The World Turned Upside Down
AUGUST 5, 2012
By Tom Wheeler
Google's "let me show you how to build high-speed infrastructure" effort is not only thumbing its nose at the cable and telephone companies, but is also upending the 150 year old paradigm of network supremacy. Ever since the telegraph the network was in control of how it would be used and what it would offer. Over the years government policy has been instituted to control potential abuse of that power. Now, in Kansas City a network user has inverted that history. A service that rides the network now has the economic wherewithal to build its own network, offer vastly expanded capabilities, and call its own tune.
The Google all-fiber network in Kansas City will offer speeds of 1 gigabit per second for $70 per month ($120 if you want to add cable service). Google triumphantly points out this is far in excess of the U.S. national broadband average of 5.8 mbps. The Wall Street Journal reports, "the move was designed to accelerate the deployment of faster networks and show off the sort of services that high-speed connections can enable."
It has also thrown the old ideas about communications networks – and communications regulation - into a cocked hat.
Google Fiber, for instance, will not offer telephone service. Why should it? Traditional telephone service is an Alexander Graham Bell legacy. Today a voice call is an Internet application, no different from Angry Birds. Consumers subscribing to Google Fiber will be able to make phone calls, but those connections will be more like Skype than Bell; zeroes and ones no different from everything else the network carries.
Some traditional cable channels like HBO and the products of the Disney Company such as ESPN have chosen not to provide retransmission rights to Google. It’s a risky move as the Web appears primed to do for television what it did to newspapers. Google Fiber subscribers may not be able to get HBO, etc., but the Internet is full of movies and entertainment that the fiber will stream quickly. Google Fiber could mean that what today is called "over the top" content because it comes from other than network-controlled sources may soon be the standard. Google’s own video service, YouTube, has already copied HBO’s strategy of specially-produced programs.
Regulatory assumptions (many of which have advantaged Google) are particularly challenged by Google Fiber. For a century public policy has been based on assuring that network providers do not abuse their position vis a vis network users. The assumption that the network provider holds the economic upper hand, however, just went out the window in Kansas City. For the first time the economic strength of a network user is sufficient to allow it to build its own facilities.
Public policy used to worry about a network owner cross-subsidizing to control content. Now all of a sudden, a content company can cross-subsidize into the network business. Want to guess the default search engine for Google Fiber?
That cross-subsidy, however, is being put to some socially advantageous purposes. For decades the federal government and network providers have engaged in an elaborate plan to subsidize high-cost areas and populations. Recently the FCC announced its new version, called “Connect America” to support broadband deployment. Now Google is giving away basic Internet access for free. Any resident located in one of Google's “fiberhood” footprints can receive free Internet service at speeds of 5 mbps (i.e., about the national average). Five megs for zip is pretty amazing - all thanks to the cross-subsidy from the Google services those customers will use. For years we've been talking about how the Internet would make phone service free - Google just made the Internet free!
There are limits to this seeming Nirvana, however. Unlike cable and telephone companies which must provide service in all areas of a city, Google will provide service only in areas where advance signups assure the economic viability of providing the service. Imagine the outrage cable companies would face with city councils and telcos would face with PUCs if they engaged in what some would no doubt describe as “redlining.”
Google Fiber subscribers who sign up for cable service will receive an Android-powered tablet as the TV remote control. Not only will it allow Web-based interaction with the TV, but also it completes the power play for Google. Now Google services, running on Google hardware, powered by Google’s OS have moved the nexus of market power away from the network. The ultimate edge player has just integrated backwards to control the last part of what it doesn’t already own – the network itself. Indeed, the world has turned upside down.
Tom Wheeler is Managing Director of Core Capital Partners, a venture capital firm specializing in early stage companies, including next generation wireless services. For almost a dozen years prior to joining Core Capital he was the president of the Cellular Telecommunications & Internet Association.