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Tuesday, 30 August 2016 12:36

How Strong Is Google's Search Business?

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Google needs to strengthen more of its segments

If you have been reading my articles, then you may have noticed that I have mixed feelings about Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), the parent company of Google. On the one hand I love the stranglehold Google has on the search engine market, its sheer dominance in the mobile operating system space and, of course, the evergreen YouTube angle. But despite having some of the brightest minds in the world on its payrolls, Google is still a one-trick pony that keeps failing at nearly every other trick it tries to do.

As such, Google is still highly reliant on its advertising revenues from search and partner sites, and this is what I’d like to explore in some depth.

Despite having disrupted the search game early on, the company is continually expanding the touch points surrounding its search engine. Take Chrome for example, the world’s leading browser: This is the conduit through which Google gets a lot of its search traffic.

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Another conduit is Android, the world’s most prolific operating system with over 80% global market share. The majority of non-iOS devices that are sold each year come with Android, with Chrome being the default search engine despite the Chinese attempt to promote UC browser on certain smartphone models that it makes.

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Yet another conduit is Google Maps, which has not only made our lives easier on the road, but is also dominating the GPS mapping world. It is the most-used map application by far, permeating nearly every mobile device in the world. It’s free, but you'll notice a lot of it points back to Google Search. Whether it’s a restaurant you’re looking for or information you need about a particular location, search is right there on the heels of Google Maps.

It’s clear that all of these products have one focal point, and that is Google’s search engine. As a result of that ecosystem, Google now has the wide moat possible protecting its search engine business.

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But can the same be said of its advertising business, which is their main breadwinner?

If Search is Google’s crowd-puller, then the cashier must be advertising. As the crowds spend their precious time on Google search and, through it, its partner sites, the company has the opportunity to serve them ads. The more time users spend on search, the greater the opportunity, and Google has been able to leverage this to create tens of billions of dollars in revenues each year.

 

 

As the world’s internet penetration increases, Google is practically in lockstep with it, pushing its own search and advertising agenda to new users in the far corners of the world. There are several countries around the world where Internet penetration is still low and, as such, there are a lot more potential users for Google to reach out to.

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Though Facebook (NASDAQ:FB) has turned the heat up on Google and is vying to get as many advertising dollars as possible, the online advertising market is expected to grow at 12.7% CAGR (according to Mckinsey) for the next five years, so there is still enough room for both the companies to keep increasing their revenues.

With no credible competitor of size to challenge their mobile operating system Android or the default Chrome browser, the chances of Google search falling out of grace from mobile customers are very slim.

What Google has done is create a legal monopoly on the world’s online quest for information, hosting 1.2 trillion searches per year. Advertising revenue is merely the fruit of that tree, and Google has a pretty strong fence around that tree.

 

 

The one thing I can’t stand to see is Google wasting billions of dollars with no apparent method to the madness. I’m being brutal, but half the time I have no clue what Sundar Pichai is talking about on the earnings call. In stark contrast are the direct and insightful comments made by Microsoft CEO Satya Nadella when quizzed by analysts at the end of the calls. At least with Microsoft you know the direction they’re taking.

With Google you can never be too sure.

Its Other Bets, for example, are so diverse that the units resemble a massive conglomerate of businesses with none of them showing significant top line income. Perhaps that’s why Alphabet is trying to bring more accountability to Other Bets - push them out of the nest and maybe they’ll learn to fly yet.

With potentially powerful lines of business sitting in their line of sight - artificial intelligence, mobile virtual reality, cloud, autonomous cars, social media, paid video streaming - it’s about time Google made a dent in at least one of them to supplement its advertising business.

Source : http://www.gurufocus.com/news/438938/how-strong-is-googles-search-business

 

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