The Fly in Alphabet’s Soup

It seems funny to think of Google as an advertising company – but that is how it makes its money. The internet business now known as Alphabet (NASDAQ:GOOGL), which is the most valuable company in the world with a market capitalisation of around £380 billion, had revenues of USD20.3 billion (£13.9 billion) in Q1 this year[i]. Of this, £12.5 billion was advertising revenues generated by Google, up 16 percent on Q4 2015.

Although much has been made of Alphabet’s investments in other technologies, the Google internet cash cow still dominates the business. Its health technology business, Verily, generated only £115 million of revenues by comparison. The contributions of its much vaunted driverless car and artificial intelligence operations are still minimal.

Google sold more ads but the average price paid for each fell by 9 percent in Q1 2016. Overall, analysts were disappointed and the shares fell back.

Actually, it would be more accurate to describe Google as, not so much an advertising business, but a technology which marries advertisers to their target customers with pin-point accuracy. It does this by profiling its users – you and me – every time we carry out a search on its platform. Given that, collectively, we carry out 3.5 billion Google searches per day, this activity gives the company plenty of data to play with.

If you want to know what Google thinks you are interested in then you can find out at www.google.com/settings/u/0/ads/authenticated where you will see that they even know your gender and your age group. (I presume that you should use your normal workstation as I think they link your Google account with your computer’s IP address – but please don’t ask me – I’m hopeless on what goes on inside these wretched machines.)

What I understand is that the boffins at Alphabet/Google have developed an algorithm (I love that word because nobody really knows what it means) which links our search activity with our predispositions to buy certain types of product. In a similar way, Facebook (NASDAQ:FB) can work out a lot about our inner psyche just by monitoring our “likes”; and of course Amazon (NASDAQ:AMZN) can anticipate our future interests based on our buying and browsing histories. These are the three cunning giants of Big Data.

YouTube, of course, is owned by Google and is all part of Google’s data-acquisition machine. As I write this I’m listening to the soundtrack of a film I saw last week, thanks to YouTube. Dammit – that’s why they know I like cinema… And I’ve stopped receiving pop-up pugs, which must mean that they know that I’m post-pug, like so many others. (In fact I think the world reached peak pug around Q3 last year.) It’s all devilishly clever.

Not everyone is impressed, however. On 20 April the European Competition Commission renewed its assault on Google. The charge is that Google has abused its dominance of the Android operating system. Android, you will recall, is the world’s most-used mobile phone operating system, powering an estimated 1.8 billion devices. If the Commission could prove that Google has broken European competition law then it has the power to fine the company up to 10 percent of its global revenues.

In principle, Android is open-source, meaning that anyone can use it; but in practice mobile phone manufacturers such as Samsung, Huawei and others have licensed it to power their phones because the cost of servicing the system can be significant. The Commission alleges that the licensing terms bias phone users towards a host of Google’s apps and services (Google Play, YouTube, Gmail etc.), even where the licensing agreement itself is free. It’s telling that Google requires that the Google Search box must be designated the default home page on the browser.

Google argues that manufacturers can pre-install other apps on their phones and that users can always deactivate any Google apps once they set up their phone. Samsung, which has an almost 25 percent global market share of the handset market[ii], actually sells phones with Google’s suite of apps plus a suite of its own apps which have almost identical functionality. Moreover, Samsung powers low-cost phones sold in the Indian market with its own operating system, Tizen.

In the nineties and noughties the European Commission fought similar battles with Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC). Microsoft was lambasted for bundling up its browsing software (MS Internet Explorer) and media player with its crushingly dominant PC operating system (MS Windows). By the time the case was resolved events had overtaken its protagonists – Microsoft Windows had been eclipsed by the rise of tablet computers manufactured largely by Apple (NASDAQ:AAPL). Nonetheless, Microsoft was obliged to pay a fine of €860 million in 2003.

In filing this case the European Competition Commission is firing a shot across the bows of the entire US technology establishment, including Facebook, Amazon and Apple. It’s about who ultimately controls the internet. Knives are out for Google not only because it is perceived to be crushingly dominant but because its record on paying taxes in Europe is highly controversial. This company which will have annual revenues greater than the GDP of Luxembourg this year faces a fine greater than the GDP of Moldova!

Alphabet’s Q1 results came out one day after the European Competition Commission announcement and it was the earnings data which caused the share price to slouch by 6 percent. Since then the shares have drifted down from the US$740 mark to around US$725 today. So the market has more or less shrugged off the threat of European fines as just a fly in the soup.

Even without the Android operating system, Google would still control the internet. Who knows what the internet will look like by the time this case is settled, but Google will almost certainly still be the dominant player. And they’ll know even more about what we are up to than they do now – and they’ll be using that data in even more subtle and effective ways.

Anyway, I’m gratified that Google at least got my gender right. If I hear some lefty-type on BBC R4 say gender is just a social construct again I think I’ll scream. I can’t say I’m happy that they know my age, though.

[i] Announced on 22 April 2016.  See: http://9to5google.com/2016/04/21/alphabet-announces-q1-2016-revenue-of-20-3-billion-misses-expectations/

[ii] See: http://www.idc.com/prodserv/smartphone-market-share.jsp