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.

About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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