Google goes in search of ways to provide its own internet services

From sending solar-powered balloons into the stratosphere to offering free wifi in parks, Google is quietly spending hundreds of millions of dollars on nascent internet services that may one day challenge the telecom and cable companies.

In recent months, Google has announced plans to bring free wireless internet access to 7,000 Starbucks cafés across the US&; it has asked US regulators for broader access to wireless airwaves; and it has launched 30 solar-powered balloons over the South Pacific ocean, designed to beam the internet to remote regions.

Then there is Google Fiber, the high-speed cable TV and internet service that was introduced in Kansas city late last year and that will be expanded soon to Austin and Provo, Utah. Fiber delivers internet speeds at 1gb per second, as much as 100 times faster than the average US network.

Google is happy with customer responses in Kansas so far and may roll Fiber out to more cities.

“Fiber is considered the golden child right now within Google because of its disruptive nature and the applause that they get from the communities using it,” said a former member of Google Access, a group headed by vice-president Milo Medin, who drives the company’s internet access projects.

Medin leads a few hundred employees. The group operates autonomously with its own engineering, finance, and marketing units.

As Google delivers more music, videos, and other content to mobile devices, it has become increasingly invested in ensuring it gets the bandwidth it needs. Web access projects like Fiber could help Google grow revenues beyond its maturing search business, and give it more insight into consumers’ online habits, crucial to making ads more effective.

But Google would be venturing into territory far afield from its traditional strengths and margins may suffer as a result, analysts say. The company would also be competing against well-established internet service providers&.

Kevin Lo, general manager of Google Access, said Google was pleased with the customer response to Fiber in Kansas city so far.

Building high-speed networks is a cumbersome process that requires tearing up streets and working with local governments to get access to utility poles and approvals.

Given Fiber’s small footprint and the limited amount of online services that actually need such high bandwidth today, the immediate threat to cable and telecom companies may be limited, according to some industry observers.

“I have to think that the existing players are trying to figure out how to respond to this, because if it goes bigger it will definitely give them a new kind of competition,” said Bill Coughran, a partner at venture capital firm Sequoia Capital.

To make a difference to Google’s overall business, which is expected to generate roughly $60bn (€45bn) in revenue this year, the Fiber service needs to achieve significant scale.

In a city of 1m households for example, Google would reap a modest $288m a year in subscription revenue if 20% of families were to sign up for its $120 monthly TV and internet service. If Google were able to enlist half the homes in the city, that could mean $720m in annual revenue.

Bernstein analyst Carlos Kirjner estimated the cost of making Fiber available to 300,000 homes in the greater Kansas city region at $170m. Expanding Fiber to 20m US homes, which Kirjner believes is not likely, would cost $10bn to $15bn, he wrote in a report.

Diving into the access business in a bigger way could in the short term hurt Google’s operating margin, which stands in the mid-40% range for its core internet business.

Typical cable industry margins are in the mid-30% range.

Michael Binger, a portfolio manager at Gradient Investments which owns Google shares, said he is comfortable with the company’s current level of investment in projects like Fiber.

But if Google were to radically ramp up such efforts, for example by investing in a costly nationwide high-speed network, he said: “I’d want more detail about what their vision is, and how it provides a financial return down the road.”

With $54bn in cash, Google can afford to fund experiments such as Fiber and Loon — the air balloon project run by Google X, the secretive arm of the company that specialises in bold, futuristic projects such as robot cars.

Loon involves creating an airborne wireless network using 12m-tall, super-pressured air balloons powered by the sun. They would drift along relatively slower air currents in the stratosphere and run off batteries at night.

In June, Google launched a test of 30 balloons over New Zealand equipped to deliver 3G-like wireless speeds to ground antennas that in turn transmit the signal to wireless devices. The goal is to eventually keep a large fleet of balloons in the skies, though analysts say Google will face many technical and regulatory challenges operating such a network.

Some investors consider these projects a waste of resources.

“There are people on Wall Street who would like Google to quit spending on things that may not actually materialise in generating significant revenue,” said Needham & Co’s Kerry Rice.

- Reuters

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