Google Has Kittens

NEW YORK ( TheStreet) -- A decade ago, in my book Moore's Lore,, I wrote about how Enron was done in by "kittens."

I was actually writing about a technology called Wide Division Multiplexing (WDM), which lets you multiply the data-carrying capacity of a fiber cable many times by using light in a variety of colors, not just white on-and-off pulses.

Back in the late 20th century, Enron tried to monopolize Internet data traffic by running it through a market, the way it was running natural gas through a market and costing Californians' millions. The effort failed, because WDM cut prices on data transmission so dramatically. The power of abundance undercut any effort to create scarcity.

It was as if Enron had two cats, I wrote, capitalized the value of all the kittens they might produce, then learned that other people could also breed cats. Cats are what economists call widgets, since they have endless utility and no discernible economic value. Something like data bits.

Around the time I published my book, Google ( GOOG) began buying up "dark fiber." That is, it bought fiber lines that were not turned on, due to overcapacity, at bargain prices.

Ever since, the heart of its business model has been to encourage use of Internet resources, as its own infrastructure had the industry's lowest costs. The more the Internet is used, the more vital its cost advantages become. Hence the headline -- take all the kittens you want, Google will make more.

In contrast to Google, companies like Verizon ( VZ) and AT&T ( T), and to a lesser extent cable operators like Comcast ( CMCSA) and Time Warner Cable ( TWC), see infrastructure as a cost. Wires are expensive because it takes money to roll trucks into neighborhoods and string them one-by-one. They want to practice an economics of scarcity.

So while Google can run 1 gigabit/second downloads, and 100 Mbps uploads, in Kansas City, and soon Austin and Provo, through its Google Fiber, Verizon can offer only one-fourth the speed, at four times the cost, on its FiOS Quantum system.

Few places have Google Fiber, so Verizon, AT&T and the cable companies figure they have the power Enron sought. They're the local gatekeepers to your Internet, and you pay what they say. By expanding Google Fiber, Google gives this strategy a sell-by date.

To Scott Cleland, who often advocates for the interests of companies like Verizon, this makes Google an evil monopoly. Even though Google has never used government subsidies, while Verizon and AT&T have taken billions to provide "universal service," we should hobble Google for winning the market anyway, he argues.

Google is certainly winning the Internet core, which AT&T and Verizon have long dominated. According to new research from Deepfield 60% of all Internet users now connect with a Google server at least once a day, and it now accounts for 25% of all Internet traffic, up from 6% just three years ago.

A lot of this gain is due to the success of Google Global Cache, which brings Google servers into Internet Service Providers' offices to serve popular content locally, especially YouTube videos.

Dark fiber gives Google capacity to deliver even more low-cost bits, which is why its $35 Chromecast device, which turns your Android phone into a TV remote, drawing content from Google through your Internet connection, is so important. The more bits you get, the more money Google gets to pay for that infrastructure, and the closer it can bring that infrastructure to you, multiplying the cost advantage.

This is why I wouldn't want to own Verizon or AT&T shares. If your best bet is to complain that an unsubsidized competitor is beating your subsidized offer in the market, don't expect much sympathy. Expect, instead, the suggestion that you learn to breed cats, like Google has.

At the time of publication, the author was long GOOG.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Dana Blankenhorn has been a business journalist since 1978, and a tech reporter since 1982. His specialty has been getting to the future ahead of the crowd, then leaving before success arrived. That meant covering the Internet in 1985, e-commerce in 1994, the Internet of Things in 2005, open source in 2005 and, since 2010, renewable energy. He has written for every medium from newspapers and magazines to Web sites, from books to blogs. He still seeks tomorrow from his Craftsman home in Atlanta.