Google Fiber is the latest challenge to cable TV providers, and could compete in both rural and many urban areas. Unless there’s a meaningful uptick in housing/pricing,  there could be little room for further expansion and investors will force companies companies to demonstrate their ability to beat and raise earnings estimates. Google Fiber is consistent with the FCC’s objective to increase broadband.

Google Fiber wireline providers

Under the National Broadband Plan, the FCC would like to improve wireline broadband competition in the US in order to enhance customer service. Advertised download speeds are highly correlated to the number of competitors in a footprint. Roughly 80% of the population is served by two service providers. By increasing the number of providers such as Google in a footprint, this will likely boost speeds.

There’s no place like home

This is one of many reasons why Kansas City offered generous incentive plans for Google fiber. Google receives free land, office space and a 50% discount relative to Time Warner Inc (NYSE:TWX) on the use of city utility poles. In addition, the city is offering marketing assistance and the right to build in high demand areas first vs other HSD providers that are required to build in all markets they enter.

Google fiber kansas

This likely led Time Time Warner Inc to recently sign a parity agreement with Kansas City that offers the same incentives as Google Inc (NASDAQ:GOOG)’s. Time Warner Cable will liekly receive receive similar incentives in Austin, TX after both Google and AT&T announced plans to buildout 1Gb Internet there.

Internet Analyst Ben Schachter believes Google is launching its own broadband initiative to prompt competitors to provide faster services. The intent is to provide a competitive threat to existing telco service providers and prompt a more widespread rollout of faster Internet service, which would likely drive more Internet usage among subscribers. Along with standard subscription television service, Google Fiber TV platform will also provide access to streaming video.

Where will Google Fiber come next?

While it’s unlikely that Google Inc (NASDAQ:GOOG) will launch a broad national rollout, Schachter believes Google Inc (NASDAQ:GOOG) will continue to target one to two cities or 1-1.5m homes/year. While it’s unlikely that Google will target NYC due to the presence of several overbuilders already,  it is a risk in many other areas. Google Fiber is competition for Time Warner Cable (~100k HSD subs in Kansas City, MO/KS and ~200k+ HSD subs in Austin, TX) and likely Charter and Comcast in the future.

As seen in the map below, roughly one-third of the US either does not have access to broadband or has insufficient download speeds. These areas are the most susceptible to Google Fiber penetration build outs.

Google fiber broadband

So far, Google Fiber has plans to build out in Kansas City, MO and Austin, TX, which are currently serviced by Time Warner Cable. Schachter believes Google will continue to target one to two cities or 1- 1.5m homes/year. As seen in the table below, Google is unlikely to target markets where FiOS has a significant presence such as NYC, Washington, DC and Philadelphia.

Google Fiber versus FiOS

Details on Google Fiber pricing

At first, the service will only be available to users in specific neighborhoods in Kansas City, and will charge a $300 installation fee (waivable depending on service subscription) to users in order to run Fiber from the street into the home. Google held a ‘rally’ over a six-week period in August/September 2012 to allow for neighborhoods to build support and compete with each other to move to the front of the line for installation. A similar process is expected to take place in 2014 to determine the sequence of installation for Austin. Details on the package options for Kansas City residents are included below:

Gigabit Internet + TV: Google is offering a single bundle of standard TV channels (along with premium movie channels for an extra monthly fee) together with 1 Gbps Internet service (both download and upload, with no data caps). This service will cost $120/month, but with a 2-year contract Google will waive the $300 installation fee. With the service, users will get a Nexus 7 tablet (for a remote control), TV set-top box (smaller than most current cable boxes, also functions as WiFi hotspot), Network access box, DVR Storage box, and 1 TB of cloud storage.

Gigabit Internet: For a $70/month charge (with the $300 installation fee waived with one-year contract), users will have access to the same 1 Gbps Internet service. Users will get the Network access box and 1 TB of cloud storage.

Standard Broadband Internet: Google is offering current average broadband Internet service (~5 Mbps download and ~1 Mbps upload, with no data caps) FREE, meaning no monthly charge for at least seven years, with payment of the $300 installation fee. Alternatively, consumers can waive the $300 charge and pay $25/month for this service.