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:
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.
Alphabet Inc. (GOOGL +4.08%)
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.
Google Pixel 9 Series
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.
Waymo currently operates in 4 cities: Los Angeles, San Francisco, Phoenix, and Austin. It is now available in all of Los Angeles, with Miami next in target, as well as Atlanta.
Quantum Computing
Google has historically been a software, data, and algorithm company, with hardware-focused products, such as its Pixel smartphones, only linked to its software strategy.
This might be slightly changing with Google’s recent achievement in quantum computing. Google recently announced its Willow quantum chip, the first with a scaleable design. This will open the way for commercially viable quantum computers in the next 5-10 years.
Source: Google
This technology could, in theory, revolutionize entire industries using encryption, such as finance or defense, and radically accelerate human scientific progress in many fields, from biotech and medicine to energy and aerospace.
But Google’s greatest contribution to quantum computing may be in software, which is its core competency as a company.
Already, Google’s Quantum AI makes available a suite of software designed to assist scientists in developing quantum algorithms.
It also openly advocates for “researchers, engineers, and developers to join us on this journey by checking out our open source software and educational resources, including our new course on Coursera, where developers can learn the essentials of quantum error correction and help us create algorithms that can solve the problems of the future.”
AI
As AI quickly became the center of attention of the entire tech industry in 2023, Google was an important contributor to the field.
A key advantage of Google is the sheer amount of data it has access to. This of course can be said of other tech giants as well, but ultimately few besides Microsoft and Apple have access to so much email, chat, videos, etc. As AI models become more and more complex, requiring ever more data for their training, this might prove a decisive advantage.
Threat & Opportunity
AI could be the occasion for the company to repeat its initial success with search, providing information and services better than the competition, and becoming the one-stop destination when you need something from a computer.
It could also be a serious threat, with 2 different risks:
- Becoming an established player that was disrupted by better technology, like it did to Yahoo in 2000.
- Seeing AI-driven search cannibalizing its core business, and potentially its profit, even if it wins the AI race.
Gemini 2.0
Gemini is the AI core of many other AI-related projects at Google, including:
- Project Astra, which explores the future capabilities of a universal AI assistant
- Project Mariner, an early prototype capable of taking actions in Chrome as an experimental extension
- Jules, an experimental AI-powered code agent.
The AI could also turn into a serious competitor for Adobe image retouching software, as well as generating images (Imagen3) and video (Veo), while identifying AI-generated images with SynthID.
Source: X – El.cine
Gemini is likely to be deployed on Apple hardware as well, with an ongoing collaboration between the two companies on AI being worked on.
AI is also being deployed onto Pixel phones, VR headsets, and Android in general, with features like AI-enhanced image description, captions on videos, voice-controlled search, etc.
It could also replace game engines, with Google’s Genie 2.
Source: DeepMind
Other AI efforts
DeepMind and a few other industry-specific AIs are the more technically focused AI from Google, with many use cases already being implemented by scientists, for example:
Google Potential Problems
Innovator Dilemma
While definitely impressive in many respects, Google/Alphabet is not a company without issues, and investors should be on the lookout for a few specific risks. We already covered how AI could be a serious threat to the search segment, making more than half of the company’s revenues.
This is part of a larger problem called the innovator dilemma. The key idea is that an established company is less likely to stay innovative, as innovation is likely to disrupt its existing product line. This in turn will face opposition by insiders, as well as the very rational fear of cannibalizing the company’s revenues.
A well-known example of this issue going wrong was with Kodak, the leader of argentic photography completely missing the turn to digital cameras.
AI turning search engines obsolete, in favor of LLMs like ChaptGPT (now tied to Microsoft) is another good example of how the AI revolution is both a risk and an opportunity for Google.
Broken Search
Another argument sometimes leveraged against Google is that search has declined in quality over the last few years.
A key culprit is the multiplication of ad links, sponsored content, and the overall tendency of modern SEO (Search Engine Optimization) to favor products over informative or useful content.
To some extent, the concern is legitimate as the Internet as a whole has become a lot more commercial in the past 20 years.
Google also has an incentive to maximize its revenues, and as long as other search engines are not better, it will not risk its dominant position.
For example, “as of April 2024, Google has been testing the stuffing of PPC ads into the middle of organic search results, making for a frustratingly Ad-cluttered User experience”.
It is possible that between the limit on how much ads and revenue can be extracted from search, and the rise of LLMs answering questions, the time for quick growth of the search market has ended, which could hurt Alphabet’s valuation.
Monopoly
In the past, Google has been repeatedly sued and often fined for abusing its monopoly position.
This has been mostly about Search and Android and reflects the issue that the company is often at the very edge of legality when it comes to anti-trust laws.
With a judge ruling that “Google has an illegal monopoly on search” in the summer of 2024, new trouble could be brewing on the horizon.
Specifically, Google’s exclusive deals with Apple and other key players in the mobile ecosystem were anticompetitive.
Google has also charged high prices in search advertising that reflect its monopoly power in search, he added.
US District Judge Amit Mehta
AI Scaling Questions
Scaling up AI capacity is proving more expensive and energy-hungry than expected. This is a common issue for all large AI companies, and Google is no exception: “Google’s AI development is experiencing lagging improvement rates compared to the previous model versions”.
This could either slow down progress or mean that dozens of billions need to be poured into AI data centers, with none of these options good news for shareholders hoping to see AI becoming a profit center as soon as possible.
These growing computation requirements also mean the need to secure more reliable energy supplies. Like most tech giants, Google is now turning to nuclear energy to solve this issue. More precisely, to the Californian startup Kairos Power to buy energy generated by the company’s future SMRs (Small Modular Reactors).
Of course, the worst possible outcome is that AI progress is reaching something of a plateau and that further progress will be less and less noticeable, no matter the time or resources thrown at the problem. This is not the most likely scenario, but it is a risk that cannot be fully ignored either.
Conclusion
Alphabet, which includes Google, but also YouTube, Waymo, a quantum computing department, and other projects, is a very impressive company. It has enjoyed for the last 2 decades a de-facto monopoly on online searches and a dominant position in ads.
This has been used as a foundation on which to build other equally impressive monopolistic businesses, including videos and smartphone OS.
It should be noted, however, that both Android and YouTube were acquisitions that were later scaled up by Google. Home-grown innovations out of search have a more spotted record, with many moonshots not going anywhere.
Waymo is here a standout, as the current leader of the race in autonomous driving, and for now, the closest to becoming an actual business with sways of paying customers.
Lastly, the AI revolution is of prime importance to Google. On one hand, DeepMind, AlphaFold, and other tools are revolutionizing scientific research, while Gemini, Imagen3, Veo, and Genie could revolutionize how we use the Internet and any digital device.
This is also a threat to the core profit source of the company, Search, which could in the long run face the same fate as the Internet indexes that were replaced by superior search engines.
So, Google is a company investors should be interested in because of its strong monopolistic position in ultra-large markets and track record of successful diversification. At the same time, they should cautiously evaluate if the once-disrupting startup is not slowly becoming a giant primed for disruption by new technologies.
