Cable Has to Keep up With Fiber or Face the Consequences

Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Editor's Note: The initial article incorrectly identified Comcast's connection speeds. This version has been corrected.

Where do you get your Internet from? I get mine from Comcast (NASDAQ: CMCSA), and I’m sure a lot of you do too. Comcast obviously isn’t the only Internet fish swimming out there in the sea though. Some people out there (the lucky ones) live in an area where AT&T’s U-Verse or Verizon’s (NYSE: VZ) FiOS can reach their homes. Then there are the uber lucky who get their Internet from Google’s (NASDAQ: GOOG) new fiber service.

Obviously these four aren’t the only companies currently playing around in the Internet space, but they are some of the biggest. The question we have to answer is, do these companies make money from their Internet services? The answer, you bet your bottom dollar they do!

Comcast and its counterparts in the cable business make, as some recent sources have claimed, as high as 97% profit margin on currently-existing Internet services. Sure, there may be new line implementations that are earning them a lot less, but if they’re earning 97% from some segments of their Internet business, that’s just astonishing.

The problem arises when you see that Comcast really isn't investing in expanding Internet infrastructure.  Comcast has implemented caps and throttling off Internet services in order to make an extra couple of dollars per account. That money isn’t going to any kind of build out.

The Incoming Competitors

So, while Comcast is busy growing and expanding their network at a snail’s pace, they’re being caught up by the likes of AT&T, Verizon and newcomer Google. Each one of these services has its own merits over Comcast, and each one, at some point in the future, could challenge the cable companies to be King of the Internets!

Verizon FiOS could have been the Internet competitor that people were looking for. The service has unfortunately also stopped its build out. I have spoken to people who use the service, and they are actually quite pleased with it.

Google is the company that is bringing the real competition and the real fear to both the cable companies and others that provide Internet services to their customers. Kansas City is the only place that you can currently experience Google Fiber, and there has so far been no announcement as to when the service will expand to other locales. For $300 the service will give you free Internet for life. If you’d prefer to get the Gbit Internet service that Google is offering then you’ll be paying $70 per month ($120 with TV/DVR service with free Nexus tablet and other hardware).

Obstacles

The major obstacle for services like Verizon FiOS and Google Fiber has to be the cost. Comcast and Time Warner have established bases from which to work with their tiny year-by-year service increments, but Google and Verizon had to start afresh.

It has been estimated that each home accepting Google’s Fiber will cost around $6,000 to $8,000 to get going--that’s no small investment. With the TV service included, and at the top rate, it would take Google five and a half years before they start seeing a profit from a house, that’s a big risk to be taking.

Bottom Line

Google will likely continue on with their Fiber service. It won’t spread across the country quick, but as time moves on and infrastructure grows then I’d expect to see the expansion rates increase, especially if costs go down.

With Google expanding, Verizon may see the chance to help out with fiber build out, and the two could end up with a solid partnership, never say never.

An expansion of fiber based Internet to the masses could leave Comcast without a leg to stand on when it comes to selling Internet. This company has to keep moving at a pace that keeps both Google and Verizon at least a couple of steps back over the long haul. The Internet is here to stay, and the cable companies should start treating it as such or they’ll be left behind like AOL once was. 


Ash1402 has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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