Tell someone from ‘Generation Z’ that Google didn’t exist twenty years ago, and watch their mouths drop. It’s like saying there was no such thing as trains or hot food. Even 12 years ago, when the firm went public, it was barely a drop in the blue chip pond, with revenues of only $3.2bn. Its growth since then has been little short of astonishing.
On the only way is up... Source: Alphabet Inc.
Given how long Google has been supreme in online search (and therefore online advertising) in the US and Britain, it might be tempting to think this was a result of international expansion, but that’s not the main reason. Back in 2009, for instance, the ‘rest of the world’, i.e. not the US or UK, represented 40% of its business. In 2015, the figure had only crept up to 44%.
Instead, Google has simply been able to expand its share of the rapidly growing digital advertising market. Here, though, is its natural cap. Google is essentially an advertising company and the world only spends a certain amount on advertising.
The good news for Google is that this amount is very high – and Google’s share of it is still growing. According to eMarketer, global ad spend was $569bn in 2015. Of that, digital advertising was $170bn, of which $67bn or 39% was Google’s.
Although the global advertising industry is growing by about 5-6% a year, a closer look at the data indicates almost all of that growth is in digital, and specifically mobile. The mobile ad industry is predicted to grow by 175% from $72bn in 2015 to $198bn by 2019, while non-mobile spend will grow by approximately 1.9% to $521m.
This isn't really good news. Mobile search is a lower margin business than desktop search. In its Q1 2016 results, Alphabet revealed its traffic acquisition costs (e.g. paying Apple for mobile traffic on iPhones) had risen from around 18.5% to 21%. Combined with currency headwinds, this resulted in its revenues rising only 17.4% year on year. Alphabet shares duly plunged 6% as investors panicked.
Let's be clear though - the move to mobile will not strip Google of its title as one of the world's great tech companies. It may face more serious competition to its hegemony from Facebook, which got an impressive 80% of its $17bn revenues from mobiles last year, but there is no serious doubt that Google will be among the leaders in this huge industry.
Healthy growth for the foreseeable future is more or less guaranteed then, but this doesn't mean it's immortal. The company itself identifies risks in the form of ad blockers, cyber breaches, privacy violations (here’s looking at you, the FBI), snazzy start-ups and the possible loss of key personnel (specifically named as Alphabet’s CEO Larry Page, co-founder Sergey Brin, chairman Eric Schmidt and Google CEO Sundar Pichai, he of the $200m pay packet).
The success of YouTube and Google Play, between them estimated to represent 15% of Google’s segment revenues, is clear evidence that the firm cannot simply rest on its laurels – if Google hadn’t branched out of web search to invest in those businesses, someone else would have got there instead. It’s the same reason it’s trying so hard to catch up with Amazon and Microsoft in the cloud.
Ultimately, though, the biggest threat to Google in the (very) long term is that its core search business will cease to be relevant, displaced by some as yet unfathomable disruptive technology. But even if Google ages and eventually dies, Alphabet could live on.
The parent company’s ‘other bets’ may have failed so far to do more than crash a driverless car in slow motion and beat someone at Go, but with three billion spent every year on them, eventually one or more of these bets will pay off. Surely. If nothing else, it would seem foolish to bet against the firm with the smartest robot and the most data – if any big company can spot the next big thing, it’s Google.