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Google 'Big Gig' Ups Ante In Austin ; AT&T Fires Back

By: Investor's Business Daily
Posted: 4/9/2013 5:45:00 PM
Referenced Stocks: GOOG;NFLX;T;TWC

The nation's broadband battle escalated on Tuesday after Google confirmed plans to expand its superfast Internet and TV service to Austin, Texas. There, it will take on market leader Time Warner Cable and AT&T, which said it is prepared to match the gigabit speeds offered by Google if city officials grant it similar concessions.

Austin will be the second market whereGoogle ( GOOG ) builds a fiber-optic network, following Kansas City. Austin is one of more than 1,100 municipal governments, mostly small, that have sought the Google Fiber service, which offers broadband speeds of up to 1 gigabit per second.

The Texas city, a high-technology hub, launched a public relations campaign called "Big Gig Austin" to snare Google in 2010. Analysts have expected Google to roll out its service in more markets, but the prevailing view is that the Internet giant, despite its financial muscle, will not expand across the U.S.

In markets like Kansas City and Austin, though, Google will pressure incumbent service providers, analysts say.Time Warner Cable ( TWC ) operates in both Kansas City and Austin. Phone companyAT&T ( T ) sells broadband and Internet services in Austin.

While Time Warner Cable sells broadband speeds of 50 megabits per second for $79 monthly, Google charges $70 for its gigabit service in Kansas City. Google's service is 20 times faster than Time Warner Cable's offering.

Google plans to start connecting homes in Austin by mid-2014. Austin residents will be offered a choice of products similar to those in Kansas City. Pricing will be "roughly similar" to Kansas City, Google said.

"We believe the Internet's next chapter will be built on gigabit speeds," said Milo Medin, Google Fiber vice president, in a blog post.

AT&T on Tuesday afternoon issued a statement saying it'll upgrade its Austin network to 1 gigabit speeds if city officials grant it "the same terms and conditions as Google on issues such as geographic scope of offerings, rights of way, permitting, state licenses and any investment incentives."

"Policies which eliminate unnecessary regulation, lower costs and speed infrastructure deployment can be a meaningful catalyst to additional investment in advanced networks which drives employment and economic growth," said Randall Stephenson, AT&T chairman and CEO.

At a Morgan Stanley conference in February, Time Warner Cable's CFO Irene Esteves said the cable firm isn't seeing much demand from customers for 1 Gbps speeds. "We just don't see the need of delivering that to consumers," she said.

Google, though, is being proactive. Think Big Partners, which works with startup companies, is sponsoring the "Gigabit Challenge," a contest for companies to develop applications that take advantage of the 1 Gbps speeds.

"Google Fiber will be disruptive in the markets it targets because it allows the development of a new generation of applications to emerge," said Oppenheimer analyst Tim Horan.

Google's entry into new markets, analysts say, will hurt the ability of cable TV companies to raise prices or introduce consumption-based billing. Broadband usage caps, consumer groups have charged, aim at derailing competition from online video providers such asNetflix ( NFLX ).

In mid-2012, Time Warner Cable reintroduced data usage caps in Austin, a policy it first tried in 2009. If customers exceeded a 5 GB usage allowance, the cable firm charged fees of $1 per gigabyte, up to $25.

Google began installing its service in Kansas City in November. It's building out the service initially in neighborhoods where the most subscribers registered and paid a $10 deposit.

In Kansas City, Google has received government concessions to speed up its fiber build-out, including staff assigned to issue permits, space for central office equipment, and right-of-use on utility-owned poles. Goldman Sachs, in a report, says Google may be encouraged to expand its fiber-optic service to more markets if local governments provide incentives.

Even so, Google would be hard-pressed to become more than a regional player. Bernstein Research analyst Carlos Kirjner estimates Google would need to spend $10 billion to $15 billion over five years to reach 20 million homes, about 15% of the U.S. market.

"We remain skeptical that Google will find a scalable and economically feasible model to extend its build-out to a large portion of the U.S.," he wrote.

In Kansas City, Google charges $120 for both Internet and pay-TV services. Google has less flexibility to offer TV discounts, analysts say, because it must pay content providers programming fees, just like cable, satellite and phone companies.

Time Warner Cable has about 45% of video customers in Austin, with AT&T at 13%, satellite broadcaster DirecTV at 17% and Dish Network at 16%, said Vijay Jayant, analyst at ISI Group.