While fellow tech companies showed signs of wear and tear in second quarter reports, Google is going from strength to strength. Why?
A sector under scrutiny
As technology becomes more and more integral to our everyday lives, and we rely on it for everything from keeping in touch with friends and consuming news to running our businesses and monitoring our health, so we have started to question the tech companies more – as consumers and as brands. How they handle data has become of particular concern, leading the European Union to implement the infamous GDPR legislation. Many have come under fire, both in the courts of law and in the court of public opinion: the financial ramifications were evident in Facebook’s second quarter reports, and Snapchat and Twitter suffered too. All three social networks lost users in the wake of GDPR, while the Cambridge Analytica scandal was particularly painful for Facebook.
Google is thriving
So where’s Google in all of this? More than 86% of internet searches are carried out on Google and it handles a vast quantity of consumer data, so it would be unsurprising if they too had been affected by negative sentiment and distrust. However, if parent company Alphabet’s second quarter reports are anything to go by, they have not just weathered the storm, they are positively thriving. Thanks to better-than-expected earnings ($11.75 per share versus the $9.59 projected by analysts) and revenue ($32.66 billion versus the $32.17 billion estimate), Alphabet’s share price soared by 5% in after-hours trading, settling at an increase of 3.2%.
A bleak future for TV?
Indeed, you could be forgiven for believing that the growth of mobile means a bleak future for linear TV. The young, mobile generation are increasingly tending to stream video content instead of watching traditional linear TV, and often do so on a mobile device. Many tech companies have noted this and are acting upon it: in June, CBS announced that it will be streaming NFL games on mobile devices from this autumn, while, shortly after closing their acquisition of Time Warner, AT&T announced the launch of their new mobile streaming service, Watch TV. These services will no doubt be popular, thanks in part to the smaller ad load for content streamed on a mobile.
This remarkable success was in spite of the issues surrounding GDPR in the European Union, YouTube’s brand safety scandals, a $5 billion fine from the EU for competition abuses and condemnation following reports that Google will in effect be supporting state sponsorship by launching a mobile search app in China that will allow blacklisted content to be blocked. So how is Google doing it?
Resilience lies in diversity
Resilience often lies in diversity and, as we mentioned in our blog about Facebook’s woes a few weeks ago, Alphabet’s revenue is less heavily reliant on advertising
than its competitors’. While a massive $28 billion of its second quarter revenue was from Google’s advertising business, that wasn’t the only revenue source. Google’s other revenues, such as its cloud services, hardware and app sales grew by 37% to $4.4 billion. By contrast, 98% of Facebook’s Q2 revenue was from advertising, and this will become increasingly difficult to grow as it reaches saturation in many mature markets in North America and Europe. Furthermore, Google has an impressive seven billion-user products – Search, Gmail, Chrome, Maps, YouTube, Google Play Store and Android; YouTube in particular has enjoyed strong growth recently, meaning that Google doesn’t rely solely on Search for ad revenues. That said, it should be noted that YouTube (and other video ads) are still under scrutiny for shortcomings in terms of measurement – a mere just one second of viewing is defined as ‘seen’ – and in terms of the quality of material the ads are shown in. What’s more, brands and agencies still need to work out a creative format for video success: currently, many video ads are simply replicas of TV ads and not optimised for the channel, meaning they are not as efficient as they could be. The search business, by contrast, is much more stable, comparable as it is to the telephone books of yesteryear: if your business isn’t there, it may as well not exist.
Looking towards the future with ‘Other Bets’
While Google will without doubt remain a highly profitable business for Alphabet, Alphabet isn’t putting all its eggs in one basket. The new corporate structure has separated the core Google business from the more experimental companies, known collectively as ‘Other Bets’, which collectively brought in $145 million in revenue in quarter 2. These include healthcare projects, venture capital, internet providers, a think tank, driverless cars and an AI research lab, among others. While they represent a small percentage of Alphabet’s huge turnover and are currently loss-making, only one or two need to make it big to make Alphabet’s success even more stratospheric. The favourite for huge potential is Waymo, a self-driving car business which plans to launch a commercial ride-hailing service by the end of this year. In June Morgan Stanley estimated that Waymo could be worth $175 billion in the next few decades.
The very existence of this ‘Other Bets’ strategy is a demonstration of Alphabet’s commitment to diversifying their offering and their investment in the future – and we believe that it is this approach, this mindset, that will continue to make them an attractive partner for brands and a safe bet for investors for years to come. And that is why they’re rapidly approaching the trillion dollar mark.
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