Call it the miracle on Francis Street. Last year Ryan and Jenny
Carpenter got a deal seemingly too good to be true in their
Kansas City,
Mo., neighborhood: an installer from
Google Fiber
wired their bungalow to give them at least 50 times their previous
Internet access speed and a substantially better TV service, all for
only $125 a month, tax included—just a few dollars more than they’d been
paying
Time Warner Cable.
Ryan Carpenter still speaks in amazed tones of the December night
when he simultaneously streamed four
high-definition TV shows (two
Christmas specials, an episode of
The Office and a Kansas
University basketball game), recording three of them on the included
two-terabyte DVR. That’s two more shows than he could previously watch
at once, with plenty of capacity to spare.
“It just blows my mind—we can be running video via Wi-Fi on two
smartphones and on two laptops and also be watching and recording TV
shows all at the same time,” he says. “It’s a vastly superior service.”
And that’s even without touching high-bandwidth web apps that work
seamlessly at superfast speeds, such as 3D maps of cities that have
imperceptible load times.
The question of how Google offered this value is a mystery to the
couple—and to much of the rest of the nation. It’s not that the
technology involved is groundbreaking; the fiber and connections are
off-the-shelf technology. Yet
Google’s supercharged service is priced at just $70 per month, or $120 with bundled television, plus tax.
For the TV service, Google struck content deals, including for some
sports channels—though HBO is not yet part of the mix. And all of this
comes with a Nexus 7 tablet remote and two terabytes of DVR storage plus
another a terabyte of cloud storage. And a Google spokeswoman says the
company “expects to operate profitably” and that Google Fiber is neither
a loss leader nor a PR stunt.
If that’s true, then why isn’t it being made available everywhere?
The answer is that there are no compelling business incentives for the
established players, says Blair Levin, a former U.S. Federal
Communications Commission chief of staff, who helped write the
National Broadband Plan and is now executive director of
Gig.U, a consortium of universities trying to deploy very fast networks in local neighborhoods.
In parts of the country, slower-speed copper, fast-download cable,
and a few fiber networks are already built out. The cable distribution
giants like Time Warner Cable and Comcast are already making a 97%
margin on their “almost comically profitable” Internet services,
according to Craig Moffet, an analyst at the Wall Street firm Bernstein
Research. As Levin points out, “If you are making that kind of margin,
it’s hard to improve it.” And most Americans have no choice but to deal
with their local cable company.
While Verizon operates the fiber network serving the largest number
of home subscribers in the nation, the company is backing off from
installing additional U.S. fiber connectivity. The company’s fiber
service, called
FiOS, offers basic service starting at 15 megabits per
second (which can be upgraded in some areas to as much as 300 megabits
per second). As of last year, FiOS had about 5 million subscribers (most
of whom also take the optional bundled television service)—or roughly
one-third of the possible market where the company has strung fiber. But
CFO Fran Shammo said in a conference call last fall that there are no
plans to expand FiOS beyond those areas.
“At this point we have to capitalize on what we have invested,” he
said. The basic goal is to sign up more people in the existing service
areas, which adds the most revenue without increasing capital costs.
The story is similar with other carriers: Comcast’s
Xfinity Platinum
offers 300 megabit-per-second download cable service in some locations
(for about $300 a month), and Time Warner Cable is installing some fiber
in
New York City office buildings, but the companies are focused on
capitalizing on existing cable infrastructure, not emulating Google
Fiber by building out fiber connections to homes and businesses.
In Kansas City, Time Warner Cable in late January (likely in response
to Google Fiber’s presence) boosted speeds and lowered prices, offering
download speeds of 100 megabits per second for $75 a month. For $199
users can get cable bundled with TV and phone service, with two
DVRs.
In the
United States, areas taking the one-gigabit plunge have
benefited from some special circumstances. In Kansas City, Google has a
good reason to experiment: its long-term corporate fortunes are closely
tied to heavy web usage. At the end of the day, more web traffic—and
more eyeballs on that traffic—means more ad revenue for Google.
All the same, Google is likely making a profit on fiber subscription
sales alone, says Susan Crawford, a telecom policy expert who is a
professor at the
Benjamin N. Cardozo School of Law in New York and
former special assistant for science, technology, and innovation policy
in the Obama administration. “They are making money on sign-ups, and not
counting on indirect effects,” she says.
