Parsing the Starbucks/Google/Level 3 WiFi Deal

August 4th, 2013 by · 22 Comments

Last week there was a very interesting deal that I've been trying to get my head around. Starbucks has decided that its Wi-Fi hotspots needed an upgrade, and to get it the king of retail coffee is ditching AT&T and going for a service to be provided by none other than Google and Level 3.

Level 3 will be providing the connectivity and managing the hardware, while it appears that Google will be handling the actual interface with users/customers. They'll be starting the upgrade over the next month, with some 7,000 stores to get significantly higher speeds over an 18-month roll-out.

Leaving aside the star power here, this really is a harbinger of a deal that will reverberate throughout the industry. First of all, AT&T has been feeding Starbucks' Wi-Fi with T-1 pipes, which these days barely count as broadband. To boost that by around 10x as advertised and to keep up with further demand, Level 3 will surely be using a mix of direct fiber connectivity and other tools like Ethernet-over-Copper.

One thing you can be sure of is that they won't be bringing 7,000 sites on-net in 18 months all by themselves.  As extensive as it is, their network doesn't go everywhere, and they don't have enough hands or trucks to roll even if it did go everywhere. That means there's a big opportunity here for competitive operators of all stripes around the country to get a piece of this pie.

Another thing to note here is that Level 3 is surely looking at this as a foot in the door to more of the retail sector. Starbucks is generally near, well, everything else right? Once they've got fiber close, the neighboring businesses will know about it quickly enough when the signs go up.  And how many multi-location retail outfits are often conveniently right near a Starbucks in dozens of markets?  Hmm...

But what exactly does Google get out of this? The money involved will be minor to them, but it's about the customer relationships and the wresting of more eyeballs from a monopoly controlled last mile. In light of their expansion of Google Fiber to new markets, their long dalliance with WiFi overall, and the submarine cables they've been dabbling in, they're now unequivocally a network operator in addition to being a content provider.  And given the simmering disputes between content and the last mile, the more endpoints that are free of the incumbent the better for their long term opportunities.

In fact, I think that this deal will sooner or later (and probably sooner) resurrect the rumor that Google could buy Level 3.  And actually, such a thing is starting to actually make sense even to me -- and I've made a hobby out of shooting down such rumors.

 

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Categories: Internet Backbones · Metro fiber · Wireless

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22 Comments So Far


  • GuiaHosting says:

    Google & Level3 together? Hmmm…

  • mhammett says:

    Any idea on how to get a piece of the last mile pie? I reached out a couple of ways on the day of the announcement, but I have little faith they’ll go anywhere.

  • I don’t remember hearing the rumor that Google was to buy Level 3. Besides long haul fiber is not Google’s, or anyone else’s, problem. The real problem is the last mile and the cable companies.

  • Brent Neader says:

    Id guess this is more of a benefit for the cable MSO’s (LEC’s as well, depending on their pricing flexibility) out there than level3 to be honest. In most markets level3 really doesn’t have that deep of a metro footprint, so as some have already said they are going to have to get local loops from a lot of different folks out there, and it only makes logical sense to keep the amount of different companies to a smaller amount, as to not have a different mom and pop fiber provider in every different city.

    Given that, pretty much only leaves the LEC’s, cable co’s, and other independent fiber providers. LEC’s pricing is typically out of line from my experiences, and cable co’s love FTTT which this can be thought of in a similar way, along with the fact most of the big boy MSO’s cover a lot of real estate, so level3 could deal with only a handful and cover a lot of stores.

    • Anonymous says:

      My bet is that the cable MSO’s will be the majority winner of this deal when Level 3 comes begging them for the access into the 7000 stores.

  • CarlK says:

    For many years I have opined, “There is no chicken or egg, which came first STORY between the Level (3) Network and Google. Google would NOT exist in all of its splendor today, if not for the Level 3 Network being built first.”

    Level (3) trucks are being rolled around last mile major cities throughout the nation for good reason.

    The “end run” play on the telecom field is in full motion now. All IP roads lead to The Level 3 Network, and there is going to be a “follow the leader” trend that captivates enterprise “mind share” causing “disruption” in telecom and cable land as big as TECH TITANS want to occur.

