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Should Alphabet Split Up Into Four?

Posted on Monday, Feb 5th 2018

Alphabet (Nasdaq: GOOG) recently announced its fourth quarter results, which relayed mixed signals. Alphabet’s Google has long been synonymous with search, but now its bets beyond search are paying off. However, there are also serious societal and ethical questions coming into focus that cast a shadow over the company and its peers, especially Facebook and Apple.

Alphabet’s Financials

Alphabet’s fourth quarter revenues grew 24% over the year to $32.3 billion, ahead of the Street’s forecast of $31.9 billion. EPS of $9.7 was, however, lower than the market’s forecast of $10 for the quarter.

Alphabet ended the year with revenues growing 23% to $110.9 billion. Profit declined 35% to $12.6 billion due to a tax bill for $9.9 billion and a $2.7 billion European Union antitrust fine, which is under appeal.

By segment, Q4 revenues from the Google segment grew 24% to $31.9 billion driven by a 24% growth in revenues from Google’s properties. Google properties revenues came in at $22.2 billion and revenues from its Members’ websites grew 13% to $5 billion. Other revenues grew 38% over the year to $4.7 billion. Google Other segment includes revenues from non-ad businesses such as the Play Store and infrastructure sales and hardware.

Revenues from Other Bets grew 56% to $409 million. Other Bets includes hardware sales from its popular Nest connected devices. Losses from the segment reduced marginally from $1.1 billion to $916 million.

Among operating metrics, aggregate paid clicks grew 43% over the year and 18% sequentially led by growth in mobile. Paid clicks on Google websites grew 48% over the year and paid clicks on members’ websites grew 13% over the year. Aggregate cost per click fell 15% over the year mainly because most of the growth in paid clicks came from mobile, which bring in less money than desktop clicks.

The company also revealed that Google Cloud, which includes Google Cloud Platform and G Suite, has become a $1 billion per quarter business.

Alphabet’s Acquisitions in 2017

In 2017, Alphabet acquired 11 companies that strengthened its portfolio. In January, it bought Swedish company Limes Audio to boost the sound quality in Hangouts and mobile app developer platform Fabric from Twitter. In March, it bought data science startup Kaggle and cloud specialist firm AppBridge. In May, it acquired VR studio Owlchemy Labs famous for its VR games Job Simulator and Rick and Morty: Virtual Rick-ality. It followed this with AI-focused acquisitions of Halli Labs in July and AIMatter in August. It also acquired cloud identity management startup Bitium in September, AMP converter Rwlay Media in October, and podcast startup 60db in October.

Its biggest acquisition in 2017 was the $1.1 billion acquisition of HTC’s engineering and design team. Apart from 2,000 engineers, Alphabet will get a non-exclusive license for HTC’s IP.

These acquisitions reiterate its focus on AI, cloud, video, and hardware. CEO Sundar Pichai said during the earnings call that they will dominate its strategy in 2018 as well.

Alphabet’s Divestitures

To focus on its core assets, Alphabet has been trimming its portfolio. In February 2017, Alphabet announced its plan to sell its satellite imaging business Terra Bella aka Skybox Imaging to Planet Labs, a San Francisco-based private satellite operator. Alphabet had acquired it in 2014 for $500 million.

In June 2017, Alphabet sold its robotics firms Boston Dynamics and Tokyo-based Schaft to SoftBank Group. It is also looking to offload its restaurant review guide Zagat, which was bought in 2011 for $151 million.

Is YouTube too Big to Handle?

About 1.5 billion people per month reportedly watch videos on YouTube and prefer it over traditional TV. Last year, to drive more users to the service, it launched YouTube TV for over-the-top streaming TV devices last quarter that allows subscribers to stream live television on their TVs. The new app is available for Android TV streaming devices, Microsoft’s Xbox device, Apple TV, and Roku.

YouTube has also tweaked the criteria for monetization. To apply for monetization and attach ads to videos, creators must have had 4,000 annual viewing hours and have at least 1,000 subscribers. Earlier, it required just 10,000 public views. These new rules are expected to help the company  to weed out the bad users and prevent them from monetizing potentially inappropriate videos. The company also plans to increase the amount of human vetting for videos.

YouTube is now the world’s largest video site and it appears that it has become too big to handle. Early last year, ads were appearing next to extremist and hate content. As a result, brands including AT&T and Johnson and Johnson boycott advertising on its platform. Then again late last year, grotesque videos appeared on YouTube’s channels for children.

It was also alleged that Russians might have interfered with the US elections using YouTube and its search engine. There were also incidents of fake news in the Top News section of its search engine about the shooter in the Las Vegas mass shooting incident.

Alphabet doesn’t break out the revenue figures of YouTube, Android, or its search engine. But Google is estimated to have a market share of 85% of the global online-search-ad revenue.

Challenging its dominance has become next to impossible. Last year, the European Commission accused Google of using Android to give a boost to its own apps. It ended up paying a $2.7 billion fine.

Questions for the Alphabet Board

Alphabet and tech giants Facebook, Amazon, and Apple have been facing a lot of criticism in the recent past about being BAADD—big, anti-competitive, addictive and destructive to democracy.

These are concerns that do need to be addressed. One idea is to break up these monopolistic companies into smaller pieces. Should Alphabet break up into YouTube, Google Search, Google Cloud, and Android?

Another point of concern is that Apple is bringing back the foreign cash. What is Google’s plan? If none, there needs to be. There is a ton of money sitting around in foreign accounts.

Apple is setting an example. Peers need to follow.

Alphabet’s stock is currently trading at $1,111.9 with a market capitalization of $776 billion.  It touched a record high of $1,186.89 last month. It had fallen to a 52-week low of $795.25 in January last year.

 

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