In the wake of Google Access CEO Craig Barratt’s “goodbye Access” post on the Google Fiber blog yesterday, there are papers left, right and center predicting the end of Google Fiber. Barratt's post tries to sound upbeat, but in essence he's announcing that Google Fiber won't be expanding further (pending a strategic reevaluation), that people will be made redundant, and that he's leaving. I don't know Craig and can't really comment on his tenure as Access CEO, but that doesn't exactly sound like good news.
For analysts like me this is a complicated topic for a very simple reason: for anyone other than Google, an infrastructure venture on the scale of Google Fiber as currently announced would have had to disclose numbers by now. Wall Street would have asked for take rates and ARPUs and all kinds of other metrics to evaluate the validity of the investment. Before the Alphabet restructuration however, this was just another Google project. Now that Access is its own company, we might have expected these numbers to come out. The problem is, Google isn't talking.
So we're left to speculate. I've been thinking about this not just for the last few weeks but for a couple of years at least, and I finally want to share these thoughts now that Google Fiber seems to be at a turning point. So just to be clear: this is not me sharing information, this is me analyzing and speculating on the basis of what little we know and trying to think how what's been achieved might be salvaged and expanded upon.
Without going too far back, my impression has always been that Google Fiber was a schizophrenic project. At the very beginning it felt like those Google decision makers who were more interested in achieving important policy goals wanted Google Fiber to be a catalyst, something that would shift the market with a bang and then be a shared experience for others (public or private) to take over. The idea of a blueprint was floated in the early days.
But there were also those who seemed to think that Google Fiber could become a new business for the company, something not just aimed at shifting market perceptions and shaking the complacency of telco and cable incumbents but a profitable business line in its own right. That has always seemed to me to be an unlikely proposition. I am confronted on a daily basis to the paradox of short-term focused telecom operators considering long-term fiber investment efforts, but their short-term is longer than Google's core business short-term by an order of magnitude. Unless there was a long game plan to view this as the "pension fund" arm of Google's finances, it didn't really make sense to me.
And if I'm honest, I didn't much care about that second proposition anyway. The US market is already plagued by a lack of competition in fixed. Replacing one closed monopoly by another (no matter how sexier) didn't seem to me like a particularly desirable goal. So while I fully wanted to believe in the potential for Google Fiber kicking the telecom anthill, I wasn't so convinced by the relevance and likelihood of this becoming a fiber business like every other.
Now that it looks like there's at least some serious soul searching around the second proposition, I think it's time to consider whether the first has worked and how things could go from there.
My take is that there was one fundamental flaw going into this, one that's probably still floating around: Google believed they could revolutionize the laying of fiber. They didn't just think they could offer a kickass service, they thought they could deploy much cheaper and much faster than anybody else had ever done. That's fully in line with the Google mindset, but unfortunately it ignores the fact that hundreds of company had been deploying wireline access infrastructure for years by the time Google Fiber decided to give it a go.
I'd suggest we're now seeing the windfall from that misguided assumption: Google is finally admitting (in a roundabout way) that despite all the clever people they have on hand, they haven't revolutionized fiber deployment. It still takes time to do the planning properly, to work with local authorities effectively, to do the outside plant layout efficiently. Did Google manage to do things cheaper than others did ? Probably, but not by a wide margin. And as they decided to scale beyond Kansas City, they realized that the efficiencies they might have been able to find in KC didn't scale well elsewhere because a lot of those things are down to local specificities and relationships.
So Google is deploying fiber in the access, they're doing it well, but they're not doing it so well that it's hugely more profitable for them than it would be for anyone else. In other words, the cost side of the equation is roughly on par with industry norms (again, my speculation). What about the revenue side ?
On the revenue side, the two key metrics are take-up and ARPU. And the first one is much more important than the second one. Google understood that and went with a frankly very cool product at a very affordable price point. I've never been really convinced by the need to have a linear TV-play, but that's besides the point: if they wanted a chance at a high take-up, they needed a low price point and a kickass product. That's not always enough though: incumbents respond by lowering their price locally, migration is a painful process for the customer, etc. There are many reasons for inertia in customer acquisition even with a good product, a fantastic brand and a collaborative local community.
My bet is that Google's take-up is not that great in the markets they've started commercializing. Note that it may be very good by industry norms, but again, remember that Google expected to blow industry norms from the get go. If I had to guess a number I'd say Google Fiber is in the 30-40% take-up range in areas that have been open for service for three years. Industry average is about 7% per year the last time we looked into it, so that's very good, but again probably not enough by Google standards.
Keep in mind also that the pre-sales in Kansas City were astounding. When that data was still publicly available we scraped the website and analyzed it. Some areas had over 100% pre-subscription and, if I recall, average pre-subscription rate was already in that 30-40% bracket even before they'd started deploying. The problem is that these people want you to connect them now, and in actual fact it's going to take months, if not years, to get to them. By the time you actually get there, they may have moved out, they may have finally had a good offer from their cable operator or they may just be pissed-off at you taking so long to serve them.
And that (in my opinion) is what's happening at Google Access right now: costs are higher than planned (even though lower than industry norms would suggest) and take-up is lower than expected (even though higher than industry norms would suggest). Since Google isn't really looking at this as an infrastructure player would, it's time to reconsider.
In parallel to that, wireless is starting to look like a potential solution to some of the problems. Don't believe the hype about residential fixed service being substituted by a wireless access solution anytime soon, at least not in most urban geographies. There are promising technologies ahead, but they're far from mature yet.
Google's acquisition of Webpass however is interesting. Few journalists took the time to try and understand what Webpass does. Webpass uses wireless solutions for urban aggregation, not access. In other words, it doesn't connect homes wirelessly, it connects multi-tenant buildings wirelessly and uses existing in-building wiring to connect the homes from the rooftop antenna.
