Is Google’s Business Model Under Threat?

  • Google Alphabet, the parent of Google Alphabet, has reported its second-lowest quarterly growth since 2013.
  • Earnings per share fell short of analysts’ expectations by 15.44 percent and have raised fears about how advertising revenues will evolve as a source of income for businesses.
  • Ad spending is declining due to the economic conditions; however, Apple’s recent changes have directly impacted the advertising revenue of companies such as Google, Meta, and Snap.

Alphabet, Google’s leading company, posted its slowest growth in 2013 before the beginning of the pandemic of covid. Apart from not meeting revenue growth expectations, earnings per share were also 15.44 percent behind analyst estimates.

In the earnings report that’s delivered generally positive so far, the announcement has raised concerns regarding the main advertising business and has seen the Alphabet price drop nearly 6 percent in the pre-market trading.

The latest evidence suggests an overall slowdown in the advertising industry as thethe rising cost of living is causing businesses and consumers to cut back. We’re all getting sick of talking about it. However, it won’t go away soon.

The lower amount of advertising concerns Alphabet; however, this is one of their issues. They are also sneaking up on them and other companies whose business is founded on ad revenues, such as Meta Apple’s ad network.

Apple introduced significant changes to privacy settings within iOS 14, which has made it much more difficult for companies such as Facebook, Instagram, and Google to collect user data and display targeted advertisements.

Although this was hailed as a victory for privacy activists, it’s becoming apparent that it’s provided Apple an advantage in expanding their advertising platform. However, that’s likely just an accident.

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Alphabets’ Q3 results have scared investors and raised questions regarding Big Tech.

The company’s revenues grew by 6% in the quarter, reaching $69.1 billion. These might appear to be excellent figures, but they represent the company’s 30% under analysts’ expectations for revenues growing by 9.

In a breakdown of the various sections of the business, Search revenue was below the predicted 8% growth to record 4.2%. 4.2 percent increase. In contrast, YouTube revenue dropped 2.2%, which was against the expected 4.4 percent growth.

Earnings per share stood at $1.06 for the quarter. This was a significant drop from (the admittedly robust) Q3 of 2021. It was also a considerable reduction from $1.25, which Wall Street analysts had been anticipating.

There are numerous worries about a worldwide slowdown in the advertising industry. Chief finance officer Ruth Porat attributed the poor performance mainly to the strength of the U.S. dollar.

The issue has been a constant problem for many U.S. multinationals that have reported this quarter. It is worth-noting that the U.S. dollar has gained immense against major currencies around the globe. It’s a sign that money earned on foreign markets is less when it’s recorded in U.S. dollars.

PS1 million made in the U.K. at the same time last year generated a headline profit of about USD$1.4 million. That same PS1 million is only adding about USD$1.15 million Alphabets net profit.

There are ongoing issues across a lot of the globe. It’s unlikely we’ll see any drastic deterioration or a downfall in the value of the U.S. dollar in the long term.

Spotify and Snap are also feeling the pinch of advertising revenue.

Alphabet isn’t alone and has experienced a slowdown in ad revenue growth. Spotify released its most recent results on Friday night and announced that its margins on profit diminished due to a decline in the market for advertising.

Spotify Chief Executive Officer Daniel Ek stated that this slowdown “Is an early indication of the concern businesses have concerning the state of the economy. We’re not worried long-term; however, it is impacting our business in the short run and contributes to the loss in gross margin that we saw in the quarter.”

The situation is worse than it was Snapchat, the parent firm Snap, which recently announced its lowest revenue growth since the organization was listed on the stock exchange in 2005.

Very negative remarks from the company accompanied the numbers. They stated that the outlook for the near future will be “challenging” and that the organization will not be able to make a forward revenue forecast due to the difficulties of the circumstances.

The market hit them, and the stock plummeted 25 percent over a day.

The results are also significant for other Big Tech companies that still need to release their Q3 results. The most important name to keep an eye on is Meta which will announce its Q3 numbers after the market closes on Wednesday. They heavily rely on advertising revenue.

The rise of apple advertising network

Another risk to the model of advertising is the targeted approach Apple. The launch of iOS 14’s privacy enhancements was reported to have put $10 billion in Meta’s advertising revenue in several hours.

The new update is being marketed to improve privacy. However, there’s a detail to be read. It doesn’t mean that Apple won’t gather data from users; however, it does mean that they will no longer disclose it.

They won’t reveal your sneaker choices or your favorite T.V. shows or plans to shed pounds with Google, Meta, Snapchat, or any other company. However, they can still target users with advertisements of their own.

This gives the Apple advertising network a massive advantage over other advertising, and some experts believe that the ad revenue of Apple could reach 6 billion dollars in 2025.

Last week, we saw Apple litigate a dispute in this field by introducing the most recent App Store Guidelines, which are included in iOS 16.1. The new guidelines stipulate that “boosted” posts that can be purchased through an app require an in-app purchase feature.

This means that any advertising spends placed on apps like Facebook or Instagram must pass through Apple and allow the apps to get a massive 30 percent of any income made this way.

Do we need to worry about Alphabet be concerned?

With headwinds escalating, Alphabet has some concerns for the near term. It’s evident that they’ve noticed the signs on the wall for their ads business for some time, and a concerted effort is being taken to diversify their business away from solely ads revenue.

Cloud computing is the most significant element in this. The business has seen rapid growth and continued the trend in the third quarter, which saw a 38% increase in revenue. However, development can be costly, and the business unit suffered an operating revenue loss of 699 million during the quarter.

It’s not just an excessive quantity of funds, but it’s even worse than last year when it lost $644 million.

In the future, we’re likely to observe Alphabet diversify away from advertising revenue, which will be replicated throughout the entire industry. Meta has been looking for ways to increase revenues for a while now as well as companies like Snap are attempting to incorporate premium subscription models into their businesses.

The issues highlight the continuous change in the technology sector. There are constantly new disruptive companies coming into the market and shifting the power of the top firms in the field. Each has billions available and access to the top talent around, which makes innovation not just an option, but an absolute.

For investors, this makes it challenging to select and pick suitable investments. You only have to examine the decline of specific tech’s hottest companies to understand how challenging it is. Snap is down 79 percent through the first quarter of this year. Netflix paid -51 percent, Meta 59%, and Spotify 54 percent.

Diversification is always the rule when investing, particularly in the technology sector. But the old strategies of constructing a sure percentage portfolio and then sitting it for years must be fixed. The world is moving faster.

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Robert Scoble
Robert is the assistant managing editor for HC News, overseeing coverage of markets, companies, strategy and business leaders. Originally from Boston, Scoble began his journalism career in 1997 & now resides outside New York.

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