Google (GOOG) Shakes Up The Internet Access Business

Google (GOOG) is a noun, a verb and the maker of the world’s most popular smartphone operating systems. Soon it could be your Internet service provider, too.

The company recently announced the launch of a new fiber Internet service, Google Fiber, in Kansas City, Mo., and Kansas City, Kan. As of mid-2013, Google expects to begin delivering Internet service 100 times faster than current average speeds to residents of the two cities.

Not only will Google Fiber be faster, it will also offer the opportunity to combine traditional television and Internet service. Customers who subscribe to both Google Fiber television and Internet service will be able to watch the package’s full assortment of television channels on their computers, smartphones and tablets, as well as Internet videos on their television screens. While Google has so far only announced a “representative” channel lineup, that list currently includes Viacom channels such as MTV, BET, Nickelodeon and Comedy Central, but excludes Disney-owned channels such as ESPN, the Disney Channel and ABC Family. Premium channels will be available for additional fees.

The combined package is priced at $120 a month, with the Internet-only option priced at $70 a month. Google will also offer current standard-speed Internet at no monthly charge, for at least seven years, to users who pay a one-time $300 fee to have their homes made fiber-ready.

Google plans to build the necessary fiber infrastructure only in neighborhoods where at least 5 percent to 25 percent of households sign up. Residents have until Sept. 9 to preregister and can track how many of their neighbors have signed up online. The neighborhoods with the most preregistered subscribers will be visited by construction crews first.

While only Kansas City residents will benefit immediately, the move is good news for everyone. The high cost of building infrastructure for cable or fiber Internet has long meant that the Internet service provider game was only open to established players. This has left customers with minimal choice and companies with minimal competition – and little reason to improve offerings or restrain costs. Google’s entry, even in a limited market, is a sign that new players can indeed emerge, often from unexpected directions.

The move also has important implication for “network neutrality,” the principle of preventing service providers from prioritizing certain kinds of Internet traffic over others. As users have increasingly turned to the Internet for access to video content, service providers, objecting to the bandwidth taken up by high volume users, pitted themselves against content providers. Meanwhile, as some service providers have acquired content of their own, fears have grown that service providers might prioritize their own content or block competing material.

Google is a content provider, both indirectly through its search feature and directly through its ownership of YouTube and other sources of entertainment and information, including Zagat and, soon, Frommer’s travel guides. As a content provider, it has been one of the chief corporate proponents of network neutrality. In becoming a service provider itself, it will face the temptation to favor its own substantial content. Given its long history of promoting network neutrality as a content provider, however, such a move would be a public relations disaster. I am giving Google the benefit of the doubt: I think it will take this opportunity to show that a high-bandwidth service provider can offer its own content on equal terms with competitors’ without problems.

Google is not the first major player to combine distribution and content. With its acquisition of NBC Universal last year, Comcast, the nation’s largest cable TV provider, launched an ambitious bid to build “the ideal entertainment and distribution company,” as its CEO Brian Roberts put it. But Comcast carries some net neutrality baggage. In 2007, Comcast became the target of the Federal Communications Commission’s first attempt to enforce network neutrality rules and, in 2010, it won an appeals case requiring the FCC to rewrite those rules.

For now, Google’s infrastructure will strictly take the form of underground fiber. I wouldn’t be surprised, however, if the move to fiber Internet service is just the first step on a path that will eventually lead Google to take to the airwaves.

The Google Fiber launch shows that Google is willing and able to compete with established providers. As a result of its acquisition of Motorola Mobility (MMI) last year, Google already has a position in the mobile handset market. Most importantly, there just happens to be a company with significant infrastructure and spectrum that is up for sale.

Since the death, at the hands of regulators, of the proposed merger between AT&T and T-Mobile last year, Internet commentators have been more than happy to propose possible alternate buyers for the ailing wireless carrier. At least a few have put forward Google’s name.

The consequences of a content provider like Google entering the wireless market would be even more far-reaching than those of it entering the wired market. Google itself, in a recent policy proposal issued jointly with Verizon (VZ), essentially admitted that any form of network neutrality for wireless Internet is a losing battle. A Google blog post defending the policy proposal explained that the “constrained capacity” faced by wireless carriers requires that they “manage their networks more actively.” The same supposed “constrained capacity” has also pushed wireless providers to eliminate unlimited plans in favor of data caps.

Of course capacity is an issue, but traditional wireless providers also have little motivation to increase the amount of content their customers can access. The same would not be true for Google, which might be willing to forego overage charges in the hopes that some of that “excess” data might be its own.

So far Apple (AAPL), which has also been mentioned as a long-shot possible T-Mobile buyer, has shown little interest in following Google into the Internet service business. Apple and Google have a complicated relationship, in which they are occasional collaborators but frequent competitors. Apple will have to think about whether it is willing to live in a world where Google might emerge as a major channel for Internet access and about what it would be willing to do to stop that from happening. The most obvious strategy would be for Apple to get into the access business itself, but my guess is that it is more likely to try to strike alliances with other vendors, such as the big cellular companies, or maybe Comcast and its cable peers.

Whatever happens, techies across the country will be watching Google’s new strategy closely. Those in Kansas City will just be able to watch a lot faster.

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