Google's Expanding Dominance
In 2015, Google rebranded itself as Alphabet Inc. Alphabet has many subsidiaries, including self-driving car company Waymo and biotech lab Calico, but Google has remained its largest source of revenue by far. Therefore, in order to examine Alphabet’s growth, Google’s growth must be fully understood.
Google Ads have driven Google’s revenue growth. In the first quarter of 2018, ad revenue was up 26%. The fastest growing sources of revenue came from the Google Pixel phone, cloud offerings, and in-app purchases, which grew 36%. However, these sources only account for about 30% of Google’s revenue growth, with the rest coming from Google Ads. Google Ads controls a significant portion of the online advertisement market. In fact, along with Facebook, Google accounts for 73% of all online digital advertising as of the fourth quarter of 2017, up from 63% in the second quarter of 2015. Around 83% of all digital advertising growth comes from either Google or Facebook. The digital advertising industry grew 23% in the second quarter of 2017 to $20.8 billion in ad revenue, leading some, like Pivotal’s Brian Wieser, to believe it may be a bubble. Regardless, Google Ads is continuing to grow and shows no signs of slowing.
Google uses ads in order to make money from searches, so understanding search query growth is key to understanding Google Ads’ revenue growth. As of 2017, 74.54% of online searches were made on Google. However, this number has been shrinking since August, mainly due to the increased popularity of Baidu, a Chinese tech company and search engine. However, Baidu’s growth has not been enough to hurt Google’s sales, which are expected to grow by 24% in the second quarter of 2018. When only mobile searches are accounted for, Google controls 90% of the market. Mobile phones account for 50.3% of web traffic, up from 27.1% in 2014. For this reason, if mobile phones continue to control a larger portion of the web market, Google searches will likely see growth as well. Baidu has been less successful, being used for only 5.44% of all mobile searches. If it expands its success on mobile, it may be able to more significantly cut into Google’s market share.
Google will benefit from a larger percentage of search done from mobile phones.
One of the reasons for Google’s mobile success is that it has preset its search engine as default on Android devices. However, EU regulators have labeled this a manipulation and an unfair advantage over its rivals. As a result, Alphabet faced a $5 billion fine from the EU. However, Wall Street didn’t seem to care, and Alphabet’s stock actually rose slightly on the news. Compared to the aftermath of similar fines levied against Facebook, Intel, and Apple, Alphabet’s stock has remained relatively unaffected by the decision. However, it remains to be seen how the decision will affect Google’s dominance in the mobile search market.
Google's search app is pre installed on Android devices.
Despite recent fines and the rise of Baidu, Alphabet’s Google is still the dominant player in online ads and searches. It will be interesting to see how these factors affect Google's future performance.
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Written by Jack Vasquez, Edited by Rachel Weissman & Alexander Fleiss
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[4] All financial information from Yahoo Finance and the Securities and Exchange Commission
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