Google Inc (NASDAQ:GOOG) has recently expanded its fiber-network footprint to Austin, Texas. Google’s fiber role out to its second city has definitely gotten attention from other ISPs. Google Inc (NASDAQ:GOOG) offers up to seven years of free Internet to residents, who can then upgrade for a cost of $70, add in cable and it comes to $120.
Just after Google fiber was announced, Dallas-based AT&T Inc. (NYSE:T) announced a roll out of its own — Gigabit Internet. It seems like competition is heating up in the ISP space.
The pressure is on
Google Inc (NASDAQ:GOOG)’s push into the ISP business has worried the large dominant companies that provide Internet to large cities. Time Warner Inc (NYSE:TWX) is the largest ISP in the Kansas City, MO area and has the most to lose with Google moving into the neighborhood. Time Warner even offered $50 to people in Kansas City with information on the new Google-fiber roll out. Time Warner Inc (NYSE:TWX) certainly does not like seeing its large capital investments turn virtually worthless overnight, as Google Inc (NASDAQ:GOOG) promises to offer a better service at a better price.
Broadband has traditionally been one of the most lucrative and sticky businesses for consumers. Think about how many activities you do every day that require Internet. As more and more of us start relying on the cloud for storage, we will become more and more reliant on the companies that provide us a path to get there, the ISP. Google is putting pressure on those companies to provide better service at a better price.
The pressure’s on
Last year, Time Warner brought in $9.5 billion on its subscription division, nearly one third of its $28.9 billion in total revenue. Google Inc (NASDAQ:GOOG) Fiber is forcing these large companies to expand their broadband capacity and keep prices inline with today’s standards. This will put pressure on operating margins as capital expenditures will increase with revenue staying constant. The biggest players in this industry have the most to lose here; companies like Frontier Communications Corp (NASDAQ:FTR) in rural America won’t have to worry about a fiber line being dropped in their back yards anytime soon.
Time Warner’s saving grace will be its original content division that houses brands like HBO and Warner Brothers. As Google presses on with Google Fiber, we could see broadband margins erode as the company relies more on its creative content as its profit center and capital expenses rise. Google fiber is in its infancy now, but it could become a very real threat to the moat that Time Warner’s ISP division has built.
Google Inc (NASDAQ:GOOG) has more than $48 billion sitting idle on its balance sheet, but is that any reason to build out an infrastructure like this? Google could just use this money to purchase Charter Communications, Inc. (NASDAQ:CHTR) outright and upgrade its established network.