Google Fiber is more than the experimental publicity/political “stunt” many large cable companies and Wall Street investors have suspected since the search giant first announced it would build a 1,000/1,000Mbps fiber to the home network.

BTIG Research, which follows the telecom sector for large institutional investors and investment managers, says there is a lot more to Google Fiber than many initially thought.

If Google’s fiber project expands outside of Kansas City, it could ultimately transform the business model of broadband in the United States. It already has generated unease for Time Warner Cable, which has resorted to knocking on doors to preserve its customer relationships.

It is one thing to consider Google Fiber from a New York City office and another to see it working on the ground. BTIG’s Rich Greenfield and Walt Piecyk decided to travel to Kansas City to investigate the new fiber service first-hand.

“We believe Google Fiber will accelerate rapidly, changing consumer habits in its territory,” they concluded. “While it is very early in Google Fiber’s life, we fully expect Google to build out more markets after they perfect the broadband and TV offerings in Kansas City.”

There is ready-made demand, judging from the 1,100 cities that asked Google Fiber to set up shop locally. Local governments recognize their telecommunications future has been largely monopolized by one cable and one phone company, and it is important for that to change. Some have taken steps to build their own networks, others will throw a parade if Google does it for them. Reasoning with the likes of Comcast, Time Warner Cable, AT&T, and Verizon — among several others — has not gotten world class broadband at a reasonable price. Instead, many incumbent players have used their market power to raise prices, restrict usage with unnecessary usage caps, and retard innovation.

Google may prove to be the only force large and aggressive enough to throw a monkey wrench into the comfortable business plans and conventional wisdom about how broadband should be packaged and sold in this country. Community owned providers have shown they can deliver superior service and pricing, but face deep-pocketed incumbents that can use predatory pricing to save customers in one market while raising prices on captive customers in others. Incumbent providers also have successfully advocated for protectionist bans on publicly-owned broadband in a number of states. Washington regulators have thus far been largely supine and disengaged when asked to address the challenges consumers face from rising bills for more restricted service.

BTIG’s own research is a marked departure from the usual dismissive attitude incumbents and Wall Street have paid to the Google project. Greenfield himself acknowledges that the investment and business media communities typically respond with three reactions when one mentions Google Fiber:

• “Is it a sustainable business with those economics?”
• “How much cash are they blowing?”
• “Who cares about what they are doing in a couple of relatively small cities such as the Kansas Cities?”

But such thinking underestimates Google’s potential much the same way Yahoo! and AltaVista did with their dominant search engines a decade ago. The biggest mistake one could make is to assume Google just wants to be another competing cable or phone company. It goes far beyond that.

Greenfield believes Google is seeking to become an integral part of the communities it serves, equal in stature to the cable and phone companies, but without their reviled reputation.

But the most significant change Google brings is a challenge to the current business model of consumer broadband.

Phone and cable companies first monetized broadband speeds. The faster the speed chosen, the higher the price. The earnings power of broadband gradually increased as more Americans signed up for service and the costs to provide it declined. But as cable TV margins continue to erode, the money to cover the difference has come from broadband, which has seen regular, unjustified rate increases since 2010. Not content with monetizing broadband speed alone, many providers are also attempting to monetize broadband usage with usage limits and/or consumption-based billing schemes. A recent Wall Street Journal article estimated 90 percent of the price consumers pay for Internet access is profit.

With that kind of profit margin, the economics of Google’s ambitious fiber project do not look as unfavorable as some on Wall Street suggest.

Greenfield calls Google’s 1 gigabit speeds insanely low-priced at $70 a month. He’s right when one considers current pricing models of incumbents. At Time Warner Cable’s current pricing (50/5Mbps service for $99 a month), the cable company would charge consumers $1,980 a month for 1,000/1,000Mbps service, assuming they could actually deliver it. Upstream speeds above 5Mbps might cost even more. Cable television, which used to be the core service offered by cable companies, is almost an afterthought for Google. It can be added for $50 more per month, which is actually cheaper than many competing providers charge for a similar package.

Greenfield feels Google has an aspirational goal for its Kansas City network.

“In Kansas City, Google has a customer facing service with employees who are part of your community, trucks that come to your house and customer service reps that answer your questions when you need help,” Greenfield notes.

