Why Google Fiber spooks AT&T and Verizon
As owner of infrastructure that can meet demand for Internet resources at the lowest cost, Google undermines the business model of its telecom and cable rivals.
By Dana Blankenhorn, TheStreet
A decade ago, in my book, "Moore's Lore," I wrote of how Enron was done in by "kittens."
I was referring to a technology known as Wide Division Multiplexing (WDM), which lets you multiply the data-carrying capacity of a fiber cable many times by using light in a variety of colors, not just white on-and-off pulses.
Back in the late 20th century, Enron tried to monopolize Internet data traffic by running it through a market, the way it was running natural gas through a market and costing Californians' millions. The effort failed, because WDM cut prices on data transmission so dramatically. The power of abundance undercut any effort to create scarcity.
It was as if Enron had two cats, I wrote, then capitalized the value of all the kittens it might produce, only to discover that other people could also breed cats. (Cats are what economists call widgets, since they have endless utility and no discernible economic value. Something like data bits.)
Around the time that I published my book, Google (GOOG) began buying up "dark fiber." That is, it bought fiber lines that were not turned on, due to overcapacity. Google was getting these unused fiber lines at bargain prices.
The more you take, the more Google makes
Ever since, the heart of Google's business model has been to encourage use of Internet resources, as its own infrastructure had the industry's lowest costs. The more the Internet is used, the more vital its cost advantages become. Hence the headline -- take all the kittens you want, Google will make more.
In contrast to Google, companies like Verizon (VZ) and AT&T (T) -- and to a lesser extent cable operators like Comcast (CMCSA) and Time Warner Cable (TWC) -- see infrastructure as a cost. Wires are expensive because it takes money to roll trucks into neighborhoods and string them one-by-one. They want to practice an economics of scarcity.
So while Google can run 1 gigabit/second downloads and 100 Mbps uploads in Kansas City and, soon, Austin, Texas and Provo, Utah, through its Google Fiber, Verizon can offer only one-fourth the speed, at four times the cost, on its FiOS Quantum system.
Few places have Google Fiber, so Verizon, AT&T and the cable companies figure they have the power Enron sought. They're the local gatekeepers to your Internet, and you pay what they say. By expanding Google Fiber, Google gives this strategy a sell-by date.
Google's core advantage
To Scott Cleland, who often advocates for the interests of companies like Verizon, this makes Google an evil monopoly. Even though Google has never used government subsidies, while Verizon and AT&T have taken billions to provide "universal service," we should hobble Google for winning the market anyway, he argues.
Google is certainly winning the Internet core, which AT&T and Verizon have long dominated.
According to new research from Deepfield, 60% of all Internet users now connect with a Google server at least once a day, and Google's servers now account for 25% of all Internet traffic, up from 6% three years ago.
A lot of this gain is due to the success of Google Global Cache, which brings Google servers into Internet Service Providers' offices to serve popular content locally, especially YouTube videos.
Dark fiber gives Google capacity to deliver even more low-cost bits, which is why its $35 Chromecast device -- which turns your Android phone into a TV remote, drawing content from Google through your Internet connection -- is so important. The more bits you get, the more money Google gets as compensation for use of that infrastructure and for bringing that infrastructure so close to users, multiplying its cost advantage.
This is why I wouldn't want to own Verizon or AT&T shares. If your best bet is to complain that an unsubsidized competitor is beating your subsidized offer in the market, don't expect much sympathy. Expect, instead, the suggestion that you learn to breed cats, like Google has.
At the time of publication, the author owned shares of Google.
More from TheStreet.com
Why can they do it cheaper than Verizon and AT&T which have much larger systems in which to tie into them?
Copyright © 2014 Microsoft. All rights reserved.
Start investing in technology companies with help from financial writers and experts who know the industry best. Learn what to look for in a technology company to make the right investment decisions.
Forget Facebook: DataCoup allows users to sell their private data directly to businesses. But will consumers feel comfortable taking them up on the offer?
VIDEO ON MSN MONEY
MUST-SEE ON MSN
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'