every major shipping TV this summer, and who built the $300 Nexus Q and Chromebook.

    Talk is talk and their wild optimism is flying in the face of much different precedent from a major telecom and a sketchy record of homebrew cost control. Prove me wrong Google!