How likely is it that Google Fiber takes over UTOPIA?

Even before Provo announced that Google Fiber would be taking over iProvo, there’s been a lot of speculation that Google Fiber could potentially take over UTOPIA. UTOPIA made their pitch with 1100 other cities, and I produced my own video explaining why a partnership would be a good deal for both parties. Since then, Google has drastically altered the original terms of the arrangement, throwing both open access and municipal involvement under the bus (unless you consider providing tons on concessions “involvement”). Despite Google and UTOPIA being in talks shortly after the RFI closed, I don’t think we’re likely to see any kind of takeover or partnership between the two unless there’s concessions from one or both sides.

I think the largest sticking point is going to be open access. UTOPIA has repeatedly stated that their goal is to offer a world-class infrastructure that any private company can use to provide services. It’s not just enough to provide a third pipe; the network must allow you to pick between companies that differentiate themselves on what they can do with it. This kind of competitive environment has been proven to drive innovation and lower consumer prices across the board. While I have no doubt that Google’s network will do both, it runs the risk of being so superior to existing options as to become a new monopoly.

Google’s focus has been on residential customers. While this is a critical segment for service, there’s almost no mention of business needs. Yes, small businesses and startups can probably do just fine using the same tier as residences, but many need more than that. UTOPIA’s biggest customer uses 20Gbps of bandwidth. If all of their users on the network were on gigabit, they’d need even more to keep up with all of them. The lack of focus on the business end of the pipe degrades the value of the gigabit connections for residential customers. UTOPIA has a complete end-to-end vision; Google does not.

Another problem is the financial terms of any arrangement between the two. Google got a very sweet deal on iProvo, effectively a perpetual free lease with a $1 security deposit. The city is still going to have to pay off the debt on the asset themselves. In exchange, they’re hoping that improvements done to the network will improve it enough that it will be an economic net positive. I think the city could have negotiated a better deal and Google would still be doing well on it financially. I have no doubt that the UTOPIA cities, who are much more eager to pay off the bond, would hold fast for better terms.

If the numbers from iProvo translate to UTOPIA, Google would have to spend somewhere in the range of $40-50M to connect houses currently passed by the fiber and upgrade them to gigabit. This doesn’t include building fiber rings to areas not yet covered. That could easily add another $150-200M to the tab. Should they manage decent take rates (35% of customers paying for service split evenly between Internet-only and double play, and another 35% taking the freebie service), they’d earn $78.1M per year on expenses (including the bond) of about $36M per year. At the high end of finishing the network, it would take them almost six years to break even.

Given that Google seems to be aiming for seven-year commitments, that might be a price they’re unwilling to pay. The cities would have to make some kind of concession to sweeten the pot, and it would likely include tossing existing providers off the network and covering at least some portion of the bond debt. These actions would cause a decent amount of backlash both from residents as a whole and the power user subscribers who have been evangelizing the network for years. If Google’s goal truly is to increase broadband penetration, I’d like to think they would accept any offer that doesn’t make them lose a small fortune.

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9 Responses to How likely is it that Google Fiber takes over UTOPIA?

  1. Pete says:

    Last time I spoke with Utopia, just under a week ago, they were not in talks with Google however the person told me that Google was more than welcome to sell their services over the Utopia network since it’s open access and all.

    • Jesse says:

      Sure, they could become a service provider, but would they? The current economics of doing so are not in their favor. If they chose to replicate the Kansas City model and push a $300 connection fee, they’d end up eating $2450 in install costs. That’s between two and three years of subscriber income right there. I suppose it all depends on if Google is more concerned with promoting good broadband or making a buck while doing so.

      • Mike Stevens says:

        Well, I have never heard anyone argue that the $3000 Utopia install fee was the cost of doing an install. None of the various analysis of the Google Fiber product indicates the cost is anywhere close to that.

        I think Utopia is charging a lot to try and make a reasonable amount of profit on each install to help retire some debt, which is a good thing.

        Google execs have said they believe that they can make money doing this, and just on the core subscription product, not through other product subsidies. I would tend to believe them if their CEO says they think they can make a lot of money there like he did in a recent earnings call.

        Google makes a lot of their own gear for datacenters and the rest, and I wouldn’t be surprised if they are doing things like that to drive out cost at the equipment side as well.

        • Jesse says:

          I think it’s a more realistic expectation of what a network can cost. Excluding the costs of shared infrastructure (NOC, headend, fiber to a major POP) is tempting (and Verizon does it too), but without those things, a network has no value. I would also doubt that UTOPIA would waive some or all of the current install fee for a provider because someone has to front those costs.

          I understand Google is using a lot of custom “black box” equipment for building their network including a highly customized CPE. Given how they’ve use some crazy custom servers in the past to drop costs, this isn’t surprising. All the same… treat this as an edge case. I know a lot of people like to also use FIOS as a pricing comparison, but $700 a residence? Sure, if you’re wiring 15M homes at a go, using cheaper PON, have a national transport network already in place (including multiple metro Ethernet networks), and can spread your shared costs like that. Few can do that.

          • Mike Stevens says:

            Well, google already built that video headend and designed the devices for the KC and other markets. So why should they have to subsidize paying for Utopia’s?

            Besides, a lot of people don’t need TV since they get that from satellite. So all those data only customers shouldn’t have to pay more – the TV users should pay for that as part of their TV prices.

            Still, I don’t see how you can get away with charging folks $3000 for an install when Google charges a lot less than that…

            Anyways, I do wonder what the cities are going to do when their residents complain about paying for all that debt and not getting close to the pricing Provo does. That free service is mighty attractive to the politicians.

            I wonder if Pete or anyone else will show up at the city hall meeting and out down a last minute alternative offer. The city can only choose among the bids they got, not the bids they didn’t get.

            • Jesse says:

              The reality is that Provo was willing to eat a big chunk of losses. UTOPIA cities aren’t. Debate that reality all you want, it is what it is and I don’t see it changing in the near future.

              Cities are working on ways to both extend the network build quickly and lower the costs of services. I can’t say too much about what they’re working on, but I think the vision is there, and I wouldn’t be surprised to see some new and exciting stuff over the next year or two.

  2. Rich says:

    I wouldn’t hold my breath that Google will become another choice of the nearly half-dozen ISP currently avail w/Utopia. Best we can hope for is competition and the remaining ISP’s to begin offering gigabit speeds for much less than the $300/month now being charged.

  3. Carl W says:

    I’m a UTOPIA subscriber in Centerville and have no interest in seeing Google become my only ISP choice. I prefer an open network and a competitive environment for ISPs. If Google is the only provider how long will it take for them to be as bad as Comcast or Century Link? I paid the connection cost up front and have not regretted it for a minute. I currently have 100 mbit service and the price won’t have to fall much for me to consider gigabit service. If Google wants to compete as another service provider that’s great, but let’s not give away the store just to get lower prices. If they want a monopoly let them string their own fiber.

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