Will Google Gobble Cable?
Pam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On February 10, 2010, Google (NASDAQ: GOOG) announced its experimental ultrafast broadband service, soliciting requests for information (RFI's) from interested municipalities and individuals. Over 1,100 communities and 194,000 individuals entered the contest to win Google Fiber. Topeka, Kansas even “renamed” itself, Google, Kansas in their attempt to woo Google. In the end, Google chose Kansas City, Kansas and Missouri. Why did Google do this? In its words: “to make a meaningful contribution to the shared goal of delivering faster and better Internet for everyone.” But between February, 2010 and July 26, 2012 when Google announced its pricing, it expanded its service to include television, dubbed “Google Fiber TV.” This is a real threat to the cable TV companies and they are fighting back. While Google is facing expected problems adding content to its TV offering, I believe it has the resources to succeed and I don't think Google would start a fight it could not win. So, let's look at the facts.
Is Time Warner Worried about Google? You Bet.
On September 12, Time Warner Cable (NYSE: TWC) CFO, Irene Esteves said it was unlikely that Google would attempt to expand its service nationwide because it would cost $200 billion to build a network. Dismissing Google as 'the eigthth competitor in the market,” she stated that only 1% of its subscribers were at risk. That's what she said, but what has Time Warner done to protect its turf?
For starters, two weeks before Google announced its pricing, Time Warner offered $50 gift cards to its own employees to spy on Google Fiber. In August, they added 90 people to its Kansas City sales department. In September, it dug in its heels and essentially refused to license its Regional Sports Network (RSN) to Google, prompting Google to complain to the FCC.
Finally, in late August, Time Warner announced a $25 million expansion of its network in New York City to improve its commercial broadband service to demonstrate it could match Google's speed.
5 Reasons Why Google Could Gobble Cable
1. Google's Pricing
TV is cable's most profitable service and for years, they have enjoyed a virtual monopoly in their service areas. Although the five largest cable companies, Comcast Corporation (NASDAQ: CMCSA), Time Warner, privately-held Cox Communications, Charter Communications (NASDAQ: CHTR), and Cablevision Systems Corporation (NYSE: CVC), operate in some of the same states, their territories do not overlap. They have been free to raise rates annually. But, Google is undercutting their rates.
For $120/month, you get a 1 GB Internet connection, hundreds of high definition channels AND a Nexus 7 tablet free which acts as the remote. That's $47/month less than Comcast charges for Digital Starter TV, Comcast Extreme 105 (as in 105 Mbps, about 10 times slower than Google's 1000 Mbps) and no Nexus 7 tablet. Moreover, Google throws in a DVR free which allows you to record up to 8 shows simultaneously, undermining cable's revenue from monthly fees for DVR service.
2. Dark Fiber
Despite Ms. Esteves' $200 billion estimate for building a nationwide network which was based on Verizon's spending $30 billion to cover 15% of the country, Google does not have to build from scratch as it did in Kansas City. Google has been buying up dark fiber networks since at least 2005. These could be used to expand Google Fiber TV into other areas more cheaply.
3. Google is Expanding
4. Cable's Efforts to Stop Losing Current Subs May Wound Them Financially
An increasing number of subscribers are “cutting their cords” and getting all their entertainment over the Internet further threatening the cash cow. Time Warner is sufficiently concerned that they started offering a year of FREE TV to Internet-only subscribers to woo them back. Earlier this year, Cablevision took the unprecedented step of freezing its rates. Losing TV revenue will make it even harder for cable to fight Google.
5. Google Has the Financial Resources to Disrupt Cable
Google has over $45 billion in cash, a current ratio of 4, total debt of just $6.2 billion and interest coverage of 172x on its low interest loans. As the graph below shows, with the exception of Comcast, the cable companies are burdened with heavy debt, especially Charter and Cablevision.
3 Reasons Why Google Could Fail to Disrupt Cable
1. The FCC's Suspension of “Program Access Rules”
On October 5, the cable industry scored big when the FCC voted unanimously to end its 20-year old “program access rules” requiring cable companies that own channels to make them available to competitors saying that the rules had outlived their usefulness. This could make it more difficult for Google to offer must have content, like local sports.
2. Cable is Demanding Parity With Google in Kansas City
Time Warner has demanded that Kansas City, Kansas and Missouri give it the same perks and discounts they gave to Google. This includes free power and office space and a 47% discount on annual per pole attachment fees. Lower revenue may discourage cash-strapped cities from wanting Google and higher costs may slow or halt Google's expansion.
3. Cable is Making Deals with Verizon:
Time Warner and Comcast both teamed up with Verizon Wireless to offer new cable and wireless phone customers $200-$300 Visa debit cards. In June, Comcast expanded its deals with Verizon to 10 more states adding 6 months of free DVR rental, 1 year of Streampix and an upgrade to their “Blast” Internet service which tops out at 30 Mbps. Cox is offering a similar joint promotion. While the FCC and Justice Department are reviewing these deals, if they are allowed to stand they could keep customers from signing on with Google.
Google has been buying up dark fiber for years and no one except it knows how much it owns and where it is located. It could use it to more cheaply expand Google Fiber TV. Plus it has $45 billion in cash and the ability to take on the necessary debt to finance its expansion into 100 cities if it so wishes. Cable's only defenses are refusing to license local content which may provoke government intervention, co-marketing with Verizon which may be found illegal and otherwise lowering their prices which will cut into the money needed to service their debt. This will be a long and bloody war, but if Google wants to win it, it will.
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