Google Inc (NASDAQ:GOOG) will deliver 5 mb of service for free, and 1 gigabyte speeds for $70 a month. I have heard many Google shareholders complain that this has little to do with Google’s business plan, that it will take forever to recoup the money invested if they ever do, and that the whole thing seems like a waste of resources.
First off, let’s work on the assumption that Google Inc (NASDAQ:GOOG) loses millions of dollars from this, never recouping the money spent on developing the infrastructure from the revenue generated from supplying Internet service. I still believe the move brilliant, and here’s why.
Forward thinking
Once again, I am impressed with the forward thinking of Google Inc (NASDAQ:GOOG)’s management, and that’s why this is truly a stock to own for the long run. Google’s business model is based on ubiquitous Internet service. Google’s gone so far as to send chairman Eric Schmidt to North Korea to convince the Korean government of the power and benefits of the Internet.
It’s why, despite declining average revenue from pay per click (down 4% in the latest quarter), shareholders should be excited about mobile search (despite potential increased competition) as Google Inc (NASDAQ:GOOG) is well positioned here with its Android OS dominating market share in cell phones. Simply put, the search-pie is growing.
Microsoft Corporation (NASDAQ:MSFT) versus Google Inc (NASDAQ:GOOG)
Microsoft Corporation (NASDAQ:MSFT) and Google have made two different bets on the future of computing.
Microsoft has bet that consumers will want to work offline, and thus Windows PC’s still come with large hard drives and fast processors.
Google has bet on a purely cloud-driven system, where almost all files and computing are accessed on large, powerful, remote servers. In fact, Google Inc (NASDAQ:GOOG)’s Chromebook OS is mainly a web-browser that enables you access to files stored on the cloud.
In today’s world, Microsoft Corporation (NASDAQ:MSFT) is the winner. It’s simply impossible to get online any time you want to use your computer, and even if you do, slow connection speeds hinder access to information and make it frustrating. Thus, what Google is doing is trying to speed up change so you can access your files and computing power from the cloud as quickly as you can from a hard drive.
Foul– you cry
“Big deal,” I hear you shouting. So Google Inc (NASDAQ:GOOG) invests years and hundreds of millions of dollars (perhaps billions) in hooking-up KC, Austin, and Provo. What percentage of America, let alone the world, will have access to these ultra-fast connections? 1% tops?
What Google is doing is putting pressure on the largely monopolistic telecommunications companies, or telcos, and cable providers like Time Warner Cable Inc (NYSE:TWC) and Verizon Communications Inc. (NYSE:VZ) to counter their moves. Both companies have invested a lot of money in infrastructure in the past, and investors had better prepare for them to invest a substantial amount more.
I have used both Time Warner and Charter Communications, Inc. (NASDAQ:CHTR) in the last couple of years, and Internet access on the second-tier plan is not only frustratingly slow on a frequent basis, but also intermittent. I have proposed to many people the option to upgrade to gigabit speeds for a few dollars a month more and 100% said yes.
With proof that Google Inc (NASDAQ:GOOG) is serious about this project, the telcos are responding. To stave off competition and keep their customers, Verizon and Time Warner will likely be upgrading, bringing higher speeds and better service to consumers.
Whatever the telcos invest, (and it will likely be billions of dollars) will come at expense to earnings and cash flow, and will likely affect the near-term price of both stocks. However, if you’re a long term investor, should the telcos choose not to invest in keeping their customers to keep short-term profits up in light of the Google Inc (NASDAQ:GOOG) threat, there would be no surer sign to sell. Just something to keep in mind.
Bottom line
The faster and more ubiquitous Internet service is the more Google benefits. Additionally, it will allow Google a foray into your living room, and bring YouTube and its channels to your living room at speeds that closely match your viewing experience of TV.
By threatening the telcos with competition and getting them “head them off at the pass” Google is in fact leveraging the telcos to help speed up the deployment of a Google world, and their business plan in the process. Fiber out Big G!
The article Even if Google Fiber Loses Money- It’s Brilliant originally appeared on Fool.com.
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