The news that Google is restructuring into the new Alphabet Inc. might have more to do with a business model in decline rather than the company’s colossal assets. While talk has been made of its possible desire to keep the Google search business separate from its other organic and acquired ventures, the main revenue source for search – advertising – is facing unprecedented hurdles. While Google itself shows no signs of financial problems because of the phenomenon yet, it is plausible Google is trying to get ahead of a pontentially permanent decline of advertising revenue on the web.
Google has embraced Adblock and Adblock Plus. Unfortunately, the extent to which it is impacting the classic Internet revenue stream of advertising is blowing up the web industry. A recent report by Adobe and Ireland-based consultancy PageFair found use of ad blocking software is increasing at a significant rate and expects it will cost websites $21.8 billion in 2015. That number is expected to double next year.
Dependency on ads
While those numbers refer to the industry as a whole, PageFair approximated that Google lost $6.6 billion in ad revenue in 2014, a conservative estimate according to the consultancy. That would be 10% of what Google actually brought in last year, with 90% of that being search.
Google is hardly in trouble, but they might see the writing on the wall.
In the first quarter of 2015, revenue from paid clicks increased by 13%. What might have been less noticeable, however, is that this represented the fifth consecutive quarter that paid click advertising growth had decelerated. If the number of AdBlock users does indeed grow, Google’s revenue stream will slip.
Adblock, owned by Frankfurt-based Eyeo, has negotiated with Google to “whitelist” some ads, but has apparently charged Google $25 million to do this according to German newspaper Die Welt. While it has salvaged some revenue, the urgency to deal with the pitfalls of Internet advertising might be pushing Google to improve the revenue stream of its pet projects.
Not so fast, advertising naysayers
However, others find alternatives to advertising – mainly subscriptions – to be unrealistic after 20 years of virtually free Internet. They cite the mixed or mediocre success of major newspapers to collect subscription fees; the piracy of videos continues despite services like Netflix, iTunes, and Amazon. People don’t want to pay, so how can we expect them to start now?
Besides, some argue, advertising itself still works and raises money.
Eli Novershtern, a Principal at Pitango Venture Capital, told Geektime last month that “Advertising is the engine of our economy because manufacturers need a way to get to consumers.” In other words, companies still need to advertise and the web is where to reach people. Reports by Technology Business Research Inc. and Forrester are projecting massive growth in online advertising and a shift to digital ads from traditional television, growing up to 100% by 2020.
Google’s dominance of the online advertising market has enabled it to become one of the most wealth-flushed companies in the world, letting it swallow up would-be competitors, such as Waze, and incubate other investments.
Regardless of how extremely one interprets digital marketing trends, any company with 90% of its eggs in one basket should be looking to diversify its revenue stream, Josh Rodin of JDR Digital told Geektime last week.
Others anticipate that while Google open-endedly invests about 15% of its revenue in R&D, a competitor could quickly monetize a product Google had been incubating for years before Google could get theirs to market. With signs of frustration from some investors, Google might be moving finally to monetize these projects into an Alphabetic empire.
YouTube and Google Play have brought in recognizable revenue, leading to some speculation that more will go into those divisions. But a major chunk of its side projects are not making money: Life Sciences, Google X, Deepmind, and the like. Only Nest seems to be making money, but it is still a drop in the bucket.
“Our earlier stage products, such as Fiber, Google Life Sciences, and Nest, serve as longer-term sources of revenue,” said Ruth Porat, Google CFO, earlier this year. They might not expect to make stable profits for years. That is, unless Google allowed those companies more independence to develop a revenue strategy.
Hence, the management has shaken up the company. As Google’s current CEO Larry Page wrote, “Alphabet is about businesses prospering through strong leaders and independence.”
A brave new world
Google hardly seems as alarmed as some analysts might about the challenges to advertising. Still, with pressure to diversify their revenue stream, this is as good a time as ever to implement basic business strategy. The resources exist for Google to restructure and create a consortium of CEOs with new business ideas, so it is taking the opportunity to hire them.
While Internet advertising will undoubtedly wrestle with unconventional challenges like ad blocking, it will also continue to exist and may grow at a later date. It is not clear what strategies Google – ahem, Alphabet – will implement to gets its various projects into the black. But Google is taking the challenge to adtech as an opportunity finally to morph its next-generation projects into sellable products.