Morgan Stanley analyst Scott Devitt weighs in on the recent net neutrality ruling and why he believes that Google Inc (NASDAQ:GOOG) might be a winner.

Investors have questioned whether Google Inc (NASDAQ:GOOG), a large generator of downstream traffic via YouTube and other services, may be unfavorably positioned if US ISPs and other internet transit providers begin to adopt discriminatory traffic policies. We believe that Google’s fiber assets may protect economics.

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Google Inc (NASDAQ:GOOG) appears quietly to have built its own “private internet”

According to numerous press reports, Google has been acquiring fiber optic cabling in the US since at least 2005, has invested in large undersea fiber optic cabling projects, and has purchased enough networking equipment to have constructed one of the largest global Tier 1 internet backbones.

According to LightReading, an industry publication, “by building a core of transport technologies and peering directly to the world’s leading incumbent telcos … Google could end up securing and controlling distribution of much of the world’s Internet traffic.”

Internet service providers (ISPs) rely on “peering” and “transit” to serve data to consumers:

Simplistically, internet data transmission requires larger “Tier 1” and “Tier 2” networks to exchange data with one another on an equal basis (peering), and/or to sell data transmission on an unequal basis (transit) to smaller networks and ISPs. While larger consumer ISPs may negotiate free peering arrangements and smaller ISPs may pay for transit to serve consumers, each relies on cooperation among the largest global networks – including Google.

Fiber assets act as a hedge:

We believe that Google owning major Tier 1 connections that ISPs rely on for peering and transit could give it the ability to avoid discriminatory traffic practices, as Google may be able to charge ISPs fees equal to the fees ISPs may seek to collect from Google. Google’s fiber-to-the-home experiment in a few US cities offers an additional layer of insulation, as Google controls the complete data path.

 

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