It’s unlikely that owners of Google stock — excuse me, Alphabet (GOOGL, GOOG) stock — ever even considered Google Fiber before wading into a position. Heck, Google stock owners probably don’t have a clue Fiber is offered in certain markets. Yet, given enough time, this little side project that’s currently under the “Other Bets” umbrella could end up being a core moneymaker.
Google Fiber is a fiber-optic uber-high-speed Internet service Alphabet is largely building from scratch.
Although the amount of revenue it currently drives isn’t even worth mentioning, in time, Google fiber could prove a vital part of the value of Google stock.
And the most recent turn of events in Louisville, Kentucky may prove to be a defining moment for the future of Alphabet’s Internet service provider ambitions.
What’s the Real Plan?
Back in 2012, when Google Fiber was new and not available much of anywhere, observers and analysts largely concluded the launch of the service was more to pose a money-losing hypothetical threat to current broadband providers like AT&T (T) and Comcast (CMCSA), thus forcing them to provide faster and/or cheaper Internet services that would ultimately allow those users to access more Google services; it was never about making money by selling the service.
Now, however, it’s become clear that Google spokesperson Jenna Wandres wasn’t just blowing smoke in 2012 when she said “we’ve said-and maintain- that we expect Google Fiber to operate profitably.”
Google Fiber is now available in nine cities, with a dozen more cities on the horizon, and more on the way.
The real measure of just how serious Alphabet is about expanding its Google Fiber network, though, is in its spending history and spending plans. Last year, capital expenditures for its so-called Other Bets category reached $869 million vs revenue of only $448 million for the group that consists of Nest, Google Fiber and its autonomous cars. Google Fiber made up the bulk of both figures.
CFO Ruth Porat also offered a glimpse of the future, saying after last quarter’s earnings report:
“In Other Bets, the majority of capex supports the ongoing deployment of Google Fiber. We’re still operating in only a few cities, but have announced plans for additional cities, which we expect will be reflected in 2016 capex.”
There aren’t too many ways owners (and non-owners) of Google stock can interpret Porat’s message.
A Pivotal Moment for Google Fiber
It’s only one state, and as such isn’t necessarily a microcosm of how receptive local and state governments will be when it comes to paving a way for Google Fiber. The legal battle currently unfurling in Louisville, Kentucky, however, is a meaningful barometer for how much the market wants the option, and how fearful AT&T is that Google Fiber will continue to make waves.
In simplest terms, the city of Louisville has passed an ordinance that allows service providers like Google Fiber to easily and efficiently use telephone poles owned by AT&T. AT&T has already filed a suit, complaining that the city doesn’t have the authority to make that call — that’s the FCC’s and the Kentucky Public Service Commission’s role.
AT&T has a good case, according to legal experts familiar with the matter. Many of those same experts, though, say it’s ultimately a win-win scenario for Alphabet (and therefore for Google stock).
If AT&T prevails, at the very least it will force the FCC to take some much-needed hard stances on how much control AT&T has with its poles. If the company successfully argues Alphabet can’t access its poles, Alphabet will simply dig its owns ditches to lay its own fiber. It will cost more and take longer, but one way or another, Alphabet will enter the Louisville market.
And if the FCC rules AT&T can’t keep Alphabet’s technicians off of its poles, then it’s a ruling that will likely apply universally. Either way, AT&T comes across as the big bad, looking to squelch fair competition.
Bottom Line for Google Stock
At stake are 88 million U.S. broadband subscribers and the $50 billion or so worth of annual revenue they bring to the table.
And unlike AT&T or Comcast or any other service provider, Google has multiple ways of monetizing its broadband service, beginning with highly targeted ads based on a better understanding of exactly what its subscribers are doing on the Internet.
Google Fiber is apt to mean so much more than that to Google stock in the distant future, however. While AT&T and Comcast are service providers, Alphabet is morphing into a lifestyle company, collecting nickels and dimes from consumers in various ways, all day long.
And that’s why Google stock is going to remain a high-growth investment for a long, long time.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