It's a clever approach that solves two fundamental deployment issues:
- it eliminates the need to pull fiber along street poles or bury ducts in the pavement to pull fiber along the streets. This is both costly and time consuming;
- it eliminates the need to deploy fiber inside the homes, also expensive and time-consuming, by reusing the existing wiring.
However, that approach does not seem to me to be so universal as to be usable in any deployment scenario. There are a number of potential issues that I see with it:
- first, you need to target multi-tenant buildings to make the economics work. I suspect (again, not knowing the exact costs of their solution) that the equipment necessary to install this on single homes would make the price point too high. Furthermore, you need line of sight between rooftops which is comparatively easy when people live in high downtown MDUs, not so easy when they live in detached homes.
- second, you need to be able to reuse the existing cabling in the house. I haven't had time to look into the specific regulatory aspects of this (and particularly to see if this varies from state to state or county to county in the US) but my bet is you can't always bank on being able to reuse the cabling, especially if it's been deployed by an incumbent or a cable operator. I may be wrong here, and I will be doing my homework on this, but I'm flagging it as a risk.
This doesn't mean that Webpass doesn't open up opportunities. I don't think you'd get as good and stable a service as you'd get with FTTH but you might get a service that's good enough for most customers' needs. Would it be good enough to compete with AT&T's FTTC ? Most likely. Good enough to compete with Cable's Docsis 3.1 as it gets deployed ? Less likely.
So assuming I'm right, what should Google do about it ? Here are several (non mutually exclusive) scenarios that I think would be beneficial to the US and to US customers as well as to Google. Keep in mind that I see a lot more value in the "catalyst for change" goal outlined above than in the "Google as another broadband operator" goal.
On the deployment side, the equation has changed from Google Fiber's early days. Because Google made very targeted deployment and phased them over time, it's now easy for AT&T and cable operators to respond in kind locally with a combination of price lowering and infrastructure deployment (or at least announcements) in the markets that Google publicly targets. The only way around that would be for Google to announce and undertake deployment in say 30 markets at the same time. It's now quite clear that they don't have the stomach for that.
Assuming they still want to play some kind of long game, they could however destabilize the incumbents by announcing a broad Webpass type deployment scenario. Target and quickly deploy in 30 markets with a Webpass like solution with the promise that if the demand is there, Fiber may be installed down the line. This positions the wireless broadband solution as a quick to market acquisition tool. It also forces AT&T to respond everywhere at the same time, something which (I suspect) they are incapable of and unwilling to do. This could be part of the catalyst, forcing AT&T and/or cable to really up their infrastructure game or (failing that) look at structural solutions to respond (assuming the TW/AT&T merger goes forward, the scenario of AT&T spinning off telecom infrastructure altogether is maybe not so unlikely anymore...)
Beyond that though, I think the best bet to stick to the original goal (wanting to change the market by pushing existing players to deliver significantly better service) is to open up the Google Fiber experiment. Instead of keeping everything close to the vest, go public with it and tell everyone out there: "this is how we've done it, these are the challenges we have faced, this is how we've overcome them". In other words, "here is the blueprint". Google could even be the one to federate an open discussion about this, organise and/or sponsor workshops to enable the sharing of experience for companies and municipalities looking to deploy decent infrastructure in many places in America. They could even build a consulting team to help these projects get in shape.
I think this would have two major impacts on the market:
1/ it would unleash private and municipal initiative: many cities are on the fence about this, many private players are struggling with funding. They all want to do something about the state of broadband in their communities, but they're afraid of doing it wrong, of chewing more than they can swallow. Having a clear set of "instructions" for lack of a better word, a clearer understanding of the ecosystem of deployment (Google could build and maintain a registry of subcontractors, for example), a well documented list of dos and don'ts would be hugely beneficial.
2/ it would reassure potential investors, simply because of the association with the Google name. Remember that I assume here that Google didn't underperform by industry norms, just that they fell short of their own ambitions. As far as infrastructure investors go, I suspect Google's performance would be seen as more than acceptable. Therefore following the Google recipe would be a massive help for projects in attracting capital.
This may not be enough to generate the catalyst Google should be looking for. It would have worked had they started doing this in 2011, but the situation has changed. The incumbents and cable operators have upped their game, the early mover advantage no longer pays. There are two more things Google could do that I think would clearly make a difference.
First, Google could start an infrastructure fund and look for worthy fiber to the home (or, to be slightly more technologically neutral, let's say gigabit broadband) projects to back. Again, simply because of Google's name being attached to a project, this would make capital raising incredibly easier for fiber projects. It would also allow Google to target markets where they genuinely think a difference can be made. Finally, it would position Google as a company that invests in access infrastructure when telcos are often hammering at them for being "freeriders" of the access. A win win win.
Second, Google could build a set of rules that would allow ISPs to operate with a "Google Inside" label. The idea would be for these ISPs, assuming they follow a set of standards established by Google (and maybe accept to be transparently measured on performance) to use the Google label. Why would this be important ? Because many customers sadly prefer the lousy service from a brand they know and see on TV to the potentially better service from a brand they've never heard of that can't afford TV ads. Associating Google's brand to these competing gigabit broadband ISPs would go a long way to compensating for that lack of notoriety and reassure the potential customers. The risk to Google would be minimal, because as soon as an ISP stopped to meet the requirements, they would be dropped from the scheme.
These are just some of the ideas that have been floating around my head for the last few years about Google Fiber. I think it was a great idea, a massively ambitious project and while it has (in my view) partly lost its way I still think it can make a difference going forward. I hope this post generates a conversation about that potential both outside and inside of Google.