Aug. 22, 2014 2:21 p.m. ET
Frustrated by the hammerlock of U.S. broadband providers,
Google Inc.
GOOGL +0.02% has searched for ways around them to provide faster Internet speeds at lower cost, via everything from high-speed fiber to satellites.
In the process, it is changing how next-generation broadband is rolled out.
Telecom and cable companies generally have been required to blanket entire cities, offering connections to every home. By contrast, Google is building high-speed services as it finds demand, laying new fiber neighborhood by neighborhood.
Others including
AT&T Inc.
T -0.40% and
CenturyLink Inc.
CTL -0.27% are copying Google's approach, underscoring a deeper shift in U.S. telecommunications policy, from requiring universal service to letting the marketplace decide.
As Google's model gathers momentum, it stirs up questions about whether residents of poor or underserved neighborhoods will be left behind.
U.S. policy long favored extending service to all. AT&T touted its "universal service" in advertisements more than a century ago. The concept was codified in a 1934 law requiring nationwide "wire and radio services" to reach everyone at "reasonable charges."
In exchange for wiring a community, telecommunications providers often gained a monopoly. Cities made similar deals with cable-TV providers beginning in the 1960s.
The emergence of the commercial Internet in 1990s led to a reassessment. Policy swung in favor of encouraging competition in the hope that it would bring more people online faster. Over time, Congress and regulators loosened the strings on Internet providers.
Google seized the opening in 2010, as it sought to stoke demand for bandwidth-hungry businesses, such as its YouTube online-video site. It solicited interest from cities for a new network, specifying that it sought "opportunities to experiment with deployment techniques." More than 1,000 municipalities responded.
"The main point was to win and bring that infrastructure to our city," said Rick Usher, assistant city manager of Kansas City, Mo.
As phone and cable companies slowed their own expansion plans, more cities allowed the selective approach.
Mary Beth Henry, director of community technology in Portland, Ore., says broadband providers balked at covering the entire city. So Portland stopped requiring universal coverage in 2007 and this year signed a deal with Google that employs the build-to-demand approach.
Offering service everywhere is "too risky and returns are lower," she said.
In Kansas City, Google divided the region into areas of a few hundred homes it called "fiberhoods" and asked residents to pay $10 to preregister for a service that would operate at one gigabit per second, about 100 times the U.S. average. The service now costs $70 a month.
If interest exceeded a certain threshold, generally between 5% and 25% of households, Google connected the area. The threshold varied based on population density. Google also worked with local officials to speed the permitting and construction process. It skipped some areas entirely, because they were too thinly populated or because of construction challenges, a company spokeswoman said.
To date, Google has conducted preregistration in 364 neighborhoods; all but 16 hit Google's threshold for connection. Google hasn't disclosed how many homes in each neighborhood subscribe to its service.
A survey earlier this year of five neighborhoods in the Kansas City area conducted for brokerage firm Bernstein Research found that more than half of households had signed up for the service. At that rate, the service would be "very profitable" for Google, Bernstein analyst Carlos Kirjner said.
The Bernstein survey found that participation varied with income. In the Wornall Homestead neighborhood—median household income $116,000—83% of residents surveyed subscribe to Google Fiber; in the Community College area—median income $24,000—27% subscribe.
The flexibility to choose where to build, more efficient construction techniques and cheaper components mean it costs Google about 20% less to reach a home compared with
Verizon Communications Inc.
VZ -0.47% 's FiOS high-speed service, according to Bernstein estimates.
Kevin Lo, general manager of Google Fiber, said the build-to-demand approach is crucial for making the business work, but said Google isn't cherry-picking the best neighborhoods or ignoring poorer areas. Of the city's 20 lowest-income areas, he said 19 qualified for Google's fiber service.
Still, concerns persist that Google is exacerbating the "digital divide" because its service may be more common in well-off areas. That is more important as more day-to-day services shift online, such as applying for jobs.
Installing fiber only where there is most interest "leaves out every city's most vulnerable citizens," said Michael Liimatta of Connecting for Good, a Kansas City nonprofit that focuses on digital divide issues.
To address these concerns, local officials required Google to offer free service to schools, libraries and community centers, said former Kansas City, Kan., Mayor Joe Reardon, who worked on the initiative during his tenure. Google agreed to offer service in "economically distressed" neighborhoods and offers a slower service that is free for seven years, after a $300 installation fee.
But Mr. Liimatta and others think those steps aren't adequate. "It is too early to say whether the stuff Google is doing is enough," said Angela Siefer, who researched these issues this year for the University of Illinois's Center for Digital Inclusion. "Being friends with Google is great, but you have to go further to address these issues."
Google didn't respond, said Steve Reneker, the city's chief technology officer. A Google spokeswoman said the company is focusing on its networks in Kansas City, in Austin, Texas, and Provo, Utah, and the 34 others it hopes to enter.
Verizon was required by cities and some state laws to build and offer its FiOS service widely across cities. It stopped expanding to new cities in 2010; to date, it has spent more than $23 billion on the FiOS rollout. Chief Financial Officer Fran Shammo said in March that the company wouldn't expand to additional markets until FiOS had "finally returned its cost of capital."
If Verizon resumes expansion, the company would consider Google's build-to-demand model because it has the potential to be more profitable, said Chris Levendos, a Verizon executive overseeing the FiOS build-out in Manhattan.
Others are doing just that. AT&T said in April it would offer Internet speeds of up to one gigabit in as many as 100 cities. It is building to demand and working with local authorities to reduce construction costs, the company said. Tuesday, it said it would bring the high-speed service to Cupertino, Calif., close to Google's headquarters.
This approach "starts to make this business model look quite attractive," John Stankey, AT&T's chief strategy officer, said at an investor conference on Aug. 13.
In North Carolina, AT&T also agreed to provide free service for seven years for up to 100 community centers, though cities or outside groups will have to pay connection costs.
CenturyLink this month said it plans to offer one-gigabit Internet service in Portland, and 15 other cities. CenturyLink will choose where to offer the service based on usage patterns of existing customers.
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