It was recently reported that Larry Page, the CEO of Alphabet told Google Fiber to cut their staff in half from 1,000 to 500 and to also cut the cost of building new fiber. That certainly is going to slow or even stop Google Fiber’s expansion plans. There are a few lesson to be learned from that announcement for all fiber start-ups.
It’s expensive to build in cities. Building new fiber networks from scratch is expensive. It’s very doubtful that Google has found any magic that would let them build fiber networks for much less than anybody else. Verizon always said they stopped expanding FiOS due to the construction costs. Yet Verizon built most of their network in places where the construction was relatively inexpensive. They lashed fiber to existing phones cables where there was poles or installed underground fiber where there was existing conduit. But Google Fiber didn’t have either of those advantages and so they were spending a lot more than Verizon.
The company is now looking at wireless technologies to cut construction costs. Unless the company has some really good millimeter wave technology ready to roll out soon, this could cause a big delay on expansion. Lots of companies are thinking about wireless loops, but we know from past experience that there is a big transition with any wireless technology when moving from a lab into the real world.
You have to sell what customers want to buy. The news articles I saw say that Google Fiber had 200,000 customers at the end of 2014. One would expect that they have up to twice that by now. But considering their initial goal to have millions of customers those numbers are low.
My guess is that the company has had trouble convincing enough households to buy their $70 broadband. I would buy that in a flash, but I expect a lot of homes found the product to be out of reach for their budgets. I see that in Atlanta that Google Fiber has introduced a 100 Mbps broadband connection for $50, and that has to open up a lot more sales opportunities for them.
This highlights one of the biggest challenges for a fiber overbuilder. The biggest expense by far of getting into the business is to build the fiber network. Once you’ve sunk that money the goal is to get as many paying customers as possible onto the network, and that means having a wide enough array of products (which are still profitable) to generate revenue.
Delays are to be expected. There has been news over the last few years of delays in Google Fiber construction, much of it having to do with access to poles. Google Fiber learned the same lesson that had deviled many of my clients: when you need to get poles from the company you will competing with they are going to use every legal trick in the book to slow down the process. I’ve written about pole horror stories before in the blog.
Labor costs can be your enemy. The announcement said that Google Fiber had to slash their work force from 1,000 to 500. They face the same dilemma as other broadband start-ups – there is a lot of work to do in launching new markets compared to the number of people needed to operate them once they are mature.
For many years I have used a general rule of thumb for the number of employees that a telecom company ought to have. For example, a medium sized carrier with 20,000 to 50,000 customers ought to have roughly 1 employee for every 350 customers. As companies get larger and more efficient that ratio increases and companies up to about 250,000 ought to have around 1 employee for every 400 customers. Bigger companies should get even more efficient, but seems to be a natural cap at some size reached by very large companies.
It’s impossible to judge if Google Fiber has too many employees without knowing how many customers they have today. I also have no idea if the company uses contractors in addition to full-time employees because those would count in this calculation. But if the company has 400,000 customers today and doesn’t use contractors then the 1,000 employee count wouldn’t be too bad. But if they have fewer customers and also use contractors they are currently overstaffed.
One issue that can justify a larger staff than normal is the need to have a staff that is working ahead on future markets. Those employees would not be counted when looking at the size of the needed staff.
Also, the ratios I cited are more than a decade old and if I put some thought to them I would probably revise them higher. There are numerous improvements in customer service tools and other efficiencies that can reduce the number of times that a customer has to talk to or see a live employee. With the upcoming AI revolution one would imagine that a lot of customer service is going to be handled by bots and lower labor costs.
The bottom line of all of these issues is that Google Fiber hit the same wall hit by every other overbuilder. There comes a time when you have to show profitability or the money dries up. And it’s really hard to show profitability when you are still growing rapidly.