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Implications of Google's Broadband Plans for Competition and Regulation -- Part 3 of Modernization Consensus Series
Submitted by Scott Cleland on Mon, 2013-01-28 13:51
Google's latest broadband pilot, experimenting with micro-cell (mesh) wireless broadband in its Mountain View headquarters, comes on top of Google Fiber's high-profile, commercial broadband pilot in Kansas City, that Google's CFO recently told investors was not a "hobby" but a real business opportunity.
These broadband pilots put a spotlight on Google's overall broadband plans and beg an analysis of the potential implications of Google's broadband plans for competition and regulation.
Summary of Conclusions:
1. Securing much-faster broadband access for its users is a strategic imperative for Google.
To more fully control its own destiny, Google knows it needs to provide more ultra-fast broadband access like Google Fiber in Kansas City and Google Mesh-Wireless in Mountain View.
Edge bandwidth is the only weak link in Google's computing network chain of computer processing, storage, and bandwidth. Current edge bandwidth performance lags Google's cloud computing and storage performance by orders of magnitude. Speed is Google's overriding corporate obsession, consistent focus, and deeply-appreciated comparative advantage.
Consider that Google has the world's largest computer network comprised of ~two million servers, three times more than any competitor per Bernstein Research. Per Google's Chairman, Google stores every two days more data than the world created from "the dawn of civilization through 2003." Google's innovative "Big Table" database with near-perfect global synchronization makes it the fastest system of data retrieval in the world.
Consider that Google-YouTube is by far the Internet's dominant TV broadcaster with 800 million viewers 15-30 times more than various types of competitors. In the U.S., Google-YouTube commands 65% of Internet video streams, 27 times more than Hulu and 48 times more than Netflix.
And Google Fiber's Gigabit + TV already offers most all channels that any other video distributor offers. With an unregulated broadband service, Google can begin its effort to make broadband competitors' superfluous, because they offer: more speed; a much more comprehensive bundle of vertical programming, information, products and services than anyone; and few of the privacy and regulatory constraints that their traditional video distribution competitors shoulder.
Consider that Google-Android is the fastest-growing operating system in the world with around 600 million users and which is on path to have over a billion users by the end of 2013 and to become the #1 operating system in the world by devices by 2016 per Google.
Consider that via Google+, Google's omni-integrated, largely-free, ad-supported, product and service bundle, includes most every product and service that a broadband user could want or need, and that all of those products and services are designed to operate much faster than competitors' offerings via their fastest-by-design giga-bit broadband, browser-designed for speed, and cloud service designed for fastest data retrieval.
The fact that Google Fiber offers to provide broadband service for free at "today's average speeds," (7 Megabit) to those who will pay a $300 installation fee in Kansas City, underscores Google's long-term commitment to having as many Google broadband customers as possible.
Simply, without a broader ultra-fast broadband service offering everything else Google does is substantially sub-optimized.
2. Google can offer much-faster broadband access, more widely, less expensively, and potentially more profitably, than conventional wisdom believes.
Apparently most everyone is vastly underestimating what Google is already doing and can do in the not-too-distant future. That is because most everyone is looking through the very familiar lens of how it has been done before, and not through the very unfamiliar lens of how Google intends to radically "disrupt" the status quo.
Google can offer much faster broadband access than any existing competitor because they do not have an existing customer base and revenue stream that can be cannibalized and commoditized by offering ultra-fast broadband service. Google is also the only new entrant already operating a global fiber-CDN network with hundreds of peering arrangements that rival most any competitor.
Google can offer broadband service more widely than anyone else. Google is the only truly global video distribution system in the world. No competitor is remotely close in global scale, scope or reach to Google.
For example, YouTube already distributes locally from 43 countries in 60 languages, and has the world's best and most comprehensive immediate translation service capability to potentially dub or subtitle video programming via automation. In addition, most all of Google's broadband competitors are national or regional in focus, not global.
Google can offer broadband service much less expensively than its competitors. Google can cherry-pick the most population-dense, easiest-to-build, most Google-friendly locations willing to substantially subsidize Google's market entry -- like Kansas City. Google also has the Internet freedom to "red-line" if it chooses to not serve less-profitable neighborhoods.
Google can offer broadband service potentially more profitably than competitors, because in addition to earning broadband subscription revenue, Google can monetize its service via targeted advertising to a much broader bundle of vertical products and services than a traditional broadband competitor can provide in its bundle.
Via its dominant search and analytics, Google also uniquely knows what most all customers demand, a dominant capability no other competitor enjoys. And in the U.S. given the FTC's closing of the Google antitrust investigation of search bias, Google now can more aggressively divert its dominant user base to Google-owned products and services to cross-subsidize its broadband offering and further augment its profitability.
3. Competitively Google is counting on favorable industrial policy to accelerate rollout of its broadband offering in the U.S.
A big part of Google's U.S. broadband business calculus is the FCC's concept of competition continuing to be, not market-forces competition, but FCC-managed competition with the goal of redistributing market share or spectrum from incumbent competitors to smaller competitors and new entrants.