On that basis, Google can reboot itself into an entirely new entity in Kansas City, offering much more than a broadband service and a search engine.

Google’s sleek network box.

Greenfield notes Google Fiber has been carefully developed to break away from the familiar experience one has with the phone and cable company:

• The home terminals and DVR equipment more closely resemble a sleek Apple product, not a Motorola/Cisco set top box that has looked largely the same since the 1990s;
• The installation experience has been streamlined — the external network interface on the side of the customer’s home does not require anyone to be home during the installation, reducing the time needed for a customer to sit around while service is installed inside;
• In-home equipment envisions a more integrated IP-based network future with Ethernet and Wi-Fi connectivity, a centralized storage device which acts as an enhanced whole house DVR, and a minimalist TV box that can be hidden — no more unsightly hulking set top boxes. It represents a home entertainment network that goes far beyond what the competition is offering.

These factors deliver a positive customer experience, if only because Google paid attention to complaints from cable and telephone subscribers and decided to do things differently.

Other traditional business model busters noted by Greenfield:

• Google will deliver 6/1Mbps budget priced Internet for a $300 one time fee (payable in $20 installments) which includes an in-home router, breaking through the digital divide and getting Google’s infrastructure into homes that simply cannot afford traditional cable or phone company broadband. It blows away the current “lite” offering sold by cable and phone companies with much better speeds at a far lower price;
• Google is working with charitable organizations to help the poorest get broadband for even less, through donations and other fundraising;
• Google leverages the community as a crowd-sourced marketing engine. Word of mouth advertising and competition among different neighborhoods helps drive the expansion of the network. Even if a consumer has no interest in the service, many fight to see it in their neighborhoods for the benefit of local community institutions who will receive free hookups;
• Every new customer signed up for two years’ service receives a free Nexus tablet. The tablet is sold as the service’s “remote control,” but it is capable of much more;
• No data caps, no speed throttling. With just two speed tiers, Google has completely discarded the speed-based and usage-based business models for broadband.

A Nexus 7 tablet comes free with the service (and a two year commitment)

So what exactly does BTIG think is Google’s master plan? Greenfield suspects Google is not recouping its initial investment or costs with their current pricing model, but that may not matter. Google may earn profit in other ways.

A 33% increase in the number of homes with broadband could be a substantial boost for Google search and YouTube, earning Google additional revenue. Improved broadband available to an entire household guarantees people will spend more time online, especially with no data caps or slow speeds. Enormously faster upload speed promotes more content sharing, which in turn means more time online with services like YouTube. A home tablet enables even more broadband usage, according to Greenfield.

As broadband speeds improve, advertisers can expose web visitors to more attractive, multimedia rich advertising not easily possible on slower speed connections. That could let Google tap into a greater share of the $60 billion TV ad market, especially for YouTube videos.

Finally, Greenfield suspects the more Google develops brand loyalty, the more successful it will be pitching consumers and businesses on services of the future.

Greenfield notes there are still bugs and features to be worked on, particularly with Google’s TV offering, but the company will have plenty of opportunities to manage those before it introduces Google Fiber elsewhere.

The implications of an expanding fiber to the home universe in the United States under Google’s price model could deliver a potent punch to incumbents like Time Warner Cable. So far, the cable company has only faced satellite dish competition for television, a technologically inferior AT&T U-verse, which will never have the capacity Time Warner has so long as the phone company still relies on any significant amount of copper wiring, and Verizon FiOS, which has disengaged from a price war with the cable company and is raising prices.

The writing is already on the wall, at least in Kansas City. Greenfield relays that Time Warner has been going all-out to improve its own customer service. One customer noted Time Warner Cable came to his house twice in recent weeks, without a scheduled service call, to check on the quality of his Internet speeds and to make sure the customer was happy.

In some neighborhoods, Time Warner is going door to door to interact with customers, something not done since cable operators first knocked on doors 30 years ago to introduce you to their service.

