Following on from last weeks post, I want to spend some time talking about the money problems associated with being an overbuilder like Google Fiber was. Now, why is the money discussion so important? People want to blame lots of things for why Google is pulling back. Most notably they want to talk about the right of ways and pole attachments. These are problems but not the big one.
So, let’s dispatch with these other problems first. There is a presumption that the ability to physically deploy was some revelation over the time of Google Fiber. The truth is that these are local laws (and each city is different) and have been around for decades. If this was a problem for Google Fiber, then I would them as completely unprepared for what they were attempting. I would argue that this was the point of making it a community-based request. Google wanted to them to waive all kinds of provisions to get the network built. If they thought this would be an impediment, then they would not have started.
I am going to use some round numbers from what Verizon told us about FiOS and then go on from a numbers standpoint. They told us that to “pass” a home was about $1,000. That to “connect” a home was about $1,500. Connecting a home is obvious. Passing a home means that all the construction and equipment was in place to be able to sell service to the home. So in math terms that mean that an actual connection cost was more than $1,500 and that includes all the money to buy the equipment, lay the cable, install the equipment and turn up the service.
To get the money back on this, you would need to earn enough profit to make the investment come back to you. One easy mistake that people make is that they start with revenue instead of profit in a Return On Investment (ROI) calculation. Let’s call a triple play home (voice, data, and video) $250. Profit margins on such a business might be 10% or $25 per month. That creates a break even of 5 years for the $1,500. Now, a more realistic break even is 24 months so the profit on these lines is more like $62.50. The problem is taken rate or the percentage of people that take the service.
Let me use 3 numbers for taking rate: 50%, 25%, and 10%. The profit from one home must cover the cost of all the homes that don’t buy. Or in each case a total of $2,500, $5,500, and $10,500 respectively. As you can imagine at really low take rates the ability to pay the kind of money it takes to build a network. At our $62.50 profit margin, these are break-even times of 40, 88, and 168 months (the latter is 14 years). Now this is just a model, but at even double that profit it is a 7-year payback at low take rates.
Now, be a 3rd player in the market. 10% take rate is actually reasonable for somebody in that position. You can see why being a 3rd player is such a bad deal. Having a 33% market share is no picnic. Compared to the rest of the returns on Google Investments it is terrible. Now Google could afford to build out the entire US. But it would be an awful financial move.
This is why expecting new players to come out makes no sense.
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