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Why Google Wants In on Broadband

2/13/2010 12:00 AM Eastern

It’s been a busy week in the Googlesphere. Google made headlines last week when it announced bold plans to build an experimental fiber-to-the-home broadband network that’s slated to eventually deliver a whopping 1 Gigabit per second of Internet connectivity to 500,000 U.S. homes (see page 6).

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 Communications 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 e-mail, 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 broadband at 1 Gbps for around $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. 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.

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.