For Google, provoking ISPs is the only way to build the Internet

March 1, 2010: 9:51 AM ET

By Paul Smalera, contributor

Google's recent push to provide ultra-high-speed Internet is more about injecting competition in the dysfunctional Internet business than about creating a new revenue stream.

Google CEO Eric Schmidt

It's the 21st century equivalent of the Oklahoma land rush: Just days after Google announced it was seeking some trial areas in which to deploy its new ultra-high-speed fiber network, cities and towns began throwing themselves at the Internet giant. And why shouldn't they? The digital divide is wider than ever. A recent FCC report, concluded that 93 million Americans lack access to high-speed Internet service, with affordability being the primary barrier. Harvard's Berkman Center just rated America's broadband network 16th best among developed nations in the world -- just beating out Luxembourg.

For CEO Eric Schmidt, the middling rank isn't just a reason to hide his face when visiting Sweden (1st) or the U.K. (11th) --  it's a serious obstacle to Google's continued growth. The same goes for Facebook, eBay (EBAY), Twitter, Amazon.com (AMZN), Apple's (AAPL) iTunes Music Store and every other U.S.-based website or online service you can think of. But it's Google (GOOG) that has the pocketbook and the self-regard to attempt to do something about it: by forcing ISPs to evolve or face extinction.

Right now, high-speed Internet access in the United States is divided among geographic, regulatory, and economic lines that make little sense in a digital world. English serfs had more choice over their fates than Americans have over the set-top boxes in their living rooms. Cable companies like Comcast (CMCS.A), Cox, and Time Warner Cable (TWC) carve up swaths of "bundled" video, voice, and data customers by signing region-wide local-franchise agreements designed for the era of one-way communications: coaxial cable to the back of the TV set. Deregulated phone companies, namely Verizon (VZ), are trying to horn in the business, spending thousands per customer to swap out copper-wire for fiber. And satellite companies like DirecTV (DTV) try to fill some of the gaps.

Google executives seemed to have looked upon the broadband landscape -- expensive, competition-free, and scarce -- and spotted something like the spam-laden, limited, and brutally slow Hotmail service that they set out to demolish six years ago. And as with that destroyer, Gmail, they've set their sights incredibly high.

Where the FCC wants speeds of 100 megabits per second to be widely available by 2020, Google plans to beat that by a factor of 10, aiming to supply 1 Gigabit/second access to the lucky communities that win entry into its pilot project. Compared with today's high-speed access, the leap will be like going from riding a skateboard to riding a rocket ship.

But in Google's view, the extra bandwidth isn't wasted or frivolous. As one digital media professor noted in her university's newspaper: "When my daughter started college six years ago, every single dorm room had a television. Two years later, my son started college, and barely anybody had TVs in their room." The rate at which teenagers have taken to Internet video is startling, with many consuming nearly all of their video content online. Much of the content they crave is there legally. And the demand for what isn't is getting to be too great for content owners to ignore.

Nearly all searches for that content are initiated through Google or YouTube. And even if they're not, they're likely to evenutally lead the user to a site with Google ads. Google has, for now, won the battle of Internet dominance, and still launches new products (like Buzz) to protect that dominance. But what's really left for the company to do is not to grow market share, but to grow the marketplace itself. All things equal, that's going to mean stealing eyeballs from competing video screens -- like cable television. Which is probably why cable executives aren't really in a rush to bring consumers the high speeds they already can.

They know that if millenials' online addiction is going to stick post-dorm room, then buffered, stuttering splotchy video will have to be eliminated. So what's a cable company to do? Promote high-speed, high-margin ISP service, or continue to prop-up their flagship television offerings, despite deteriorating economics? Well, why choose, when they can do both? In 2008, Comcast CEO Brian Roberts, delivering the keynote speech at the Consumer Electronics Show, practically guaranteed 100 megabits-per-second Internet speeds by 2010. Then he bought NBC Universal for $13 billion. And we're still sitting here, buffering.

Cultural and market forces may be pointing towards the size of the pipe becoming more important than the number of pre-programmed HD channels it carries, but there's very little pressure on ISPs to change anything today, even though they have the technology to more than triple their bandwidth. Forget about them voluntarily lowering prices, despite 95% profit margins on Internet service last year. Cable channels and content producers are pushing cable companies for ever-greater carriage fees, to the point where what consumers pay for broadband will soon be used by the cable company to subsidize the fees it pays to cable channels. Rising prices for Internet access aren't coming from eBay -- they're coming from ESPN.

Google wants its ultra-high-speed Internet service to apply pressure on the other side of that equation, forcing ISPs to boost bandwidth and lower prices. Using its savvy investment in cheap bandwidth, Google will show what high-speed Internet access, devoid of cable payments and scandalous profit margins, can be. And, as it hoped, it's already causing a stir. Soon after Google made its announcement, Cisco (CSCO) -- the hardware provider to AT&T (T), Comcast, and others -- said it will be unveiling major news (we're assuming gear here) that will speed up the Net. On March 9, says Cisco,"'what's next' arrives."

To some, Cisco's move seems like an act of war (or, at least, arming for war). But Google has been explicit that its pilot project is just that -- a limited trial for a few thousand lucky American homes. Google wants to avoid getting into the business of being an ISP, beyond a limited scope. Already beset by privacy concerns, it's not interested in adding the ire customers direct at their cable company to the outcry over privacy concerns it's facing from cloud computing, Buzz, and its cooperation with the NSA. After all, "Don't be evil," doesn't mean "be a punching bag."

The whole point of Google's ultra-high-speed 'land-grant' is to prod Cisco and its ISP customers into making the necessary upgrades to provide better service for not just a few thousand people, but 300 million of them. Two years ago, Google's failed wireless spectrum auction bid was actually a successful gambit to force a sort of wireless net-neutrality onto the winners. Likewise, this is Google's attempt to change an entire industry by jamming its brainiac lever under just the right spot on the ossified ISP cabal. With any luck, there'll be a rocket ship waiting underneath.

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