Learning from Google Fiber

By / 11.1.2016

Google’s decision to pause its roll-out of Google Fiber to new cities is an important data point in our understanding of both the economics of telecom and the economics of innovation. The announcement said that:

In terms of our existing footprint, in the cities where we’ve launched or are under construction, our work will continue. For most of our “potential Fiber cities” — those where we’ve been in exploratory discussions — we’re going to pause our operations and offices while we refine our approaches.

Google should be applauded for its willingness to take a chance on laying fiber to the home—such big bets are the only way that innovation happens. Too many companies around the world choose to play it safe and avoid putting money into “moonshots.”

However, Google’s move emphasizes that telecom infrastructure investments cost big money and are risky. A company with one of the deepest pockets in the world—and a long-established willingness to innovate—has been forced to reassess its strategy. Advocates such as Susan Crawford have claimed in the past that the roll-out of Google Fiber proves that it is “cost-effective to install and sell fiber connectivity.” But by the same token, Google’s pause confirms that gigabit networks to the home are expensive, as incumbent providers have been saying, and not yet a winning proposition for most consumers.

Regulators need to remember that telecom infrastructure investments are not only large, but carry significant technological and business risk. Major telecom providers such as AT&T, Verizon, and Comcast have been at or near the top of our “Investment Heroes” list year after year precisely because they are willing to take those risks. And the risks will only get larger. No one is sure yet the best way to connect fiber backbones to homes and businesses, and what the business model will look like. For example, will fixed 5G networks be the best way to bridge the “last mile” to the home? It’s tough to say, given that the technical standards have not yet been set. A wrong bet could lead to billions of dollars in losses.

But there’s a broader point as well about size and innovation. Economists have long debated whether large companies or small companies contribute more to innovation. As a general rule, the answer is “it depends.” As we wrote in our policy memo, “Scale and Innovation in Today’s Economy”:

the current U.S. economy is dealing with a particular set of conditions that will make scale a positive influence on innovation. First, economic and job growth today are increasingly driven by large-scale innovation ecosystems, ….These ecosystems require management by a core company or companies with the resources and scale to provide leadership and technological direction. This task typically cannot be handled by a small company or startup.

Second, globalization puts more of a premium on size than ever before. A company that looks large in the context of the domestic economy may be relatively small in the context of the global economy. In order to capture the fruits of innovation, U.S. companies have to have the resources to stand against foreign competition, much of which may be state supported.

Finally, the U.S. faces a set of enormous challenges in reforming large-scale integrated systems such as health, energy, and education. Conventional venture-backed startups don’t have the resources to tackle these mammoth problems. Only large firms have the staying power and the scale to potentially implement systemic innovations in these industries.

These considerations raise certain questions about how regulators—in the US, Europe, and Japan—should think about the role of scale. Scale by itself should not be viewed an impediment to innovation. Small firms are essential to innovation, but big firms have an essential role to play as well.