Sunday, July 21, 2013

Is Google Fiber a Big Revenue Opportunity for Google?

How big a business might Google Fiber eventually represent for Google? The question has been asked ever since Google launched Google Fiber in Kansas City, Kan. and Kansas City, Mo.

You might say the questions are larger now that Google Fiber is going to operate in Austin, Texas and Provo, Utah.

So far, Google Fiber in the Kansas City markets seems already to have passed the threshold for a sustainable Internet service provider operation. About 33 percent of 200 homes part of a survey by Bernstein Research are taking the service, and three-quarters of the rest are considering doing so.

That’s a very healthy take rate so early in the marketing effort of the first year. Some 85 percent of respondents are buying the gigabit service, and about 15 percent have opted for the free 5 Mbps service.

So some might argue Google Fiber could well expand to other cities, even if doing so would require triple-digit billions over time. That has lead to skepticism about just how extensive Google Fiber might eventually become, as a product for Google.

On its earnings call for the first quarter of 2013, Google executives were asked about prospects for Google Fiber. Carlos Kirjner, analyst at Sanford C. Bernstein & Co. asked about Google Fiber impact, noting that even if Google invested billions, and managed to pass 20 million U.S. homes, Google “would be at best and mid-sized provider in a market that accounts for less than half of your current business.”

There is another way to look at matters, and that is that if Google Fiber managed to generate revenues equivalent to 50 percent of Google’s current total revenues, that might well make it a meaningful business for Google.

Larry Page, Google CEO, answered that “we would love to find businesses much bigger than our entire current business to invest in, but I think there's only a very small number of such companies that even exist.”

But fiber-based Internet access might just be one of those “very small number” of businesses big enough to be significant for Google. “We look at places where we can provide products that can make really big difference in peoples' lives and we can make a lot of money and resources doing it,” Page said.

“We're not in a business to lose money, cross subsidize or any of these things,” Patrick Pichette, Google CFO, said on Google’s second quarter 2013 earnings call. In other words, Google intends to make money on Google Fiber.

“We really look at every incremental profit dollar that creates shareholder value and really focused on these profit dollars rather than the percentage margins,” Pichette said.

“Many of the new opportunities that we may be exploring whether it be hardware, whether it be Play, whether it be – many of these will have different margins in our core business, but they actually offer great kind of – huge revenue pools, huge margin pools in absolute dollars and then create much shareholder value and in many cases with Larry and the product area leads, great synergistic value between the products to create this great experiences,” Pichette said.

Pichette also reiterated that Google expects Google Fiber to be profitable. “We did Kansas City because we know as a city was going to be very profitable,” even if the ventures are not profitable on day one.

To be sure, Google Fiber already is changing ISP behavior. But Google executives also seem to be suggesting that if Google Fiber winds up being as successful as some believe, it could generate significant revenue for Google, with acceptable margins.

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