Why Google Wants In On The Broadband Game

by on February 10, 2010 · 4 comments

It’s been a busy week in the Googlesphere. Google made headlines earlier this week when it aired a televised ad for the first time in the company’s history, and again yesterday when it unveiled Buzz, its new social networking platform. Today, Google announced bold plans to build an experimental fiber-to-the-home broadband network that’s slated to eventually deliver a whopping gigabit per second of Internet connectivity to 500,000 U.S. homes.

Google’s ambitious broadband announcement comes as welcome news for anybody who pines for greater broadband competition and, more broadly, infrastructure wealth creation in America. To date, Google has dabbled in broadband in the form of metro Wi-Fi, but hasn’t embarked on anything of this scale. Laying fiber to residences is not cheap or easy, as Verizon has learned the hard way, and Google will undoubtedly have to devote some serious resources to this experiment if it is to realize its lofty goals.

It’s important to remember, however, that Google is first and foremost a content company, not an infrastructure company. Google’s generally awesome products, from search to video to email, attract masses of loyal users. In turn, advertisers flock to Google, spending billions in hopes of reaching its gigantic, precisely-targetable audience. This business model enables Google to invest in developing a steady stream of free services, like Google Voice, Google Apps, and Google Maps Navigation.

So it won’t be too surprising if Google’s broadband experiment doesn’t initially generate enough revenue to cover its costs. In fact, I’m skeptical that Google even anticipates its network will ever become a profit center. Rather, chances are Google won’t be at all concerned if its broadband service doesn’t break even as long as it bolsters the Google brand and spurs larger telecom companies to get more aggressive in upgrading their broadband speeds (which, indirectly, benefits Google).

Google’s broadband agenda is great news for consumers, of course. Who can complain if Google is willing to invest in building a fiber-to-the-home broadband network and is willing to charge below-cost prices? Not me!

If Google can offer 1Gbps broadband for a “competitive” price — say, $50 a month, — then why can’t Verizon and Comcast? Well, unlike Google, neither of these firms — or most telecom companies, for that matter — has a substantial stake in the content business (not yet, at least). Selling data, voice, and video services above cost is how traditional telecom companies make money. But Google’s bread and butter is advertising, not infrastructure. Also, big ISPs serve tens of millions of homes, while Google only aspires to connect a mere half million. Even if Google’s broadband service were to run a $100 million yearly deficit, Google wouldn’t suffer much — the firm earned over $4 billion in net income last year alone.

As Google’s broadband plans illustrate, smart vertical integration in the content and infrastructure businesses has the potential to benefit consumers enormously. Creative arrangements between these two industries will likely be increasingly important in the years ahead as demand for faster broadband grows. But attempts by government to steer these arrangements in unnatural, politically-favored directions — by adopting open access mandates, for instance — threaten to thwart efficient, vertically integrated business models.

By the way, when are we going to hear comment from all the critics of the Comcast-NBC deal who cried foul on the grounds that content-infrastructure integration undermines consumer welfare? A recent Free Press report, for instance, argues that:

Because the merged entity would control both content and distribution, it would have both the incentive and the
market power to limit the access of competing content to the distribution platforms it controls.

There’s an equally compelling — or, more precisely put, equally unconvincing — argument to be made that Google would have a similar incentive to favor its own content on its broadband network. If we should be worried about Comcast-NBC favoring NBC-produced content on Comcast’s network, shouldn’t we also be worried about Google favoring its search engine over Bing on its broadband network?

No, in reality, the likelihood that either Comcast-NBC or Google has the market power to sustain a genuinely anti-consumer regime of preferential treatment is quite slim. Adam and others have already documented extensively here on TLF how choice in the media marketplace is abundant and continually expanding. And the broadband market, while certainly not as vibrant, is still fairly competitive and growing more so at a steady clip, as Google’s announcement today illustrates.

Fearing the evolution of the content and infrastructure industries — whether in the form of Googlephobia or Media Merger Hysteria — is fundamentally wrong-headed. To be sure, as integration occurs, mistakes will be made, mergers will fail, and consumers won’t always get exactly what they want. But these phenomena are normal, even necessary, elements of a dynamic, rapidly evolving market. We should celebrate, with due caution, Google’s entry into the broadband game. But we should not assume that the Google model is the end-all, be-all arrangement between content and infrastructure.

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  • Brett Glass

    If Google never plans to make a profit from the service, then to roll it out would be an illegal anticompetitive move. Which, in fact, is what it appears to be intended to be.

  • Ryan Radia

    Brett, I think you've got it wrong. I'm not an lawyer, but based on my knowledge of U.S. antitrust law, offering a product below cost is generally not considered illegal, unless monopolization can be demonstrated. There's no evidence that Google is trying to harm the state of competition in the broadband market. In fact, as I argue above, Google has an incentive to use its “experiment” to improve the state of broadband competition by forcing ISPs to get more aggressive in pricing and upgrades.

    When a firm decides to set the price of a good or service below cost, that's good news for consumers — it means they can afford to buy more than they otherwise would, increasing their purchasing power. If Google runs a fiber optic network to homes in my community and offers higher speeds than other ISPs at comparable prices, I stand to benefit. Of course, Google's network may not be good news for ISPs, who will have to compete or else suffer the consequences.

    This is exactly how competitive markets are supposed to work. Remember, the purpose of antitrust laws isn't to protect companies from superior competitors, but rather to ensure that the state of competition itself isn't hindered by excessively powerful monopolists. Google has neither the incentive nor the market power to harm the state of broadband competition. I'm cautiously optimistic about Google's broadband plan. If history is any guide, it could benefit broadband users. Consider that many of Google's unpriced services, including Gmail, Google Voice, and Google Maps Navigation, have spurred innovation in their respective markets. Similarly, the broadband industry too may well benefit from a dose of Google.

  • Ryan Radia

    Brett, I think you've got it wrong. I'm not an lawyer, but based on my knowledge of U.S. antitrust law, offering a product below cost is generally not considered illegal, unless monopolization can be demonstrated. There's no evidence that Google is trying to harm the state of competition in the broadband market. In fact, as I argue above, Google has an incentive to use its “experiment” to improve the state of broadband competition by forcing ISPs to get more aggressive in pricing and upgrades.

    When a firm decides to set the price of a good or service below cost, that's good news for consumers — it means they can afford to buy more than they otherwise would, increasing their purchasing power. If Google runs a fiber optic network to homes in my community and offers higher speeds than other ISPs at comparable prices, I stand to benefit. Of course, Google's network may not be good news for ISPs, who will have to compete or else suffer the consequences.

    This is exactly how competitive markets are supposed to work. Remember, the purpose of antitrust laws isn't to protect companies from superior competitors, but rather to ensure that the state of competition itself isn't hindered by excessively powerful monopolists. Google has neither the incentive nor the market power to harm the state of broadband competition. I'm cautiously optimistic about Google's broadband plan. If history is any guide, it could benefit broadband users. Consider that many of Google's unpriced services, including Gmail, Google Voice, and Google Maps Navigation, have spurred innovation in their respective markets. Similarly, the broadband industry too may well benefit from a dose of Google.

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