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Disruptive Google Fiber Is Shaking up the Telco World

The Google Fiber project is receiving international attention. This in itself is a good thing, since it brings the benefits of high-speed FttH infrastructure to the attention of large numbers of people in business and government who will not have to deal with such developments on a regular basis.

It will also give a boost to any other company in the world that is currently rolling out FttH and will instil confidence in investors considering such projects.

The truly high-speed nature of 1Gb for $70 clearly ‘throws a spanner in the works’ for those who believe that low-speed broadband based on copper and cable TV networks is sufficient for the foreseeable future. Of course the proof will be in the eating of this fibre pudding, but with the strength of Google behind it there is a good chance that we will start seeing how this speed can be used.

Not being a telco, the company is also disruptive on how broadband services will be derived and used. This is very much linked to the apps concept on smartphones and tablets—as a matter of fact, a tablet is part of the service when customers also opt for the video entertainment (TV) services.

Taking on the appalling regulatory situation in the USA

At the same time we have to look at Google Fiber from the point of view of operating in the American regulatory environment. Yes, we can all learn from its disruptive model, and particularly when the results of the more innovative elements of the services begin to kick in; but for other reasons there is no way that this model can be replicated elsewhere.

First of all, the American telecoms market is the most incumbent-captive market in the western world. There is no other country where the incumbent telcos and cablecos have such power. These incumbents have been able to influence the finetuning of the regulatory system in their country totally to their own advantage. There is hardly anybody apart from the incumbents with a good understanding of the ins and outs of the regulatory system, and this enables these players to game the system to the maximum extent.

Thanks to the incumbents, the regulatory system is so complex that it is nearly impossible to create any form of competition within its structure. It is also rather ironic that the most enthusiastic supporter of this highly regulated system is the Republican Party, which at the same claims to be anti-regulation and pro-competition.

The reverse is in fact the case.

On top of that, hundreds of millions of dollars are spent by the incumbents to lobby the senators and congressmen and over the years this system has been turned into a well-oiled machine, so successful that hardly any politicians want to stand up to the monopolistic powers of the industry—and this applies equally to both political parties.

While the FCC understands these problems, it is incapable of doing anything about them. It is held hostage by, on the one side, the all-powerful incumbents, and on the other by its boss, the heavily lobbied Congress.

This is also the key reason Google does not offer any voice services over its network. This is a highly regulated environment and if Google were to venture into voice services it would have to spend a phenomenal amount of money in order to comply with hundreds of FCC and State Regulations that apply specifically to voice services. And at any given moment there are the incumbents, with their lawyers, prepared to take Google on.

So Google is taking on the competition on its own terms, not on theirs. It will be very interesting to see how successful Google will be in its battle with these incumbents. Not that I expect there to be any serious reaction from them. In the larger scheme of things Kansas City is small fry, and there are no plans from Google to ‘conquer the world’.

From a competition point of view the best thing we can hope for is that Google Fiber starts showing new business models that can be applied not just to Kansas City but elsewhere, and that this project will give confidence to competitors and their investors to try a new approach.

New infrastructure concept lowers costs

Another problem area is that the investments needed for FttH projects are so large that a 50%-60% take-up is needed to make it a commercially viable project. This will be impossible in Kansas City, or in any other city in America—or for that matter anywhere else in the developed world where telcos and cable companies are providing infrastructure in competition. You can have a far more superior infrastructure, such as is the case with Google, but people are not going to pay more than they are currently paying for their broadband services. This is the most important reason there is such reluctance around investment in FttH.

To overcome this problem it will either be necessary for the infrastructure to be structurally separated from the retail services and offered on a utilities/wholesale basis, as is now happening in Singapore, Australia and New Zealand—or for the cost of these projects to be lowered to such an extent that a superior service can be offered for the same cost as that of an ‘inferior’ service offered by the competitors.

Within the anti-competitive American regulatory system Google obviously had no other choice but to pursue the lowest possible costs option. It is questionable whether Google has been able to do that in a normal commercial way. It has received significant incentives from Kansas City, but that was certainly not enough, and Google had to be far more innovative. It used the OpenFlow concept, basically designing its own network, including all of the components, which they had made cheaply in China rather than using the network products and services as they are offered in the traditional way by the traditional vendors.

This development in particular will have significant consequences for all future FttH rollouts. If FttH can be rolled out at significantly lower cost by using OpenFlow rather than the traditional network designs then this will have a positive effect on the costs related to all future FttH rollouts, anywhere in the world.

Vertically-integrated Google Fibre

A negative side effect of the combination of driving down network costs and the appalling regulatory situation is that Google can only achieve success if it controls, end-to-end, all of the elements of the service itself. So this is no longer the open network as Google promised in the beginning. It has also eliminated the need for the complex interconnect relations needed for traditional networks—a system again dominated by the incumbents. Instead Google will follow the apps approach and allow content providers to deliver services over their network along the Android and iTune models; but no ISPs are allowed on the network. Such an approach again indicates the highly utilitarian nature of the infrastructure.

Google realised that it cannot compete with the telcos and the cablecos on their terms and that it will have to develop its own monopoly (vertically-integrated model) next to them and simply, over time, outcompete the other older technologies. Of course, in the end this would see Google Fibre being the only long-term infrastructure survivor. Already in the USA AT&T and Verizon are abandoning large sections of their old copper-based fixed network, without any new fixed infrastructure under construction to replace it—instead the telcos are opting for the cheaper telco version of mobile infrastructure, where they don’t have any competition from the cablecos.

This retreat from the broadband market also shows that the cablecos have basically won the American broadband battle, and it means that the Google Fibre battle will basically take place with the cablecos and not with the telcos.

If one takes a long term view and looks at the controlling reputation Google already has in the digital media market then one would have to ask if such an FttH infrastructure monopoly is a good long-term outcome from a national governance point of view. Most of our respected telco analyst colleagues in the USA believe that a structurally-separated model would be the better long-term solution. This concept, by the way, is also supported by Google, but in the case of the USA they have no other choice but to do it the way they are currently doing it.

By Paul Budde, Managing Director of Paul Budde Communication

Paul is also a contributor of the Paul Budde Communication blog located here.

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