Will Google Inc (GOOG) Fiber Kill This?

In the jargon of the telecom business, Google Inc (NASDAQ:GOOG)‘s Google Fiber is an “overbuilder,” a broadband company that comes into a territory with Internet needs already provided by a cable operator and possibly a local telephone company’s DSL service.

But in the past many overbuilders became overreachers and just couldn’t get the market penetration needed to survive. Will the same thing happen with Google Fiber?

A recent report by Wall Street research firm Bernstein Research says Google Inc (NASDAQ:GOOG) Fiber has a very good chance not only to get that necessary penetration but also to be an “economically attractive business for Google on a stand-alone basis.” In other words, it would be profitable even without factoring in the effect it would have on Google’s bread-and-butter business of search-based advertising.

Bernstein based the findings on its door-to-door survey of Kansas City residents. Kansas City was the site of the initial Google Fiber installation. Of the 204 people questioned, 98% were aware of Google Inc (NASDAQ:GOOG) Fiber, 52% said they would “definitely or probably” go with the service, and 25% said they might. Only 19% were definitely or probably not likely to buy it.

Those favorable percentages indicate a potentially much higher penetration rate than was historically earned by overbuilders — 20% to 30% was the most they could get in their best markets, according to Bernstein.

What Google Fiber offers is incredibly fast Internet speed. One-gigabit-per-second uploads and downloads for $70 a month. That’s 100 times the speed of the average Internet connection, according to Google. For an additional $50 a month, one gets HDTV with a Nexus 7 tablet to use as a remote control and a DVR. Premium channels are extra.

But Google Inc (NASDAQ:GOOG) Fiber has a long way to go before it can realistically challenge the big cable operators. The first phase of Google Fiber’s buildout in the Kansas City area passes (but is not necessarily connected to) 149,000 homes. For comparison, Comcast Corporation (NASDAQ:CMCSA) passes 53 million homes, Time Warner Cable Inc (NYSE:TWC) passes 30 million, and Charter Communications, Inc. (NASDAQ:CHTR), 12 million.

As reported by TechCrunch, Bernstein analysts Carlos Kirjner and Ram Parameswaran estimate a Google Fiber network to cover 20 million homes over five years would require an “annual capex investment [of] $11 billion” just to pass the homes without even acquiring any customers (let alone wiring them up).

So yes, the infrastructure costs for a Google Fiber build out are staggering, but “Google Inc (NASDAQ:GOOG) has the resources to continue to build out and extend its footprint, even if the profitability of its initial markets is hampered by aggressive incumbent price cutting,” according to the Bernstein report.