Examples of this FCC-managed competition are: the data roaming order; the blocking of AT&T's acquisition of T-Mobile based on a factually-challenged staff report; the FCC's forced reallocation of CableCo spectrum away from Verizon to other competitors; and pursuing unwarranted spectrum screen and special access proceedings.
In particular, Google expects the Federal Government to ease its entry as a broadband provider by: reallocating as much spectrum as possible from public auction to free unlicensed use (to lower Google and others' costs relative to cellular competitors); promoting spectrum-sharing of Government spectrum rather than auctioning it per the law (i.e. PCAST recommendations); tightening the FCC spectrum screen to constrain AT&T and Verizon's growth potential; and encouraging and effectively subsidizing Gigabit cities in all 50 states and gigabit geographic clusters around public universities and other public institutions.
4. The more Google offers broadband access the more it will need modernization of obsolete communications laws.
The more Google envisions itself as a broadband and cable TV service provider going forward, and increasingly operates as one, the more it will learn it is in Google's interests to: avoid the kudzu-like, regulatory creep of obsolete FCC, state, and local franchise regulation; and support the modernization of obsolete U.S. communications laws to create ultra-fast broadband access for 21st century demand, products, services and innovation.
Moreover, it will become increasingly incongruous for a company publicly bent on pushing the technology envelope for a 21st century Internet to not support modernization of obsolete 20th century communications law predicated on obsolete 1881 twisted-pair communications technology and 1913 radio technology, that never envisioned computers, the Internet, broadband, smart-phones or search.
Google has already rejected entering the telephone business because voice is an app on a broadband network and because Google does not want to be ensnared in all the obsolete legacy telephone regulation. Google's head of Google Fiber, Milo Medin, explained Google's rationale for not offering voice service with Google's broadband/TV bundle. “We looked at doing that. The cost of actually delivering telephone services is almost nothing. However, in the United States, there are all of these special rules that apply.”
5. Potential FCC Title II regulation of broadband could be the single biggest threat to Google's ultra-fast broadband plans.
The regulatory status quo is best for Google's broadband aspirations in the U.S. However, if the D.C. Court of Appeals overturns the FCC's Open Internet Order and net neutrality regulations as expected, Google will be confronted with the single biggest threat to Google's vision and business need for ultra-fast broadband service -- efforts by net neutrality activists to reclassify broadband as a Title II telephone regulated service.
If Google would not offer telephone (voice) service to users because of onerous Title II regulations, it can't be expected to offer more broadband service in the U.S. if broadband is subject to onerous Title II telephone regulations.
Simply, Title II reclassification of broadband could be a game-breaker for a broader Google Fiber roll-out.
Ironically and interestingly given Google's market-leading vertical integration of applications, content and now broadband, Google originally supported the potential use of Title II authority for broadband if the FCC deemed it necessary to preserve net neutrality. Three years ago Google told the FCC: "Broadband network operators' growing vertical integration with content and applications that ride over their networks increases their incentives and opportunities to engage in conduct antithetical to the public interest, ranging from blocking and blatant discrimination to less obvious actions that result in reduction of competitive offerings."
It is important to note that Google's net neutrality thinking has expediently "evolved" greatly over the years. Google was the original corporate hardliner on net neutrality. A few years later when Google Android became a major strategic priority in Google's shift to mobile, Google softened its hard-line net neutrality position in joining Verizon in a compromise net neutrality position for an open Internet; this half-reversal prompted angry protests of betrayal by net neutrality supporters at Google's headquarters in August of 2010.
To promote its video strategic priority, Google has invested heavily in CDNs, peering, and local video caching so that YouTube will load faster than other comparable Internet content. Google also has launched Google Fiber broadband and TV offering in Kansas City. And most recently, Google has set a new big net-neutrality-violating precedent in paying France's Orange for carrying its traffic which has prompted angry criticisms again from net neutrality supporters.
Simply, Google's net neutrality thinking has evolved greatly as the business realities of its broad corporate ambitions collide with regulatory realities.
An interesting question related to piracy enforcement is whether Google Fiber will join the major ISP's (Comcast, Verizon, AT&T, Time Warner Cable and Cablevision) to implement the anti-piracy, Copyright Alert System, dubbed "six strikes" to discourage piracy and alert/warn broadband users that the sites they are visiting have pirated material.
If the FCC's Open Internet Order is overturned by the Appeals Court as expected, Google could be confronted with another major business need to expediently "evolve" its regulatory thinking to not undermine its own vertical integration ambitions of Google+, Google TV/YouTube, and Google Fiber.
The biggest "open" question for Google here will be whether Google allows its past net neutrality regulatory positions to limit its ambitious future plans and vision, and whether or not Google will: oppose Title II reclassification of broadband, and support modernization of obsolete communications law.
Modernization Consensus Series
(Note: This series previews potential strategic developments that could substantially change major players' interests in modernizing Obsolete Communications Law.)
Part 1: Supreme Court Likely to Leash FCC to Law
Part 2: Supreme Court's Likely Leashing of "Chevron Deference" Is FCC Game Changer