Google vs. Telco and Cable: Fibre to the Home (FTTH) in Kansas City

Commentary, Disruption, Roland Renner

In April, FCPP released a policy paper, “Rebuilding the Last Mile”

on upgrading the last mile of telecommunications networks.  Installing fibre optic cable from households to the telecommunications network creates a huge increase in communications capacity to each home.  Several models and international precedents were examined in the paper including building a third network (after telco and cable) into the home as Google was planning, and the Australian approach building one government owned facility open to competing service providers.

On July 26th, Google announced the launch of its Fibre to the Home (FTTH) service in Kansas City.Registration for the service has been strong.This marks the start of a highly anticipated FTTH deployment.  It is the first time a large, well financed corporation has directly challenged the incumbent telco, cable and DBS satellite companies in a mature, mid-sized U.S. market to  bring basic telecommunications infrastructure  to residential households.  This project has the potential to revolutionize telecom markets in North America. 

FTTH already serves about one percent of the U.S. market.  Ironically,  most of these installations are in remote communities where the large incumbents either overcharge or decline to provide up-to-date services..  The local community  developed it themselves.  This has given rise to the municipal network movement that installs fibre technology and bypasses the incumbents entirely.  Therefore, some small remote communities have the best telecommunications infrastructure in the U.S.  The largest example is Chattanooga, Tennessee, with a population of 125,000.

Most telcos and cablecos have taken the position that consumers don’t want or need FTTH because it is too expensive. They also argue there are not enough attractive applications to use the increased capacity FTTH delivers.  Instead, the incumbents have upgraded their networks incrementally, leaving the expensive segments to individual households  for last, while implementing download caps, Usage Based Billing (UBB) and high prices for faster internet speeds. 

Google thinks there is  market demand for FTTH, and opted for Kansas City as a test run.  In addition to current services, higher capacity will make room for new, creative internet applications including, for example, smart metering and the smart electricity grid.  But, to a large extent, Google wants to find out what happens when people get very fast internet at a reasonable price, They bet that new applications and inventive uses will be profitable as well as revolutionary.  Some telcos are hedging their bets with smaller deployments just in case Google is right.

FTTH deployments need a high take up rate to pay for the relatively large initial capital costs for fibre and installation.  This means signing up enough subscribers out of the total population served to pay for the service.  It also means subscribing these customers to the  “triple play” : phone, internet and most importantly video service, which has traditionally been the largest revenue generator of the three.  This shold be easy in a remote region that is broadly dissatisfied with the level of service.  In a mature market, where most households are already signed up with other companies, it is a much bigger challenge.

The Google deployment offers 1Gbps Internet access for $70 per month – add video for a total of $120 and you get 135 channels.There are some gaps in the U.S. channel line-up, like Fox, Disney, ESPN, and HBO. However, it is in the early stages. The web site claims new channels will be continuously added to the line-up.  Finally, the package comes with a number of useful features, such as a Nexus7 tablet for a remote, a TV box for HD, VOD and internet content, a network box and two Terabytes of storage.

The defining feature of the video package at this stage is simplicity. There is no complicated packaging designed to push the customer into higher price brackets. 

All-in-all, the Google deployment looks like an excellent deal. It is a combined package that is well in the range that most households spend on Internet and video, with the open-ended opportunity to use 1 Gbps internet speed. Further, there are no usage caps or Usage Based Billing (UBB) features.

Finally, there are pricing options that  far surpass the most recent historical standard for broadband internet access.  5 Mbps service (1 Mbps upload) is available for payment of the $300 construction fee or twelve payments of  $25.  Until recently, the same service cost more  per month. 

Google is addressing the take up challenge by running a sign-up contest.  It has divided the city into neighbourhoods and encouraged people to register on their web site.  This is supplemented by demonstration systems in restaurants and coffee shops.  The neighbourhoods  first to reach their registration targets will be served first. Earlier this week, 110 neighbourhoodsreached the minimum, while four neighbourhoods hit 30 percent- a very impressive response in less than a month.  

The Google approach to the revenue model challenge is also interesting.  While some FTTH deployments require customers to purchase a complete service bundle, Google allows individuals to buy internet access as a single service. Consumers can add video, if they so choose, at an attractive price. Phone service is gone entirely as a separate service.  Google assumes that people will use a mobile phone or a VoIP service on the internet.

The third challenge has been the details of pole attachment, access to conduit, amount of spare capacity in conduit, municipal and state environmental regulations, coordinating digs with municipal and other utilities.   The rules and regulations around these traditional and mundane skills have been in the province of the experienced incumbents.   The incumbents have relationships with  people who work in these positions.In contrast, Google, like any new entrant, had to start from scratch.  That isn’t easy.  “Rebuilding the Last Mile” recommended that public policy should facilitate and encourage access to rights of way and interconnection for new entrants in last mile deployments.

Is the last bastion of telco and cable market power about to fall?  Most households already have two network connections, telco and cable.  Many commentators have argued that there isn’t economic room for a third network into households.  If Google is successful in Kansas City, then the third network will have arrived.  Although this entails an element of duplication, or rather triplication, the advantages of competitive forces may outweigh the disadvantages of multiple networks.  While Google has claimed in the past that they are not interested in a national deployment, they might change their minds. Regardless, they will have pointed the way for others to succeed.  We could see a competitive scramble to build third network FTTH and and faster upgrades in response by telcos and cablecos seeking to defend their market share. 

With the Australian National Broadband network also being deployed,we will be able to compare the two models:  Google’s third network and Australia’s government-owned infrastructure model.  Supporters of the Australian approach have argued that more efficient use of expensive infrastructure will result in lower costs and better services for consumers.  Supporters of the third network approach have argued that creating more competition in the last mile will have better results for consumers in spite of the additional infrastructure costs.  We now have two real world examples to compare the results.