Alphabet, née Google, reports fourth-quarter financial result Monday, after weeks in which its market capitalization has bounced around $1 trillion. Only three other US companies have reached that milestone: Apple, Microsoft, and, for a while on Friday, Amazon.
So what now? No company, especially not a technology company, can comfortably rest. Alphabet has become a global behemoth in less than 25 years, the youngest of the trillion-dollar quartet. It is in no immediate danger of an existential crisis to its business model, and its revenue for 2019 will likely grow almost 20 percent from 2018. Revenue has more than doubled since 2015. That is a picture of financial success, full stop.
And yet Alphabet’s future is decidedly murkier. The company’s strength—its dominant position in a massive market—is, oddly, also its weakness. Unlike Amazon or Apple or Microsoft, each of which now has multiple growing businesses, Alphabet has one dominant revenue stream and lots of very small ones with opaque future prospects. In short, Alphabet is still searching for its second act.
The challenges begin with Alphabet’s inability to rebrand itself. For most people, including those who invest in the stock, it is still Google. And why shouldn’t it be? The business of Google is still, by far, the business of Alphabet. Google’s advertising business, which sells search ads against those queries that we ask it by the billions daily, remains the overwhelming driver of the company’s revenues—84 percent of its third-quarter revenue of $40 billion. That’s not going to change much this quarter or the next or the next.
That ad business has become increasingly complex, and Google has been maintaining its substantial share of overall online advertising because its vast trove of data and searches lets advertisers more precisely target users. So while online ad prices generally are falling, Google has increased revenue by selling more ads and helping advertisers obtain higher response rates.
In one scenario, this never ends, at least not in the foreseeable future. Google (which includes the highly lucrative YouTube) and Facebook account for about 60 percent of online ad revenue, with Amazon growing faster but still under 10 percent. There is no sign that Google’s share is much in jeopardy; it’s changed little over the past three years. The more it can help advertisers microtarget and reach their desired consumers, the more likely it will be able to maintain some pricing power. The sheer scope of its ecosystem is hard for others to match.
In that scenario, Alphabet’s inability to achieve critical mass in other spheres doesn’t matter much. And yet it’s perplexing, given the company’s massive investments of time, money, and energy. It has a suite of companies such as Nest, for home solutions to the astonishingly creative skunk works of X; it offers consumers tools such as Gmail, Chrome, and Google Docs, which are used by hundreds of millions; and of course it owns the Android mobile operating system that powers 75 percent of the world’s mobile devices and offers the Google Play store.
Yet all of those account for only about 15 percent of the company’s revenue. The R&D in these other areas will likely lead to advances in autonomous vehicles, quantum computing, or artificial intelligence. One of those moonshots might ultimately become the foundation of the next trillion dollars in market capitalization. For now, however, that’s only a possibility.
For all the financial discipline that the company has imposed in the past five years, the fact that it makes so much money from online advertising may limit any real urgency for Alphabet’s other ventures to prove themselves in the same life-or-death way of a startup. You can instill discipline but you can’t manufacture genuine fear and urgency. Every military in the world tries to simulate combat to train soldiers; every military knows that simulations, drills, and war exercises, no matter how well designed and how essential to preparedness, are not substitutes for actual combat experience.
Add to these questions the fact that a trillion dollars is a lot of market cap, and that it will be much harder to double and then double again from here. A company accustomed to vertiginous growth for its entire life does not easily shift gears. This is, to be sure, a first world problem, but it is still a problem.
Finally, there looms the potential assault of regulators and the growing clamor to revoke or revise Alphabet’s social license to operate. That is not an actual license, but it is the de facto operating agreement with society at large, with governments and their citizens globally. As the backlash against the power and profit of Big Tech amps up, Alphabet is a prime target, and its market dominance becomes a liability rather than a strength. As well as the company has shaped the technology landscape of the 21st century, it may be less adroit at meeting the consequences of its success.
Google/Alphabet is one of the greatest success stories in history. Nothing that happens from this point forward will change that. But nothing that has happened to this point means that the future will be bright and easy. The classic Zen saying goes “Before enlightenment, chop wood, carry water. After enlightenment, chop wood, carry water.” Google has done everything to make it great today; it will have to do just as much to be great tomorrow.
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