Why Is Google Building a Free Broadband Network?
We all know that Google's (GOOG) business model operates by its own economic laws: most of its services are free, and it happily takes big losses on YouTube. But the company's new plan to build a free, super-fast broadband network for several hundred thousand Americans is perhaps its most bizarre endeavor yet. What does Google gain by building a no-charge broadband infrastructure?
Telecom flacks have called it a PR stunt, but the more qualified reactions have been no less simplistic. Back when it was announced in February, the free broadband project earned comments like this one from David Yoffie, Harvard Business School professor:
Google, indeed, appears to be playing a chess game. If they can create an even mildly credible commitment to offer superfast broadband to the home, it could strike fear in the hearts of cable and telcos, stimulating an arms race of investment -- just as they did in the auction for spectrum a few years ago."I suppose it could, but how? Building out infrastructure is a slow, expensive process. The competing telecom companies wouldn't exactly need to scramble; it would be years before Google could actually raise the public's standard of broadband speeds to the point where competitors would have to invest in parity, if it ever could. That's years of very expensive construction, lawyering, and technical development. Surely they could find a more profitable chess game than this.
Not that this project hasn't earned Google some terrific press -- it has. Over 1,100 towns and communities applied to host Google's grand experiment, and some of the submissions displayed incredible creativity and a heart-rending desperation for a good Web connection. But good PR is hard to measure in terms of revenue potential, making this chess game not only expensive, but its results hard to quantify. If it's one thing that feeds Google's golden goose, it's quantifiable, testable experiments.
Neither is this an issue of necessity. The U.S. may have some of the crappiest broadband in the developed world, but it's not gone unnoticed. The Federal stimulus bill promised $7 billion for network infrastructure improvement, and Web-rights advocacy groups are fighting the telecoms to divulge network maps so Federal authorities can identify service areas that need bolstering. Just this week, the House Internet Subcomittee took its first glance at the FCC's proposal for free national WiFi, carried on a slice of free radio spectrum vacated by TV; public consciousness of the plan is growing. In the private sector, Sprint (S) is busy rolling out advanced 4G networking in about a dozen U.S. cities, which will compete with landline Internet connections, and TimeWarner and Verizon are touting Wideband (50Mbps) and FiOS (100Mbps) services respectively. (Google is promising 1,000Mbps.)
This isn't to say that the telecoms couldn't use some prodding -- they're some of the most draconian corporate goons that consumers have to deal with, always lobbying against net neutrality and attempting bandwidth caps. But there's not much room for Google to make money here, with so many forces already dragging the industry forward; the free broadband project must be about something else.
The answer could be ultra-rich advertising. Google makes 97% of its revenue on advertising, and it's constantly (and litigiously) defending its position by keeping the online ad market as big and competitive as possible. Just this week, on March 23, the company won a victory in European courts when judges ruled that anyone can buy AdWords that contain copyrighted terms. Google's official post on the verdict shows its top priority is the state of the ad market:
We believe that user interest is best served by maximizing the choice of keywords, ensuring relevant and informative advertising for a wide variety of different contexts. For instance, if a user is searching for information about a particular car, he or she will want more than just that car's website. They might be looking for different dealers that sell that car, second hand cars, reviews about the car or looking for information about other cars in the same category.The best way to "maximize the choice of keywords" is to develop incredibly lucrative, rich-media ad products -- and those could take serious broadband power to serve once they include video, social media, and more complex code. Here's a Google blog post from the other day, describing the future of ads:
Imagine you own a popular coffee chain in Denver that you want to promote. On Monday afternoon, it's warm and 80 degrees in the city. You run a display ad campaign online that offers Denverites a discount coupon for an iced cold latte, with a searchable map embedded in the ad to show local branches, and a real-time feed from people who have tweeted publicly about your newest flavor. That evening, a cold front rolls over the Rockies. Your ad automatically and dynamically adjusts to present a photo of a hot, steaming cup of hot chocolate in front of a warm fireplace, together with a home delivery number and an offer of free marshmallows.Doubtless that's just the tip of the iceberg. Looked at in this light, every user that Google connects to 1,000Mbps for "free" is another potential consumer of highly profitable ad material. In this way, its broadband strategy seems to be similar to its Chrome OS strategy: it's building itself another highly-profitable niche audience. It's the old ad-supported-Web model, back again -- but vertical.