Virtual Cable – the Disruptive threat to cable and Satellite TV companies

[topofeaturellc]

http://i.imgur.com/Wr6Tlv1.png

 

I would be very surpised if this did not mean people spending less time on the internet on average. Or at least less time on streaming services like youtube and netflix. If only it isn't for the entire population having to collectively wait longer to see their content. Also out of western countries, the US is the least connected.

 

There are probably millions of people in the US who would want netflix, but cannot afford a fast connection + netflix.

 

I meant youtube generating enough incremental revenue fror GOOG rolling out a meaningful fiber business priced around where we get broadband today such that GOOG is earning a decent return on the whole thing.

 

 

[ni-co]

in theory two competing essentially fungible commodities with zero marginal cost should mean both entities go bankrupt.

 

In practice, this means the one who's first keeps his monopoly (leaving aside regulators stepping in). I'd recommend every interview with John Malone within the last 5 years. He offers so much insight into the economies of the cable industry. He told Walt Mossberg back in 2009 that Netflix taking over cable was and is a pipe dream:

http://www.wsj.com/video/liberty-media-chairman-john-malone-the-full-d7-session/0DF26270-8D40-40F0-B9F3-61893BEFBCFA.html

 

He certainly is not underestimating Netflix but he knows the power of the cable economies of scale.

 

[topofeaturellc]

in theory two competing essentially fungible commodities with zero marginal cost should mean both entities go bankrupt.

 

In practice, this means the one who's first keeps his monopoly (leaving aside regulators stepping in). I'd recommend every interview with John Malone within the last 5 years. He offers so much insight into the economies of the cable industry. He told Walt Mossberg back in 2009 that Netflix taking over cable was and is a pipe dream:

http://www.wsj.com/video/liberty-media-chairman-john-malone-the-full-d7-session/0DF26270-8D40-40F0-B9F3-61893BEFBCFA.html

 

He certainly is not underestimating Netflix but he knows the power of the cable economies of scale.

 

Only because no one has had the balance sheet to do it all the way.  Nor has there been the support of bubble needed to finance it.

 

Look at the history of rails and power utilities in the US. Incumbency didn't protect the first movers there.

 

If cable goes unchallenged it isn't going to be because of something intrinsic to cable. FTTH is a superior technology that once in place is sort of perpetually upgradeable with a relatively small Capital investment.

 

[Guest wellmont]

It's quite simple: How could a company that has to dig up all the streets to put their fibre lines exactly next to the cable pipes become as profitable as the cable company (that paid for this infrastructure 20 or so years ago)? This would only work if the fibre company offered vastly superior speeds so that people were willing to pay up for it.

 

Building what is essentially a second cable network is such a capital intensive undertaking that fibre companies would have to subsidize their prices for years and years with billions of dollars only to keep up with the cable companies. Maybe Google with their vast advertising cash flow could do it. The question is: is it a sensible for them to do it?

 

 

ask google? because they've already done it in 3 markets and have plans drawn up for 9 more... and people in those cities are praying for google to get started. in many ways google offers a better product. and better products usually find success. the fact is there needs to be more competition at the local level. I live in a county where comcast has virtual monopoly. and they price accordingly. part of it is regulatory---but cmcsa does not offer me a good value proposition for video and broadband. comcast is a Great business. Google fiber in every one of their markets would probably take them down to merely being a "good" business. we're lucky goog is taking the long view and not focusing on profits in the short term. it's good for everybody.

[ni-co]

It's quite simple: How could a company that has to dig up all the streets to put their fibre lines exactly next to the cable pipes become as profitable as the cable company (that paid for this infrastructure 20 or so years ago)? This would only work if the fibre company offered vastly superior speeds so that people were willing to pay up for it.

 

Building what is essentially a second cable network is such a capital intensive undertaking that fibre companies would have to subsidize their prices for years and years with billions of dollars only to keep up with the cable companies. Maybe Google with their vast advertising cash flow could do it. The question is: is it a sensible for them to do it?

 

 

ask google? because they've already done it in 3 markets and have plans drawn up for 9 more... and people in those cities are praying for google to get started. in many ways google offers a better product. and better products usually find success. the fact is there needs to be more competition at the local level. I live in a county where comcast has virtual monopoly. and they price accordingly. part of it is regulatory---but cmcsa does not offer me a good value proposition for video and broadband. comcast is a Great business. Google fiber in every one of their markets would probably take them down to merely being a "good" business. we're lucky goog is taking the long view and not focusing on profits in the short term. it's good for everybody.

 

I don't buy that GOOG is building a nationwide network. IMO this is more kind of a message to the cable cos to take their speeds up.

[LongHaul]

Here are my notes on Google Fiber with my rough ROIC calculations. 

 

• Cost for Google Fiber to pass a home might be $700 plus $300 incremental sign up costs (CPE, etc).  Total ~$1000

• Verizon’s was ~$1,400 for Fios per home passed all in.

• Google Fiber Might make ~$500 EBITDA per home per year on the $70 per month package and get 50% market share.  $100 depreciation.  $240 after tax Net Income per sub for $2000 capital  (initial capital – only half the homes).

• Depreciation might be $100 per year.

• 12% ROIC after depreciation. 

• Fiber optic lines appear to last for 30+ years while tax depreciation is 15 yrs.

 

I think Verizon Fios got far less market share as their price point was much higher.  No questions it is a local scale business but if you're prices and profits are too high competition can come in and bring down the ROIC.  Especially when you have built up a lot of badwill with customers. 

 

Another interesting twist - apparently both cable and DSL are supposed to launch Gigabit services of their own in the coming years as they roll out new tech.

 

The virtual cable is really the big threat at this point with pretty high profit contribution margins for the cable guys.

I think a lot of the cable and satalite guys will get run over by this just as the newspaper owners were in denial about the new tech.  Cable was a great business.  It is much more threatened going forward.

 

 

 

[merkhet]

What makes you think that the cost for Google Fiber is so much lower than the cost for Verizon Fios?