With Alphabet (GOOGL) - Get Reportscaling back the ambitions of its Google Fiber project in 2016, questions now have arisen about whether the company could move to sell the high-speed broadband business.
While a sale of Google Fiber could interest some investors, it would not raise enough cash to move the needle for Alphabet. Moreover, a sale would face challenges in part because Google didn't approach the business the same way a private equity firm or a public cable operator such as Comcast (CMCSA) - Get Report would.
Google does not disclose subscriber figures. Craig Moffett of MoffettNathanson put the company's broadband subscriber base at 453,000 and video customers at 68,715 in a September report.
"If it truly is 450,000 on the broadband side, which by the way is a huge disparity between broadband and video, we're talking the 13th-largest provider of broadband in America," Bruce Leichtman of Leichtman Research Group said regarding Google Fiber.
Aspects of the business could complicate a sale. "Their video subs are so low; that obviously impacts their valuation," Leichtman said. The low video penetration limits the revenue that Google Fiber obtains per customer. Arguably, though, some buyers could see an opportunity to increase video sales at the business.
"The other thing that impacts any valuation is they are an overbuilder," Leichtman added.
Overbuilders are companies that enter markets that already have an existing provider. The overbuilder model inherently entails competition against an incumbent telecom or cable company. In some cases, Google Fiber might compete against two companies.
The best comparison for a sale, Leichtman suggested, would be overbuilder RCN Telecom Services. Abry Partners in August agreed to sell the business to TPG Capital for $1.6 billion.
"Fairly similar size," he said. "Maybe a little big smaller but more video subscribers."
Google Fiber is part of Alphabet's "other bets" unit, which includes smart-home product developer Nest, life sciences unit Verily and other holdings.
For Alphabet, which did not respond to queries for this story, the fiber model may be shifting because of internal and external changes.
New CFO Ruth Porat has brought greater attention to costs at the company's disparate businesses.
The market also has developed. Part of Google's motivation to spool out fiber was to press broadband providers to offer higher speeds on networks that carry YouTube Videos, searches and other traffic from which Google profits. Moody's analyst Neil Begley noted that speeds have increased, and recent cuts may reflect a new attitude towards the business.
"With the relatively new CFO, the company has adjusted its focus more on profitability and accountability which is why I believe the reorg occurred," Begley wrote in an email. "Therefore, I now think that [Google Fiber] continuing to push internet infrastructure investment for speeds is a secondary goal and profitability as a standalone business is the primary goal, along with the other businesses not managed in the moon-shot category."
When Google launched Google Fiber in 2010, it did not have such concerns about the bottom line.
"It was meant to prod the market and understand the market, and I think it did those things," Leichtman said. "It was as much about PR and understanding the marketplace themselves as it was about a real product."