My wife went into a Best Buy this week and when she was talking with the salespeople there they found out that we are fiber consultants. The first thing they wanted to know from her was if the rumors were true that Google Fiber was coming to our town early next year. They firmly believed this was the case and they were really excited about the possibility.
I live in a small town halfway between Fort Myers and Sarasota in Florida. Google Fiber had been in talks with Tampa which is about two hours north of here. But I can’t imagine that our community is on anybody’s radar to build fiber. I live in a snowbird community, meaning we are where northerners come to get away from winter. For about six months a year this is a ghost town. Most of the houses in my neighborhood are dark for half the year. It’s hard to think that anybody would build fiber in an area where half the potential customers are gone half the year, and where a lot of the customers are elderly and not particularly interested in fiber broadband speeds.
But I find it intriguing that there is a strong rumor about getting fiber in this area. I am sure that this rumor started from folks in Tampa since Google Fiber has been in talks with the city for the last few years. I guess people assume that if they come there that they will come to the whole region.
But I think this rumor speaks to how much fiber is wanted. These salespeople were young techie guys and would be expected to part of the fiber demographic. There are a number of people in every community that would love to buy fiber and who would sign up for it as soon as it is available. But the big question that still has to be answered is if there are enough people willing to pay a premium price for fiber to even create a business plan.
It certainly doesn’t seem like Google Fiber has been going gangbusters. They don’t release customer numbers, but the general buzz in the industry is that they haven’t picked up as many customers as they had hoped for. And that, possibly more than any other factor has probably led to them taking a ‘pause’ from new fiber expansion.
Building fiber networks is expensive. I create fiber business plans and have studied every size market possible from farmlands to NFL cities. The one common feature of every fiber business is that there is some minimum customer penetration rate needed just to break even – with breaking even meaning being able to cover all of the costs of operations including capital.
When municipalities and cooperatives look to build fiber they want to make sure that they do a little better than breakeven. They will obviously be pleased if a fiber business does even better and spins off cash, but they worry more about having to subsidize a fiber business. And it is this perspective that makes it seem easier in some ways to build fiber to small towns and even to farms than to big cities. For these builders, breakeven is good enough.
But Google Fiber or CenturyLink or any of the other commercial fiber overbuilders want to do much better than breakeven. These big companies are beholden to shareholders who expect a significant increase quarter-over-quarter in profits and returns. And the need for significant profits means they have to get a lot of customers to meet their financial goals.
Frankly, the desire for high profits and high capital costs don’t jive very well. Fiber is infrastructure and it’s a real challenge to get high returns out of any kind of infrastructure. Other utilities like electric or water are a lot more realistic and hope to make a modest, but steady profit and make it for a long time. If fiber overbuilders were being realistic they would have the same perspective – but tech companies are not utilities and their stockholders are not going to be patient with slow steady returns.
Google Fiber is now on hold and will consider expanding again if they can find a way to use wireless technology to build the last connection to customers. Assuming that such a technology lowers costs (not a given), then this would reset the bar and lower the breakeven needed – and also make it easier to make profits. But even then it’s going to cost a huge amount of money to build broadband in a city. Wireless networks like the ones Google is envisioning still require a lot of fiber, and that means they will still be an infrastructure-heavy business.
I think there is a good possibility that Google Fiber will never resume their expansion plans using an infrastructure model. This is going to disappoint millions who have been hoping for fiber like the guys at Best Buy. Google Fiber might still consider opportunities like Huntsville, Alabama where the city paid for the fiber network. But my guess is that the Google parent company doesn’t have a real appetite for infrastructure returns, and that is why Google Fiber is on hold.