Why Google-Alphabet Is Investing In the Future Beyond Advertising

While the profits and sales growth remain astounding, becoming so dependent - at @ 90% - on any one source is a strategic risk.

An enterprise with the resources, intelligence and ambition possessed by Google/Alphabet would should be optimizing its variables.

Investors in the company should be pleased - and competitors have a right to be concerned. JL


Daisuke Wakabayashi reports in the New York Times:

Currently, Alphabet makes 90% of its money from selling advertising on the internet. Google’s advertising profits were weighed down by an increase in traffic acquisition costs — the fees that it pays to make sure its search engine is the default option when people open a browser.“They want to diversify beyond just advertising being such a big part of their business.” That focus on variety comes as the data-collection practices that underpin the entire digital advertising industry are under intense scrutiny. 

Alphabet, Google’s parent company, is spending like it is beginning to prepare for life after advertising.

Currently, Alphabet makes nearly 90 percent of its money from selling advertising on the internet, and gobbles up heaps of data about its users to help marketers target those ads more effectively.

But a close reading of Alphabet’s financial results for the first quarter of 2018, which were announced on Monday, showed that the Silicon Valley giant is accelerating its efforts to diversify into other businesses.

Alphabet has made investments in areas like self-driving cars and online computer services for businesses for years, but spending in those areas was up dramatically in the first quarter. The company’s capital expenditures, which included installing undersea cables and the construction of new data centers, were $7.7 billion — more than triple the same period last year.

Ruth Porat, Alphabet’s chief financial officer, said that increase reflected a “commitment to growth” because the company had spent heavily on computing infrastructure, for both its own internal use and customer needs like Google Cloud — the unit that provides technology services to other companies.Alphabet’s expenses rose 27 percent in the quarter. Ms. Porat said the heaviest spending came from research and development costs — mainly the hiring of additional technical staff. The company said its total employees had increased to 85,050 from 73,992 in the same period a year ago.

Over all, Alphabet said its net income rose 73 percent, to $9.4 billion, from the same period a year earlier, boosted in part by an increase in the value of its outside investments. Revenue rose 26 percent to $31.1 billion.

Ms. Porat also pointed out an increase in spending for advertising to promote newer products including Google’s own hardware — a relatively new business manufacturing branded smartphones, laptops and smart speakers — and the company’s artificially intelligent digital assistant.

“They are thinking about their future,” said Collin Colburn, an analyst at Forrester Research who focuses on search advertising. “They want to diversify beyond just advertising being such a big part of their business.”

That focus on variety comes as the data-collection practices that underpin the entire digital advertising industry are under intense scrutiny after the personal information of up to 87 million Facebook users ended up in the hands of the political research firm Cambridge Analytica. Google’s advertising business is more than twice the size of Facebook’s, and the company’s portfolio of data about its users is as expansive — if not more so — than that of the social network.

Still, the search giant’s core business showed no sign of slowing in the first quarter. Revenue from Google’s advertising business, which includes ads shown on Google search and commercials running before YouTube videos, increased 24 percent during the quarter.

However, Google’s advertising profits were weighed down by an increase in traffic acquisition costs — the fees that it pays companies like Apple to make sure that its search engine is the default option when people open a browser on the iPhone.

Also among the company’s expenditures in the quarter: $2.4 billion to buy the Chelsea Market building in Manhattan, where the company had set up some of its New York offices.

On a conference call with investment analysts, Sundar Pichai, Google’s chief executive, avoided answering questions about the potential effects of new regulations concerning data privacy in Europe. The new law, which goes into effect on May 25, will restrict how companies like Google can collect, store and use personal data from users across Europe.

Mr. Pichai said the company has been preparing for the law for more than 18 months, but didn’t discuss how the new regulations may affect the company’s bottom line.