Google Fiber could ultimately force the end of one more legacy the cable industry has earned itself over the past few decades: customers loathing its service and prices.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Google Fiber Demo by BTIG’s Rich Greenfield and Walt Piecyk 11-23-12.flv[/flv]

BTIG’s Rich Greenfield and Walt Piecyk experience Google Fiber in Kansas City.  (3 minutes)

Cadillac prices for some sports networks you pay for whether you watch or not. (Early Summer 2012 – Prices have since risen for some networks)

About 50 percent of your monthly cable television bill covers the cost of live sporting events and the networks that cover them, and the price is not going down anytime soon.

At least $21 of that bill is split between more than 50 national and regional channels covering every imaginable sport.

What customers may not know is that a handful of self-interested giant corporations and major sporting leagues have successfully bid up the price to carry those events using your money.

The Philadelphia Inquirer took a hard look at spiraling sports programming costs last weekend, discovering a lot of cable subscribers are paying for sports programming they will never watch.

“Here is a little old lady who wants to watch CNN,” Ralph Morrow, owner of Catalina Cable TV Co. in Avalon, Calif., a 1,200-subscriber system, told the newspaper. “But I can’t give it to her without $21 a month in sports.”

In the last 20 months, some of the biggest names in sports programming including Comcast/NBC, Fox, ESPN, CBS, and Turner have agreed to collectively pay $72 billion in TV rights to air pro, college, and Olympic events over the next decade. Costs are anticipated to soar to $100 billion or more once those contracts come up for renewal.

To cover the growing expense, the pay television industry’s business model insists that every subscriber must pay for sports networks as part of the “basic package” whether they watch or not. Nothing fuels annual rate increases faster than sports programming, and there is no end in sight.

Many contracts specifically prohibit operators from selling their networks “a-la-carte” or in special “sports tiers” that carry extra monthly fees.  Any additional costs are quickly passed onto subscribers in the form of regular rate hikes.

Charlie Ergen from Dish Networks suggests at the current pace of sports programming rate increases, it won’t be long before subscribers will face cable bills up to $2,000 a year, just to watch television.

If you don’t believe him, consider estimates from NPD Group, which predicts the national average for cable TV bills could reach $200 a month as soon as 2020. That is up from the already-high $86 a month customers pay today, after all costs and surcharges are added up.

It was not always this way. As late as the 1980s, the overwhelming majority of marquee sporting events were televised on “free TV” networks like ABC, CBS, and NBC. For decades, major broadcast networks largely had only themselves and the economics of advertiser supported television to consider when submitting bids to win carriage rights.

With the advent of cable sports networks, supported by dual revenue streams from both advertising and subscriber fees, ESPN eventually amassed a back account large enough to outbid traditional broadband networks. If another network moves in on ESPN’s action, the cable network simply raises the subscription fee charged to every cable subscriber to up the ante.

Broadcasters have enviously watched this dual revenue stream in action for several years now, and have recently insisted they be treated equally. Today, cable operators face demands for similar monthly payments from television stations and their network owners. In effect, customers are paying both sides to outbid one another for sports programming.

Consider ESPN as a case study in sports programming inflation. From 1989-2012, ESPN rates increased 440 percent. Today, every cable subscriber pays at least $5.13 for ESPN alone. In fact, the actual amount is considerably higher, because ESPN has successfully compelled most cable and satellite programmers to also carry (and pay for) several additional ESPN-branded networks also found on your lineup.

But why do cable companies agree to pay astronomical fees for sports networks, only to later alienate customers with annual rate hikes?

First, because customers watch sports. If a cable company does not carry the network showing a game or team a customer wants to see, that company will likely hear about it, either in a complaint call or cancellation.

Second, watching live sporting events is not easy for a cord-cutter. With fewer games appearing consistently on broadcast television, a cord cutting sports fan risks missing the action only available from a pay television provider.

In a defensive move, many cable and satellite companies assume the more live sports a  provider offers, the lower the chance a sports enthusiast will consider canceling service.

Cross-ownership also muddies the water for consumers. Comcast, the largest cable operator in the country, has an obvious self-interest loading its systems up with its own sports programming and compelling customers to pay for it.

Comcast owns about a dozen regional sports networks, NBC, NBC Sports Network and Golf.

Other large cable operators are concluding if you can’t beat ’em, join ’em. Time Warner Cable found one lucrative reason to own its own sports networks: its ability to charge competing cable and satellite providers sky high prices to carry that programming.

