Google (NASDAQ: GOOG), on Thursday July 26, announced that it will be providing its new internet and TV service, Google Fiber, to Kansas City residents.  However, construction for the service has not yet begun, and the company expects the services to be rolled out by the end of 2013 in areas with high consumer demand. While Google touted last year that this product would be only an experiment, we believe that this product presents an interesting opportunity for Google to cross-sell its products. With this new initiative, Google is entering into direct competition with other internet and TV providers such as Verizon (NYSE:VZ), Comcast (NASDAQ:CMCSA) and AT&T (NYSE:T).
Google is planning to offer its fiber services at three price points. The first option allows a customer can purchase a package of 1 Gbps internet and Google Fiber TV for $120. The second and third options allow a customer to purchase either the internet service for $70 or get a 5 Mbps internet connection for free if he or she chooses to make his or her home fiber ready. The upfront costs that Google will pay to roll out the service are unknown, however, according to CFO Patrick Pichette, the company believes that it can provide these services profitably by cutting access costs.  Even if the upfront capital expenditures are not fully recuperated by the subscription fees themselves, we think that this product can increase Google’s revenues in three additional ways:
1) Faster internet allows for more usage of Google search
We believe that a substantial increase in internet speeds due to the fiber network could increase the number of searches per PC. We currently expect that internet searches per PC will steadily increase to 116 per month by 2019. However, if searches per PC per month increased to approximately 140 million, we would see a 5% upside to our price estimate.
2) An increase in the number of videos viewed on Youtube
The increase in internet speed will decrease the amount of time it will take for a user to load a video on Youtube. A decrease in load times will allow a user to watch more videos during a given time period. While this won’t have as big an impact on Google’s value as an increase in the searches per PC, an increase in the number of Youtube views can generate additional revenues for Google to help offset the capital costs of the fiber project.
3) Cross-selling apps, games, etc.
Google Play was introduced earlier this year as a marketplace for selling apps, movies, music and TV shows. The Google TV fiber service will put GoogleTV hardware in a users house, increasing the likelihood that a user buys content from the Google Play store instead of competitors such as Amazon or Apple.
Whether or not this service pays off for Google is still uncertain. Recuperating the high costs of providing fiber-to-the-premises services (Verizon spent approximately $23 billion on 17 million customers) should prove difficult. However, we think that the increased competition in the internet provider space due to Google’s entry could put pressure on other internet providers to increase the quality of their offerings. Cumulatively, this improvement should help Google grow revenues from its other online services.
We currently have a $681 price estimate for Google, which is approximately 8% above the current market price.Notes:
- Super fast fiber for Kansas City, Google Official Blog [↩]
- The economics of Google Fiber and what it means for U.S. broadband, GigaOm [↩]