As Google (NASDAQ:GOOG) prepares to roll out its ultra fast fiber optic based internet and pay-TV service, the question that will be of interest to existing cable companies is what is Google’s end game? Cable companies such as Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC) are banking much of their future on broadband growth. However, their speeds pale in comparison to what Google is about to offer to Kansas residents in the U.S. While most of the U.S. households have just begun the process of adopting high speed broadband with speeds of around 50 Mbps, Google is offering speeds of 1 Gbps in Kansas city. That’s several times faster than the fastest broadband speeds offered by Verizon (NYSE:VZ) and Comcast.
Google is focusing on only Kansas area right now, and it is not clear whether the company will expand nationwide. Nevertheless, Google has stated that it intends to keep its fiber optic service profitable and has received significant interest from Kansas City neighborhoods. If the company was to expand nationwide, the amount of capital required will be huge, much similar to what cable companies spend. It could be perhaps even be more given the high speed required from the infrastructure. This will be a fundamental shift for Google’s business and there can be no assurance of the company’s success as it will compete with established cable and telecom giants. Google’s speed advantage may not be enough as cable operators have long-standing customer relationships. Google’s move beyond Kansas will further encourage them to upgrade their own infrastructure and bring competing speeds.
Considering the pricing and the amount that Google is spending in laying out its ultra-fast broadband, it will take it a decade to recoup the costs.  That makes it a little difficult for the company to expand nationwide with similar schemes. That said, the alternate aim for Google could be to promote usage of online services such as search and youtube as well as opportunity to cross sell apps and games (see Google Fiber Could Boost Sales Of Other Online Services).
Impact on Cable Companies
If Google gets serious about a nationwide fiber optic network, cable companies such as Time Warner Cable and Comcast are likely to react by additional capital investment and attractive pricing. We estimate that roughly 30% of these cable companies’ value can be attributed to broadband, which has acted as a pillar of support amid pay-TV subscriber losses. These broadband profits could be squeezed if Google expands aggressively. If it happens, it will take time as Google is quite likely to watch its experiment in Kansas play out before taking further steps.
Our price estimate for Time Warner Cable stands at $88, implying a discount of about 5% to the market price.Notes:
- For Austin, super-fast fiber-optic network still just a dream, statesman.com, Sept 15 2012 [↩]