A Blog by Jonathan Low


Feb 2, 2017

How Google Parent Alphabet Is Finding Growth Beyond Search

The good news is that there is life - and growth - after Google search. The challenge is that advertisers are paying less for those alternatives like mobile and YouTube, which means more of the space has to be sold.

Expanding business in the cloud, in hardware and subscription revenue may also be an answer (though Amazon, Apple and Facebook are also fighting it out for those spaces). JL

Jack Nicas reports in the Wall Street Journal:

Mobile search, YouTube and automated ad buying have “only begun to scratch the surface.” (But) while clicks increased 36%, advertisers’ prices fell 15%. The gap was driven by mobile searches, because advertisers pay less for mobile-search than desktop. In the fourth quarter, the company attributed the gap to growing YouTube ads which earn less than ads above Google search. The cloud, hardware and YouTube subscriptions could be “revenue drivers."
Google parent Alphabet Inc. said fourth-quarter revenue increased nearly three times as fast as profit, as it cast about for new sources of growth beyond its traditional search advertising.
Fourth-quarter profit grew 8.3% to $5.33 billion, missing Wall Street estimates, while a 22% jump in revenue to $26.1 billion surpassed estimates. Alphabet blamed the earnings miss on a one-time tax adjustment. Its shares fell 2.1% in after-hours trading.
Google has built the world’s largest advertising business on the back of its search engine, and users are clicking more of those ads thanks to increasing internet usage in the smartphone era. To keep up its strong growth, Google is also looking to its popular YouTube video service.
“YouTube takes such a center stage on quarterly calls because that is the heir apparent to search,” said JMP Securities analyst Ron Josey.
Newer forms of advertising on Google—such as mobile search, YouTube and automated ad buying—have “only begun to scratch the surface,” Alphabet Chief Financial Officer Ruth Porat said on a call with analysts. There are “sizable opportunities that have not yet been tapped.”
The search for new ad revenue comes with a downside: Users are seeing more ads, but advertisers are paying less for them. While ad clicks increased 36% in the quarter over a year ago, advertisers’ prices for those ads fell 15%. Both figures were the highest in at least three years.
The gap between the prevalence of ads and their prices was previously driven by the increasing share of mobile searches, because advertisers pay less for mobile-search ads than desktop ones. In the fourth quarter, the company attributed the gap to the growing share of YouTube ads, which generally earn less than ads shown above Google search results.
Other new businesses—the cloud, hardware and YouTube subscriptions—could be “major revenue drivers for Google in the next several years,” Ms. Porat added. To get there, the company is investing heavily: Capital expenditures soared by nearly a billion dollars to $3.08 billion in the quarter. Much of that spending is for building new data centers, in part to help the company compete against Amazon.com Inc. and Microsoft Corp. in its cloud business of selling computing power and data storage over the internet.
Alphabet is making progress in diversifying from its advertising business, which accounted for 85.9% of its revenue in the quarter, compared with 89.4% a year prior. The company reported a 62% surge in its nonadvertising sales to $3.4 billion—driven by its cloud, app-store and hardware businesses— though any profitability for the segment is unclear. Some of the boost came from the launch of three new hardware products in the fourth quarter: its Pixel smartphones, Google Home voice-controlled speakers and virtual-reality headsets for smartphones.
Alphabet also shrank losses at its Other Bets, the collection of experimental businesses that make up the company outside of Google, including self-driving-car firm Waymo, connected-device maker Nest, and research lab X. Other Bets’ revenue rose 75% to $262 million, while its operating loss narrowed 10% to $1.09 billion from a year prior. Most of the Other Bets revenue came from Nest, high-speed internet provider Google Fiber, and Verily, the life-sciences startup that said on Thursday it is getting an $800 million investment from Singapore state investment firm Temasek Holdings.
Alphabet executives are trying to tamp down expenses at the Other Bets and make them stand-alone businesses, including a recent scaling back of Google Fiber, which was one of the segment’s biggest costs. Still, growing sales accounted almost entirely for the smaller loss in the segment.Despite its new ventures, Alphabet remains highly dependent on the advertising business that made it a tech juggernaut. Google has now posted annual growth of 20% or more in its advertising business for 20 consecutive quarters, excluding the impact of foreign-exchange rate changes, said Mark Mahaney, an analyst at RBC Capital Markets.
“We think the [advertising business] is the strongest it’s ever been, and the growth is shockingly consistent,” he said.


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