Time Warner is asking fellow cable, telco, and satellite providers to pay $3.95 a month for its SportsNet English and Spanish language networks, which feature the Los Angeles Lakers. For good measure, the same cable company that routinely complains about being forced to pass on mandatory sports programming costs from others insists companies place both of their sports channels on basic lineups, which guarantees every subscriber will also pay the price for two more sports channels, one in Spanish, they may have no interest in watching.

Share and share alike is a concept unfamiliar to Rogers Communications, at least in the eyes of the independent Internet Service Providers who have wholesale bandwidth agreements with eastern Canada’s largest cable operator that are supposed to guarantee speed parity.

The Canadian Network Operators Consortium (CNOC) last week announced it filed a complaint with the Canadian Radio-television and Telecommunications Commission (CRTC) accusing Rogers of withholding speed increases from independent ISPs.

In 2006, the CRTC made it clear that cable companies must treat its wholesale customers fairly:

The Commission determines that should a cable carrier introduce a speed upgrade to one of its retail internet service offerings with no corresponding price change, it is to issue at the same time, revised [third-party ISP access] tariff pages that match these retail service speed changes with no corresponding price change.

According to CNOC, Rogers wants independent ISPs to pay higher prices for the faster speeds it is providing its own customers for no additional charge.

That leaves providers like TekSavvy at a competitive disadvantage, according to the provider.

Peter Nowak explains Rogers is attempting to hurry independent ISPs to move to “aggregated points of interconnection,” part of the foundation of the CRTC’s earlier decision on usage-based billing. Independent ISPs were given two years to complete the transition and Rogers wants that change to move at faster pace:

Rogers wants indie ISPs to move onto the aggregated method, something it says the CRTC essentially ordered at the conclusion of the big usage-based billing fiasco a year ago. Here’s what a spokesperson told me:

We are not denying TPIAs access to our new speeds provided they have moved to a single point of connection, called an aggregated point of interconnection (POI). As part of the usage based billing rulings in November of last year, TPIAs were given two years to move from a disaggregated POI to an aggregated POI. The sooner this happens, the sooner we can provide those speeds to these third party ISPs.  Rogers will continue to provide access at existing speeds on the old network architecture until November 15, 2013.

The dispute, as usual, boils down to whether or not Rogers’ move can be considered anti-competitive. The small ISPs argue that it is, since Rogers’ own retail customers are getting the benefit of higher speeds without higher prices, yet the indie companies – and their own subscribers by extension – are being expected to pay more.

If it’s uneconomical for the indies to sell the faster speeds, they won’t, in which case the big network owners like Rogers will hold a distinct advantage since internet access is sold largely on speeds. Since they’ll simply perish if they can’t keep pace, the indie ISPs will ultimately have no choice but to accept the higher prices being pushed on them – and that effectively neutralizes the entire point of their existence, which is to provide a competitive check to the big guys.

CNOC has asked the CRTC to make an expedited ruling on the controversy as soon as possible to mitigate competitive damage.

Not long ago, the United States led the world in broadband connectivity. Now we are in 16^th place, trailing most developed nations. We need broadband policies that connect our homes, schools, and business to the 21^st century economy, but we’re pursuing public policies that are putting us in a hole, helping private telecommunications providers and harming the public interest. As the old adage goes, when in a hole, stop digging.

Halloween scare stories are back!

It is amazing the length some incumbent broadband providers will go to stop publicly-owned networks from getting off the ground and competing with the “good enough for you” service on offer from the local phone or cable company.

This morning, Stop the Cap! received word from a Minnesota reader who reports their dinner hour was interrupted by an unsolicited phone call from a group called “Americans for Sensible Broadband,” which as far as we can tell does not exist as a formal group. The caller used ridiculous scare tactics worthy of a bad Halloween movie:

• Did you know that fiber broadband networks are expensive to run and will increase your electric bill to pay for the high powered lasers needed to send the signal to your home?

Fiber broadband projects now expanding in Minnesota have no relation to your electric bill because most are run by independent community-owned co-ops, not electric utilities. Even if they were run by an electric provider, the cost to power a fiber network is far smaller than the network of signal amplifiers and other transmission equipment needed by traditional cable and phone companies. The only electrical expense to the homeowner is powering any set top boxes or other related equipment to make use of the service. These costs are comparable to what one would pay with cable or phone services.

