Fiber Is a Strategic Weapon and Google Inc (GOOG) Knows It

Advertising is complex and companies are constantly warring for power and control of the market. Google Fiber is criticized for being too expensive and the competition adamantly believes that people don’t want fiber. With custom made hardware, Google’s Fiber is most likely cheaper to implement than the competition’s. Google Fiber’s benefit is that it allows Google Inc (NASDAQ:GOOG) to become a vertically integrated company. It will be able to control everything from the internet connection in your home, to the search engine you use, to the ads you see on a daily basis.

What is Google Thinking?

Google IncGoogle Inc (NASDAQ:GOOG) is in the ad business and a significant portion of global ad spend is used for branding purposes; not the direct response ads that work well on google.com. Google wants a bigger piece of the branding pie and this is one of the major reasons it bought YouTube.

What Google would really love to do is gain a piece of the TV market, but the big TV players are fighting tooth and nail to keep their power. Google Fiber gives Google Inc (NASDAQ:GOOG) the power to completely cut out middleman like Comcast Corporation (NASDAQ:CMCSA).

Comcast is a powerful, vertically integrated company that owns everything from NBC to the utility lines that bring this content to homes. It is well-situated to soak up brand advertising dollars and has achieved a strong five year EPS growth of 21.3% and a five year revenue growth rate of 15.5%. If consumers were to switch to watching video online, then Comcast’s revenue and EBIT margin of 22.6% would be threatened.

Comcast Corporation (NASDAQ:CMCSA) is warring against internet video and the Justice Department has already started anantitrust investigation involving Comcast’s practices. The company’s future is rather fuzzy. It has terrible customer service and is fighting against upstarts like Netflix, Inc. (NASDAQ:NFLX) that are moving into the content creation business. The threat of Google Inc (NASDAQ:GOOG) entering fully into the internet service provider (ISP) market will further limit Comcast’s ability to discriminate against online content. Comcast Corporation (NASDAQ:CMCSA) is quite profitable for the time being, but it faces threats on many fronts and appears to be on the wrong side of progress.

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What about the online competition?

Google Inc (NASDAQ:GOOG) realizes that it is in a war with publishers. In a troubling trend for ad networks like Google, parts of the mobile ad spend is moving toward publishers and away from the networks. This benefits Facebook Inc (NASDAQ:FB) as will allow the company to continue developing its ad products and better meet marketers’ needs.

Re-targeting is the technique of showing ads to people after they visited a specific site. This exact level of accuracy allows marketers to target people with a higher possibility of purchasing. Facebook can charge very high rates for this product. Even though the technology has been available for many years, Facebook Inc (NASDAQ:FB) just introduced their re-targeting product in the latter half of 2012. The fact that it took so long for re-targeting to be introduced shows just how young and under-developed Facebook is.

Strategically and financially Google Inc (NASDAQ:GOOG) is in a better position than Facebook Inc (NASDAQ:FB). Facebook owns the world’s premier social network, but its EBIT margin of 10.7% and return on investment of 0.4% are very low. Google is a larger company with experience as an ISP, an ad network, a search engine, and a social network. It offers an EBIT margin of 26.8% and a return on investment of 14.4%. In the latter half of 2012 relative to the first half, Google’s revenue grew by 19.5% while Facebook’s revenue growth was a few points ahead at 26.8%.

Conclusion

With Google Fiber, Google Inc (NASDAQ:GOOG) is taking a page out of Comcast Corporation (NASDAQ:CMCSA)’s playbook. The internet innovator is able to control the delivery of content from the local internet connection all the way to the publisher. In the long run Comcast is a questionable investment as it continues to punish innovative consumers who prefer to consume their content online. A look at Facebook Inc (NASDAQ:FB)shows that it is also a secondary investment when compared to Google. Facebook’s revenue growth is strong, but Google Inc (NASDAQ:GOOG) offers stronger margins with healthy growth.

Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google.