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Alphabet (GOOGL) Spotlight: From Search Quasi-Monopoly To AI Juggernaut
Taking Back The Lead Of Big Tech
The tech industry is often perceived as moving fast, with today’s winner potentially tomorrow’s loser as new, more nimble startups constantly disrupt the industry.
This is only partially true, as in the last decade, we saw a consolidation of the industry around a few giants, notably the so-called “Magnificent Seven / Mag7”, the heir to the FAANG acronym:
- Microsoft (MSFT )
- Amazon (AMZN )
- Meta (META )
- Apple (AAPL )
- Nvidia (NVDA )
- Tesla (TSLA )
- Alphabet (GOOGL )
Each of these companies is unique in its own way (as we have already covered in our spotlight series for Tesla and Nvidia).
Still, it is Alphabet/Google that has grabbed headlines recently after hitting a series of milestones in many new segments, from self-driving cars to AI and quantum computing, all the results of more than a decade of massive investments.
(GOOGL )
A Long-Established Position
A Humble Start
When Google started, it was the typical scrappy startup attacking the domain of an established tech giant. At the time, the search market was dominated by companies like AOL and Yahoo. And it was far from certain that Google could manage to become the giant we know today.
For example, in 1998 & 1999, Google’s founders, Larry Page and Sergey Brin, tried twice to sell Google for $1M … and failed to do so.
In 2002, Yahoo reconsidered and made an offer for $3B. Google’s founders wanted $5B, which was refused. Today, Alphabet, the holding group that owns Google, is worth $2.3T.
A Search Focused Company
From its inception to today, the core of Alphabet is its search engine. The superior technology of using links and quality ranking to determine the relevance of a website for a given search proved an unstoppable force over the methods previously used by the industry.
To this day, Google represents 89.99% of all global searches worldwide, far ahead of niche competitors or regional search engines like Microsoft’s Bing, Yahoo, Yandex (Russia), or Baidu (China).
Even with ongoing diversification and new revenues from businesses like YouTube, Android, or Cloud, search and ads are still the dominant source of revenues for Alphabet, making up 65% of total revenues.
It could be argued that these other services are highly dependent on ads & search technology as well, especially YouTube (10% of total revenues), blurring the line between them.
Source: Alphabet
Cautious Expansion
Still, Alphabet’s potential investors should pay attention to these other activity segments, as they are currently the source of growth.
YouTube
By far the world’s largest video platform, YouTube was acquired by Google in 2006 for a hefty $1.65B, for a website barely two years old. Of course, YouTube generates 20x this value in annual revenues today.
It can be argued that this acquisition also saved YouTube. For a very long time, it was a money-losing business that would not have survived without the support of a much larger and more profitable corporation. For example, the Wall Street Journal mocked it in 2015 as “1 Billion Viewers, No Profit.”
This was due to the massive infrastructure costs (servers, bandwidth) and the fact that YouTube had to share much of its revenues with content creators. The lower value of visits and clicks for videos was also an issue.
Only with the universal dominance of smartphones and massive economies of scale would it become profitable, which is now achieved with 1 billion hours of video watched per day.
Source: Global Media Insight
Cloud
From Search and then YouTube, Google has always been one of the largest tech companies in terms of online capacity. This gives it an edge when it comes to selling cloud-based services and computing.
However, Google is not the dominant player in this market. Amazon’s AWS has beaten all its competitors in this segment. The B2B-focused Microsoft Cloud is also larger.
Source: Statista
Of course, 12% of a massive and growing market is no small feat and represents tens of billions of dollars in revenues per year.
Still, in retrospect, this clearly represents a missed opportunity, as there was, in theory, no reason for Amazon’s ability to build servers for e-commerce to be better than Alphabet’s experience with Search and YouTube servers.
Android
Where Google did succeed remarkably well, in contrast to Cloud, is in the smartphone operating system market.
When Apple’s iPhone took over the market by storm in 2007, the competition was intense on the hardware side, with back then Blackberry and later on Samsung, Xiaomi, Huawei, and other smartphone manufacturers fighting for market share.
Google bought Android in 2005, and used open-source Linux as the base for the smartphone Android OS, with the first announced in 2008. Android would progressively become the dominant alternative to Apple smartphone OS, progressively adopted (often with a proprietary overlay) by most of the industry, especially for cheaper models.
Today, it holds more than 70% of the global market share. Google is also directly present in the market with the Google Pixel smartphones.
Others
Not content with dominance in search, video, and smartphone OS, Alphabet/Google have created a massive ecosystem of solutions over the years, including some of the most popular options in their category:
- Gmail.
- Cloud document, Calendar, Google Docs, Gdrive, etc.
- Online meeting: Meet.
- Travel, including Google Flights.
- Google Maps & Google Earth.
- Google Finance (stock market data).
- Etc.
Google Long-Shot Bets
Something often discussed but that has historically failed to materialize into solid business is the so-called Google Bets or Google Moonshot, also called X. However, this can become confusing, given Twitter’s recent rebranding under the same name.
The idea behind this is that truly disruptive technologies are rarely predictable. So, the only way to be well positioned early is to take risky bets with asymmetrical risks. The downside is limited to the moderate initial investment required, while the upside could be hundreds of billions or even trillions of dollars.
Over the years, this has been an endless source of attention-grabbing headlines, including those about exoskeletons, the Internet from drones or balloons, smart contact lenses, flying wind turbines, and smart glasses.
In May 2024, Google was said to refocus on “core products” to the detriment of moonshots. But this is probably because the company should now focus on the few moonshots that are now bearing fruits, after a long period of somewhat poor results.
Self-Driving Cars
With mobility such a massive part of the budget for almost everyone on the planet, the idea of grabbing a large portion of this market with self-driving vehicles is enticing for every tech company. Especially with up to $4T in revenue projected by 2027, as well as the wider “Autonomous Age” that could be even more valuable.
So it is not a surprise that we have seen projects for autonomous cars from Uber, Apple, Meta, etc. over the years. But at this point, it seems that only a few companies are truly ahead and getting close to the target goal.
The first one is, of course, Tesla, with the announcement in October 2024 of Art Deco 2-seater robotaxis and 20-seater robovans.
The other one is Alphabet, through its Waymo subsidiary.
The Cautious Path To Autonomy
Waymo’s approach to developing self-driving cars has been the absolute opposite of Tesla’s. Tesla is looking to create from day 1 a fully autonomous universal solution, using only cameras.
Waymo instead chose to use advanced LIDAR (laser radar) and slowly deploy its robotaxi in “geofenced” areas, where the AI is specifically trained and tested. They have been working on this technology for 15 years at this point, starting from 2009.
Source: ABC News
The core idea here is that people, and even more so, regulators, will be very slow in trusting a potentially buggy software to drive at high speeds vehicles weighing several tons around fragile humans.
In this scenario, only through a slow deployment proving safety every step of the way will it become commercially viable. For now, this approach is paying off, with Waymo already able to get paying customers for its robotaxis, having recently passed the milestone of 100,000 weekly paid rides.