• Most fiber networks are not actually fiber at all. The largest companies in America actually let you keep your current wiring, but that is not fiber, so why spend tax money on a risky fiber network?

While AT&T U-verse has chosen the route of “fiber to the neighborhood,” which still relies on existing copper wiring from nearby poles to your home, many fiber to the home projects take fiber… straight to the home. Some community networks do make use of very short lengths of pre-existing copper wiring inside your home, but this has more to do with your convenience. You don’t need a fiber connection to your landline phone, for instance. Compare the broadband speeds and services on offer from the community provider vs. incumbent cable and phone companies. Choose the one that delivers the best services for the price.

• America’s cable and phone companies are working hard for pro-growth, pro-expansion policies in Washington that will allow your community to get the benefit of billions of private investment, at no risk to you.

An in-home threat to your children or incumbent provider profits?

Incumbent phone and cable companies already enjoy a higher level of deregulation than ever before. If they have not spent money to improve broadband in your area before, there is nothing that will open their wallets to provide the service now, unless someone else subsidizes part of the cost. Guess who “someone” is? That’s right. You the taxpayer or ratepayer. Whether in the form of broadband subsidies paid for by taxpayer dollars or ratepayer subsidies from the Universal Service Fund, only subsidies or competition prod incumbents to deliver better broadband to rural Minnesota (or anywhere else). If you fail a “Return On Investment” test, you will not get broadband no matter how much deregulation gets approved in Washington.

The question for rural consumers is whether AT&T, Frontier, CenturyLink, Comcast, or Charter Cable has your best interests at heart or whether a community co-op you partly own will.

• In socialistic countries, the government runs the broadband service and can monitor your web browsing. Do you want your local community checking up on your online activities?

“Socialistic” is in the eye of the beholder. Most broadband networks are run by private telecommunications companies, some with state subsidies, others entirely on their own. The federal government’s security agencies already have access to monitor Internet traffic under warrantless wiretapping laws, and that extends to every provider in the country, private or public. That said, there is no evidence local government officials would monitor your web browsing habits, much less have the budget or technical expertise to do so.

• Fiber cables create more hazards on utility poles designed for phone, cable and electric service. Is it worth risking those services for an unnecessary and expensive fiber network?

Electric and phone companies used the same scare stories to try and keep cable television lines off utility poles more than 30 years ago. Cable operators fought for and won the right to use utility poles to no ill effect, and at fair prices. It is ironic some cable companies want to use the same argument against municipal fiber that phone and electric companies used against them.

• In these difficult economic times, do you realize your local taxes could triple to pay for unnecessary fiber Internet?

Most public broadband projects are financed by municipal bonds obtained in the private free market. Investors can decide for themselves if they represent a safe investment, and many do. If the networks fail, private investors typically take the hit.

But the most ridiculous claim of all was that “recent news reports warn that lasers could blind your children if they happen to play with the fiber cables in your home.”

The only “news report” we could find on this subject was an Engadget news story from 2011 about an S3 Krypton laser that could blind astronauts without proper safety equipment. But those lasers are not powering broadband networks.

In reality, fiber to the home networks are safer than traditional copper phone wiring, which can send a significant electric shock to anyone playing with the wiring when a telephone rings. Many fiber networks rely on Class 1, low power lasers — the lowest risk level. Even if a customer stared at the lit end of an optical fiber connector, the visible light would be diffused into a cone pattern that would be completely harmless by the time it reached the retina. Many networks also include a secondary safety mechanism that quickly shuts down the laser light once the connection has been broken. Certain higher-powered laser communications networks can have some safety risks, but almost entirely for workers working on primary cables that deliver service to dozens of homes. Those workers are well-trained to avoid those risks.

Minnesota seems to be one of the latest hotbeds of incumbent wrath over expanding community-owned broadband networks. Despite efforts to label them insidious creeping socialism, they are actually no more threatening than a traditional co-op, except perhaps to incumbent cable and phone companies that have been running to the bank cashing checks from customers enduring low broadband speeds at high prices.