Google Should Make Telecom Investors Worry
- Google’s plans are quickly starting to mirror that of a telecom company versus an internet search giant.
- Over the next decade, broadband services and wireless phone plans could catapult Google to the next phase of growth.
- In the process, an already mature broadband and wireless U.S. market might have to share with Google.
In a previous article I explained why Google (NASDAQ:GOOG) (NASDAQ:GOOGL) is making the right choice by increasing its capital expenditures to invest in projects such as Fiber. Over the last few weeks, there have been a lot of headlines surrounding Google that could tie to Fiber, and as we examine the state of Google’s existing business, and the opportunities that could be created from Fiber, it is clear that Google has an enormous opportunity ahead that is starting to take shape, and could change Google’s existing identity, and challenge AT&T (NYSE:T) existing business.
Google is the quintessential king of online advertising, with a $50 billion business in that space. However, the rise of alternative advertising competitors such as Facebook (NASDAQ:FB), Twitter (NYSE:TWTR) and potential threats like Amazon.com (NASDAQ:AMZN), and also lower ad prices from mobile, has put pressure on ad prices. During Google’s most recent quarter, its cost-per-click prices fell 3% year-over-year, worse than the 2% decline Google saw in the third quarter.
That said, Google has found solid growth from the likes of Google Play and Nexus, but with less than $2 billion in fourth quarter revenue it remains a relatively small percentage of Google’s broader business. Given the fact that Android already dominates the worldwide mobile OS market, investors can conclude that the company’s “Other” revenue is unlikely to carry Google’s stock price in the event that its ad revenue suddenly reaches peak sales, or fails to maintain double digit growth. This means that Google needs to find its next $50 billion business, and through Fiber it might just do that.
For reference, Google offers both broadband internet and TV services through Fiber, thereby making it very comparable to AT&T’s U-Verse services. The difference is that Fiber is only in three markets, and just recently announced plans to expand into four additional markets. Meanwhile, AT&T has more than 12 million total U-verse subscribers, and created over $15 billion in revenue from U-verse last year. While it would involve heavy expenses and several years, Google could very well mirror AT&T’s success with U-verse due to its extraordinary speeds of one gigabit per second, Gbps, and the unprecedented DVR capabilities that come with such fast download speeds.
However, $15 billion in revenue a year still doesn’t double Google’s existing revenue, or completely change its identify from being an internet search company. Instead, the real upside lies in Google’s potential to become the next AT&T. This notion was supported late last month when reports indicated that Google is nearing a deal to sell mobile phone plans and mobile data as an MVNO, thereby leveraging T-Mobile (NYSE:TMUS) and Sprint’s (NYSE:S) existing networks. This move would give Google its own TV and internet services, and then also mobile phone and data services. While Google would pay T-Mobile and Sprint fees to use their network, Google won’t have the high costs that come with building a mobile network, bidding for spectrum, etc. Meanwhile, Google will collect the revenue from consumers who use its services.
In essence, the sky’s the limit when offering mobile phone, data, broadband internet and TV services for Google. Besides home phone, these services would give Google everything that AT&T has, excluding the wireless assets. And this brings up my point, that being how to assess Google’s actions, and what it means for current telecom leaders. While I’ve already predicted that Verizon (NYSE:VZ) could eventually lose 10% of its revenue long-term from the rise of Fiber and other 1Gbps broadband services, Google’s activities could become problematic for AT&T as well.
The obvious reason: Google Fiber is a direct competitor against U-verse, but more importantly, if Google is really pursuing an MVNO, then it works better for AT&T if Google uses its network. The reason is because AT&T would still collect a royalty or usage fees on Google’s future subs. Instead, Google is electing to use T-Mobile and Sprint, reportedly, which in many ways shows its willingness to compete against AT&T, and Verizon, outside of broadband services. Notably, neither Sprint nor T-Mobile are broadband service providers.
Next, despite Fiber’s infancy, Google has already rewritten the rule book for broadband providers. Before Fiber, service providers had to build networks and then hope that customers would sign up. Seeing as how most regions of the country only have two to three broadband options, those odds often worked in the favor of service providers, giving them pricing power over consumers. However, despite the fact that Fiber is only in three markets today, and is officially being rolled out into four new markets, Google is the first company to have a “checklist” of requirements for cities in which it begins construction.
When Google decides to begin construction, it is only after working with cities who then agree to accommodate Google’s needs. So far, in both Austin, TX and Kansas City, those accommodations include accelerated zoning permits and the use of existing telephone poles to drastically cut the costs of construction and speed the time of service delivery. Rather than having to build the network from the ground up, like AT&T and Verizon, Google can slap a Fiber box onto an existing pole and route service to a residential home or business. Importantly, many of these telephone poles are owned by AT&T, which further illustrates Google’s attack on AT&T.
In other words, AT&T is indirectly having to accelerate Google’s construction of Fiber, and to make matters worse, Google is entering other AT&T businesses like mobile as an MVNO, and using the competition’s network in order to do so. This all paints a very clear picture that Google sees the U.S. telecom space as ripe for the taking. What makes this promising is the level of consumer and city support that Google has received for its efforts, as cities like Nashville, Portland, and San Jose among many others have created awareness campaigns for Fiber to try and accelerate its arrival.
Therefore, Google has a lot of positive momentum going in its favor with Fiber, and can build on that excitement to offer additional services like mobile data and phone services as an MVNO. While Google may never become as large as AT&T, the good thing is that it doesn’t need to in order to significantly move its stock higher. AT&T is a business with more than $130 billion in trailing 12-month revenue, more than double that of Google. Even if Google can grow to become 1/4 the size of AT&T over the next decade with broadband and MVNO-related services, that would equal 50% revenue growth over the next 10 years, and would complement Google’s existing growth. While Fiber will cost Google many billions to deploy, Google is being smart about the construction, and has a real shot to create the next decade of excitement and innovation through its new era as a service provider.