    If Google’s owners are as smart the capital stewards as they once were when they did an IPO Dutch Auction, there is no better time to pounce on this DIRT CHEAP fiber everywhere ASSET laying inside The Level 3 PIPES, as exists today.

    That won’t stop a bidding war from ensuing; however, although if their PRICE is RIGHT, I can envision no better “combination” on planet earth for “MELDING” two great corporations together than GOOGLE(3) while LOOKING AHEAD!

    In the name of Jim Crowe, “BRING IT ON!” imo

    • mhammett says:

      You don’t get out much, do you?

    • Anonymous says:

      carlk, didn’t you see your shadow after LVLT’s last earnings report? Come back in another 12 weeks.

      This Starbucks deal is a low bandwidth snoozapalooza.

      Aside from the premium brands in the announcement which companies like Level 3 love to be associated with, this deal is low revenue per store and could be quite costly to fulfill for off-net buildings if LVLT is contractually obligated to build to (which I highly doubt).

      There is no business case that would prove in for LVLT to build-out to offnet buildings exclusively for Starbucks unless accompanied by a bandwidth intensive LVLT anchor customer at same building.

      If this contract obligates LVLT to build to offnet building this will be a money pit. (No chance that’s the case though.)

      Most likely, at the very most, Starbucks has agreed to novate its existing last mile connection contracts over to LVLT (to manage). LVLT will roll those Starbucks contracts under their existing LEC/CLEC term plans (and pass on x% of LVLT discounts to Starbucks) and, where possible, roll as much on-net as possible.

      I’d want to know a lot more about LVLT’s obligations in this contract before I got too excited.

      Top line may be nice on this deal, perhaps, worth as much as $8.5m/YEAR, but margins will be razor thin. Don’t go selling your GOOG stock for LVLT unless you’re a glutton for punishment or Carlk’s gardener.

      Remember, Starbucks is already paying third parties for this service. If this is a novation deal LVLT will get the revenue Starbucks currently pays to these 3rd parties but LVLT has to beat those costs in order get any margin dollars out of the deal. Otherwise, it’s a straight passthru.

      • Brent Neader says:

        Ill agree this route seems possible as well, but seems like a waste of time for both parties.

        If they are just moving t1 or a few bonded t1 over to level3, then really no bandwidth increase for starbucks. In the world of streaming media, a t1 or 2xt1 doesn’t really cut it anymore, so if they aren’t getting a jump to to at least 10mbps what’s the point?

        For level3, I am sure they have a good agreement on loop costs, with low speeds, come low costs, with low margins, so what’s the upside for level3 on this? A few margin points with no upgrades for all this work doesn’t quite add up.

        • Anonymous says:

          Brent, I suspect LVLT will upgrade Starbuck’s current connectivity solution once they get the contracts in hand, but incremental revenue over what Starbucks is paying now for lower bandwidth will be unimpressive. Most residential users, for example, are getting 10-20mbps today over their cable modems for <$100. The Starbucks wifi offering doesn't have to be carrier grade quality.

          Furthermore, I don't see Starbucks attracting (or wanting) groups of gamers or videophiles consuming disproportionate amounts of bandwidth at their stores.

          This deal seems like a lot of sizzle with very little steak. The value in this deal for Level 3 is probably more connected to marketing mileage than margin contribution.

      • CarlK says:

        While the financial terms of the contract between Google and Level 3 were not released, a senior research analyst for D.A. Davidson & Co. stated in a Denver Post article that Google will be paying Level 3 about $50M for the service.

        http://www.dailyconversions.com/all-posts/google-and-starbucks-wifi-now-even-more-interesting/

        • Anonymous says:

          well, not sure I’m going to take the word of a mathematically challenged journalist who said in the very next paragraph of your referenced article:

          “$50M is not just about a Google brand presence to caffeine junkies. The figure again drives home the value Google receives in collecting, storing and reselling in amalgamated format data about you and me. If my math is right, that works out to over $7M per Starbucks location over an unspecified time period.”

          Uh, your math isn’t close to right. It works out to $7k per store, not $7m. That $50m could mean anything. That could be the total contract value over 5-7 years which would work out to $7m-$10m/year in revenue and a single digit percentage of that in contribution margin.

