Google Isn’t Just Disrupting. They’re Also Showing The Path To Salvation. Will Incumbents Follow? Probably Not.

It took me about a year and a half to have a pathetically elementary insight about Google Fiber.   Like a lot of people, I’d been thinking mostly about the impact on incumbent providers and the market.  It took me this long to notice something big.

Google hasn’t just re-defined broadband as Gigabit-speed.  They have re-priced it.  The going rate is now $70 a month.     

The “market” price for broadband was accepted to be about $40-$50 a month in a bundle with cable TV and telephony.  Total household spend has crept up to @$140-$160 for cable, in the $75-$100 range for telephony.  (these are very rough my-guess-didn’t-bother-to-Google numbers BTW).

Google is charging $70 a month for its Gigabit service.  You can get a “traditional” TV package on top of that, but $20 a month will also buy you SlingTV’s 20 channel “small bundle” offering.  More to the point, Google clearly doesn’t care what’s on the other end of that Gigabit connection.   They just want your $70.

Why does that matter?

• Because $70 a month is about how much the telcos were getting way back in the days of single-home landlines.  That was what cable used to get.  It is, almost certainly, “enough” to cover costs AND deliver a healthy profit.
• Because you have to assume that Google did their own math and came to a much more rigorous conclusion that $70 a month delivered a healthy return.

Actually $70 is probably highway robbery for a mature model.  Selling “Internet” involves almost NO COSTS.

• Bandwidth is dirt cheap.  And bog-standard.  Everyone gets the same flavor at the same speed at the same price.  50x-100x “more” bandwidth only costs Google pennies more to provide.  This isn’t like electricity.  There’s no power plant on the other end burning fuel to deliver those bits.  Bits are nearly weightless and cost accordingly.
• The whole “bandwidth” operation can be run by less than 100 people (see Iliad for a real world example serving the top quarter of France’s households).  The costs are all in the field – keeping the actual fibers connected and lit in the face of backhoes, lightning strikes, and dumb users.
• Unlike cable TV, there are no expensive TV programming fees to pay, subscriber access controls to “premium” channels, or complicated PPV billing systems to maintain (unlike cable).  All that gets taken care of by the guy on the other end of the pipe selling you over-the-top service (like SlingTV).
• Unlike telecom, there isn’t a complicated array of 30-40 year old billing systems and archaic traffic interchange practices.  You can plug into that mess on the other end of the pipe via some VOIP provider.  Or you can just use Skype, Google Voice, etc. to talk for free.

The good news for incumbents is that they can realize those same awesome returns.  The bad news is it’ll be incredibly painful to get there.

• They have to re-price their revenue base.  They can’t squeeze any more blood from the consumer (see “cord-cutting”).  To raise Internet prices, they need to “cut” phone and TV video prices proportionally.  A lot easier said than done.
• They have to cut their cost base.  This is the real problem.  This really means “I’d have to fire a lot of “my” people and, eventually, myself.”  If you can run an entire Internet operation with a hundred people, there are literally THOUSANDS AND THOUSANDS of dead men/women walking out there.  And they will fight tooth and nail to hang on to their livelihoods.  

The mystery in all this?  Shareholders would be a lot better off with a Google Fiber model.  Get rid of all those messy white-collar people, outsource as much of the physical plant work as you can (MasTec and Dycom are happy to do it for you) and rake in steady, predictable, low risk revenues from a simple utility Internet service.

So can someone explain to me why this magical free market shareholder capitalist system isn’t taking us there?  Where is the steely-eyed shareholder push to maximize returns?  The answer probably lies somewhere in the fact that it took me this long to think this through myself.  The 3 I’s:  Ignorance, inertia and imagination (or the lack thereof).  So much for homo economicus.

I have a huge backlog of posts in my head.  But still trying to establish a work/life/etc. rhythm and resisting the temptation to write blog posts vs do more important stuff…  But starting to get the flywheels spinning again  🙂