Google wouldn’t grant an interview about Google Fiber—or even give
the number of installations (though neighborhood sizes suggest it can’t
be more than a few thousand). But during an
earnings call
earlier this month, Google CFO Patrick Pichette said the company plans
to finish building out the whole city, on both the Kansas and Missouri
sides of the state line, and added that the effort “is not a hobby: we
really think that we should be making good business with this
opportunity, and we are going to continue to look at the possibility of
expanding.”
Other special circumstances favoring one-gigabit construction can be
found around universities, which themselves have skin in the
fast-Internet-access game. Universities supporting the Gig.U initiative
want to make sure they stay attractive to students and researchers who
might want to access data and computing resources, and competitive with
other institutions around the world that have such speeds.
Their efforts include a deal with a private company,
Gigabit Squared,
to deliver one-gigabit service in Seattle and Chicago in collaboration
with local governments and universities. A similar effort is taking
shape among several universities and communities in North Carolina.
A final kind of special case is cities that are
taking matters into their own hands.
One example is Chattanooga, Tenn. There, the local power utility in
2010 managed to score $111 million in federal stimulus money to speed up
the build-out of a one-gigabit network for a smart electric grid. It is
now offering one-gigabit Internet access, albeit for about $300 a
month, depending what TV service you get with it.
But overall, the United States languishes in the middle of the pack
of the world’s developed nations in Internet access speeds, with average
download speeds of just 11.6 megabits per second. In many Asian and
European countries, customers can commonly get affordable service
providing hundreds of megabits or more.
So what would it take to get Google Fiber–like service everywhere
else in the United States? Not everyone has the ambition and the deep
pockets to wage long-term, labor-intensive, block-by-block warfare with
existing, well-heeled telecom companies. “Other startups trying to
disrupt the Comcasts, Verizons, and Time Warners of the world will need
similar access to capital” as can be found in Google’s deep pockets,
Crawford says.
Crawford says broader access to low-interest financing would help, as
would federal legislation to supersede state laws that make it hard for
local governments to build networks. For example, in 2011, after the
city of Wilson, North Carolina, built its own fast network—competing
with existing carriers—the North Carolina legislature, amid industry
lobbying, passed a law that made it harder for local governments to
build networks and prevented Wilson from expanding its network beyond a
county line, she said.
But even if costs and legal barriers are lowered, fiber economics
won’t work for private companies everywhere—not even for Google. After
all, as Levin points out, 80% of the cost of running fiber is in the
labor, not the fiber and equipment, and not all houses are as closely
spaced as the tidy bungalows on Francis Street, where the Carpenters
live.
“There are a lot of cities where the math wouldn’t work—areas not
densely built enough or where construction costs are too high. In
California, the environmental permitting provisions make it
cost-prohibitive,” Levin added.
The FCC says it wants to help. Last month, at a U.S. Conference of
Mayors meeting, FCC Chairman Julius Genachowski called for broadband
providers and state and city officials to build out at least one
“gigabit community” in all 50 states by 2015. And the FCC plans to hold
workshops in which broadband providers and state and municipal leaders
can find and remove barriers, lower costs, and boost incentives for
getting it done. Requests to the FCC for interviews went unanswered last
week.
At any such meetings, it’s likely that Google’s strategy and example
will be a central topic. To help keep labor costs as low as possible,
Google secured guarantees from the Kansas City government that it would
get rapid responses on mundane but important matters like city
inspections, access to rights-of-way, and even free rein to run fiber in
sewers. Kansas City says it will provide the same breaks to other
companies willing to provide similar service. Google also adopted a
novel preregistration scheme, which had it start stringing fiber in a
given neighborhood only after a certain percentage of residents — 5 to
25% — committed to the service.
It’s a good start, but the United States has a long road ahead to
achieve widespread one-gigabit service. Not every town has a university.
Not every mayor can get his or her hands on low-interest financing. The
FCC’s efforts may fall short, and it’s possible that Congress and the
FCC won’t make it easier for upstarts to compete with major carriers.
That might well leave Google or other aggressive companies to do the
job. Crawford and Levin say they expect Google to expand to other
cities. If that happens, then Google, with its long-term sights on web
advertising dollars, might wind up giving an entirely new meaning to the
term “sponsored link.”
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