          There is no way of knowing what this contract contains or what it means based on what’s been released to the public. Those that want to drink the kool-aid will read into it what they want to read between the lines. That’s always worked out well for LVLT investors.

  • CarlK says:

    Google(3) are meant to be joined at the hip. It will be the greatest DISRUPTION in the U.S. telecom and cable space that frees its citizens and businesses from TYRANNY. “The American People” have needed to wait too long for this to happen, but it will…………………………

    Drink that Kool-Aid. imo

    • mhammett says:

      Does WordPress have a plugin that can be installed so I can filter out anything CarlK says?

      • Fancy Pants says:

        Ah come on man, it livens the place up a bit at least. I can’t wait to see his almighty prattling when TWT announces earnings in about 10 minutes. Always funny to watch and read.

  • CarlK says:

    The only problem with Google firing the first shot–unless it’s a really good one, err, price–is what will Microsoft do next?

    Then there are those Oligopolists in Cable Land with lease “expirations” barely a business cycle away, who will also be forced to respond.

    Those who ignore what I have to say, usually do so at their own peril. Go ahead and make my day! 🙂

  • DaZipper says:

    The last mile will be delivered using a mix of EoC and type 2 Ethernet wherever possible. The remainder will likely be done on 7xT1 with CPE to handoff as Ethernet. As far as SBUX knows (or cares), they will get 10M from L3, where today they’ve only been getting 1.5M. Pricing will probably be marginally higher for SBUX over the premium that AT&T has been charging them. I’d venture to guess very little new fiber builds will actually be done by L3 as part of this deal. Their financials couldn’t handle the Capex required to build on this scale, even with the Global Crossing revenue engine behind it.

    Simply put, this is mostly a Type 2 play, and L3’s biggest capital expense on this deal will be the CPE x 7000 stores. The rest of the capital will fall to the LEC’s and cable MSO’s to actually get the last mile in there.

    PS – I disagree the the comment that L3 will just assume the copper loops already installed by AT&T and just roll them under their wholesale account. AT&T will *make* them install new ones.

  • Anon says:

    seems crazy to think that because google is buying a service from Level3 that they would want to buy them. Google also buys routers and cables but isn’t going to buy cisco or corning. if any company gets more “I hope” hype than L3, I havent seen it….

  • CarlK says:

    “Owning the pipes……” Who are they going to call?

    “There are people on Wall Street who would like Google to quit spending on things that may not actually materialize in generating significant revenue,” said Needham & Co’s Kerry Rice.
    But he added that a Google-owned, high-speed Internet service would support its other online businesses such as YouTube, which can offer more long-form video programming that allow for more opportunities to insert commercials.
    “If you have the infrastructure in place, there are a lot of things you can do,” Rice said.
    YouTube said in May it was streaming 6 billion hours of video a month. The goal is to get to 1 billion hours a day within a couple years, according to a person familiar with the matter, adding that bandwidth is crucial to the effort to ramp up viewership. Google declined to comment.
    Wall Street has generally tolerated Google’s experiments because of past successes such as the Android software, which is now installed on four-fifths of the world’s smartphones. Other products such as Google TV, however, have fared less well.
    Owning the pipes would give Google even more insight into consumers’ online habits, which can help make its ads and products more effective, analysts said.
    “If you’re the network provider and you’re monitoring the traffic, looking at what people are doing, you’re going to be the first to know,” said Ian Keene, a Gartner analyst.

    http://finance.yahoo.com/news/analysis-balloons-fiber-google-experiments-212331384.html

  • txlaw says:

    Level 3’s VYVX service, partnered with Google, will deliver NFL games flawlessly and directly from the venue to the screen – End to End. A new star is born, you can make big bucks now LVLT shareholders. Starbucks lights the fire to kick off the big games on the big IP Internet Backbone.

    http://www.investorvillage.com/smbd.asp?mb=444&mn=119959&pt=msg&mid=13057864

    • Anonymous says:

      Settle down Frances. There’s no deal, no contract and no mention of LVLT anywhere in the article. If you want to hype stock news, I suggest you crawl back to the message board from which you came.

      LVLT already has a similar deal with MLB.com and it hasn’t sent their stock soaring.

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