Last week, Google announced its 1Q 2006 results, which were blockbuster. One of the interesting details in the results is that the company is accelerating drastically its capital spending (servers, fiber optic cables, real estate, etc.). It is on pace this year for capital expenditures of about $1.8 billion, an enormous sum that puts Google in the league of the telephone and cable companies. By way of comparison, in 2005, the entire cable industry in the U.S. is said to have spent $32 billion on capital items. To be fair, this comparison is not entirely apples-to-apples, since Google has a global footprint while the cable companies are only domestic.
It appears that Google has become large enough that the big spenders will want to be gatekeepers for Google's business. However, because of its aggressive capital spending, Google soon might have enough reach to work independently of these forces. For instance, Google likely has or will soon have fiber near or in most modestly-sized American cities. It would be very expensive for Google to run a line to each home in the U.S., as the cable industry has done, but it might view an expansion into free wireless internet access as a natural fit. I note that TV stations still find it worthwhile to broadcast their signal over-the-air free to anyone, even though 80% of their customers subscribe to cable.
On the other hand, Google might view its most profitable role in narrower terms. For instance, recently Google bought dMarc, which resells radio airtime to advertisers. It has not yet bought any radio stations directly. Likewise, we might not expect Google to invest much in the Internet Service Provider business.
The final point that I took away from Google's announcement is that Google believes that it is spending on capital items more effectively than are its competitors, giving Google a durable competitive advantage. To be sure, I very rarely have a problem accessing Google and downloading enormous video files. However, the reliability of Google's service is dependent upon the reliability of the cable company's internet product, which I have found to be poor overall.