Google Seeking More Ad Impressions With Fast Fiber

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Depending on whom you ask,Google 's ( GOOG ) new hyperfast Internet infrastructure project, Google Fiber, which it brought online this month in a single U.S. city, is one of two things.

To some, Google Fiber is a hobby project to push other network providers to build ultraquick Internet connections, too. To others, it's the start of a new line of business for the Internet giant.

But while Google's intentions might be unclear, it is clear that Google is going to benefit from the network. Observers put it like this: Google's revenue comes from advertising, so speeding up the Internet should boost ad impressions and increase revenue for the search giant.

"Everything Google does is about driving you to more usage, driving you to more ads," said Colin Gillis, an analyst with BGC Partners.

Google is busy launching Google Fiber, its 1-gigabyte-per-second network , in Kansas City, Mo., this month. It's the first project of its kind for Google.

Google built the infrastructure and is charging customers $300 to connect their houses to the network for free Internet. (That fee is waived with a monthly subscription.) Google notes that the network, which uses fiber-optic cables instead of digital telephone cables, has Internet speeds about 100 times greater than some rival networks.

The project by some estimates cost Google "hundreds of millions" since its inception in 2010, says Gillis. The company hasn't said how much it has spent and declined to comment on whether it will break even after month-to-month payers start their payments.

Next Generation

But the hefty price tag will be worth it, says Sameet Sinha, analyst with B. Riley & Co.

"The way to think about this project is that it's setting the benchmark for the next generation of Internet connectivity," Sinha said this week. "Now, the competition has two alternatives, either be better than what's in Kansas City or fade away."

Surely, other network providers will be building fiber-based networks they hope will rival Google's. But those competing providers, includingVerizon Communications ( VZ ) andComcast ( CMCSA ), likely will not be able to maximize the benefit to their top line quite as easily as Google will be able to, says Gillis.

"Google can give away a service at break-even, or even at a loss or just a small profit, because they know the total value of it will be greater over time," said Gillis.

That "total value" for Google will include more traffic for its services like Search and Gmail, observers say.

If the Internet is as fast as Google says it will be, then more people will be logging on more often, says Gillis.

And if more people are logging on to check their email or search the Web, Google's ad revenue surely will grow, too.

Even without hyperfast Internet, Google's year-over-year sales growth already has been accelerating this year.

Sales grew 24% in the first quarter, followed by a 35% jump in the second quarter. And in the current quarter, analysts polled by Thomson Reuters see a 58% jump to $11.9 billion from $7.5 billion, excluding what Google pays other sites to carry its advertising.

New Line

Other Google watchers on Wall Street say they're not sure Google's building a super-fast network just to accelerate competition. It might be the start of a new line of business for the company.

Think Equity analyst Ronald Josey says it is likely that if Google's experiment in Kansas City succeeds, the company will expand the network to other test cities around the world. For now it's in the "experimental phase," he says, "but if this works and they can actually get scale and build it out, maybe it's more than that."

Another benefit for Google is that the company's bundling TV service in with the Internet service it's offering, which will lead to a "convergence" of devices for consumers, says Josey.

Google will be able to better see how users in Kansas City switch between TVs, PCs, tablets and smartphones, which could lead to a better understanding of how to design future products, he says.

"If they can figure out better products and how to present them to consumers, that could go a long way," Josey said. "And Google could potentially do that without having to roll out fiber networks nationwide."

Google and other tech companies have been working to recreate the traditional TV experience with new devices and new streaming video channels. And those products could benefit from consumers switching to a fiber network. Having faster Internet might mean more viewers for streaming Web video companies likeNetflix ( NFLX ),Amazon.com ( AMZN ) and Google's YouTube, say analysts.

YouTube, for example, is building out its stable of proprietary programing, which is "poised to replace traditional cable television," says Gillis.

"Advertising is growing in two key areas -- Internet advertising is growing and so is television," he said. "So that's a massive pool of ad dollars that Google hasn't got its hands on. But it could."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: AMZN , CMCSA , GOOG , NFLX , VZ

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