About two months ago, I found myself in a Provo, Utah, mini-mall. Don't ask. Anyway, there among the fusion sushi joints, oxygen bars and anti-UV T-shirt shops was a store I'd never seen before: a Google retail outlet.
Being the asteroid mining operation this company is these days, it should come as no surprise that this was a shop like no other. Nothing appeared to be actually for sale. There was little real foot traffic. In fact, nobody stopped in over the two hours or so I lurked about. From what I saw, the store appeared to be nothing more or less than a living showroom -- a kind of a giant diorama where customers could stroll in to see, feel and touch Google's latest flagship fiber-to-the-home Internet access service, Google Fiber.
Google, I have to say, turns out to be not a bad little retailer. The display of just how cool TV, digital video recording, cloud storage and, of course, the Internet would be when it all runs at 1,000 megabits per second was way cool. And what's not to love about the prices? Free, Internet-only plans, were, uh ... free. And full gigabit + TV access ran just $120 per month. That's about $80 less than my average combined Cablevision and Verizon FIOS bill here in Westchester County.
Thing is, the more I poked around Provo, the more it became clear that Google is not being shy about pushing into the cable TV biz. There were repair trucks and a downtown customer service center and even marketing and promotion in local publications. All of which made perfect business sense, since Provo, along with Austin, Texas, and Kansas City, Mo., is an early test market for Google to work out the kinks of offering direct fiber-optic access to the Web.
But that business logic quickly zoomed down that fiber-paved road to hell as I starting asking the obvious investor questions: What on earth will the cost of all this retail, hardware and marketing imply for the fortunes of this now mostly virtual $52 billion Internet company?
Amazingly enough, the answer seems to be: Nobody cares.
An un-tied fiber logic
What's most surreal about spending months sifting through Google's fiber-optic ambitions is not that its spokespeople declined to comment. That I expected. Or even that customer service representatives, both in the retail store and online, had almost no idea about the details of the service they were trying to tell.
What's flat-out bizarre is how little of the financial implications of offering fiber-optic service on real scale is discussed in Google's financial statements. I may have missed something, so by all means, confirm for yourself. But when I read and then searched the company's 2013 10-K annual statements for references to Google Fiber -- or even fiber-optics at all -- I could not find a single mention.
It's strange because there's probably no single technology that affects a company's balance sheet more than a service such as Google Fiber. Optical networking is a terribly expensive and uncertain technology involving running either an above-ground line or a continuous underground trench to most every single home served. And worse, pure fiber access, by definition, cannot redeploy a legacy physical plant as cable, power or phone companies do to cut costs.
Fiber is such pricey, from-scratch stuff that cost estimates are tricky things. Probably the best guess right now is the widely quoted New York City-based Bernstein Research figures from last year pegging the cost of Google Fiber at a cool $11 billion to offer service to just 20 million of the 100 million or so homes in the United States.
That implies a nearly $60 billion spend to build out the country -- if that's possible at all.
Fiber is bad for Google's diet
A snazzy retail outlet is not needed to demonstrate the havoc this sort of capex burden can wreak on even the hardiest balance sheets. Just take a look at successful service provider Verizon, which already is in the business of deploying fiber-optic service. From 2012 to last year, long-term debt -- that's all the money it's obligated to pay back -- jumped from $47 billion to, wait for it ... $89 billion! Besides being a debt load that jumped nearly 90% year over year, debts now run at 110% of current assets and 400 or so percent(!) more than bottom-line net income.
Compare that level of leverage to Google's, which had a total long-term debt load of just $2.9 billion last year on $93 billion of current assets, which -- when compared with its net earnings -- is essentially a rounding error.
Now comes the truly strange part: Despite the fact offering fiber-optic service would fundamentally change Google's financial posture, this year the enterprise almost casually announced it will expand the Google Fiber product into nine metro areas and roughly 34 cities.
Many analysts saw this move as a PR boon, or as a means for prodding local cable and phone operators to spend more on faster Web access. But investors would be foolish to pass this fiber build-out as a passing fancy. Google -- as a culture -- prides itself on trying the impossible, including mining said asteroids and a global Web access technology called Project Loon. It uses, I kid you not, a series of high-altitude balloons to provide Internet access to rural areas.
Is anybody saying spending billions on a fiber network that gives this company direct access to millions of new customers is beyond its ambitions? It will take time, but "Google: The Network Operator" -- and all the trauma of re-calibrating investor valuation that go with it -- is only a matter of time.
Investors would be loony to bet otherwise.