WAYMO THAN LAST TIME?

The key to Alphabet’s future success isn’t in advertising

Alphabet will be hoping you’ve heard of a few of its other companies too.
Alphabet will be hoping you’ve heard of a few of its other companies too.
Image: AP Photo/Thibault Camus
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Later today, Alphabet, the parent company of the profitable Google and many other less-profitable ventures, will announce its second-quarter earnings. Analysts are projecting another strong set of results as a follow-up to last quarter’s barn-burner. (In the first quarter, the company generated $24.7 billion in revenue—a 22% increase over the same quarter the year before.)

So what’s the problem?

Well, while the trend in overall revenue growth isn’t expected to change much…

… neither is the trend in revenue for Alphabet businesses beyond advertising.

Analysts expect Google’s share of the digital advertising market to remain relatively stagnant over the next few years. So Alphabet will be looking to secure its long-term future through new ventures, like its cloud-services business—which showed encouraging signs last quarter—and the group of more adventuresome business concepts that the company bundles together and literally reports as “Other Bets.”

 

Within the Google division itself, the company separates out non-advertising revenue as “other revenues”—this includes things like the cloud-services business, as well as subscription services such as YouTube TV (its cord-cutting live TV offering) and YouTube Red (an on-demand service for original content), and hardware such as the Google Pixel smartphone and Daydream VR headset.

Look to see what percentage of Google’s revenue came from non-advertising activities in the second quarter—the percentage has been rising in recent years, accounting for 11.3% of Google’s revenue in 2016, versus 9.6% in 2015. (If Google were to continue the trajectory it set last quarter, its other revenues would be $12 billion on the year, up from $10 billion last year.)

But any gains from these new revenue sources will likely be canceled out by the massive losses sustained by Alphabet’s “Other Bets” companies. This includes its venture capital arms, as well as Calico and Verily (research facilities trying to get us to stay alive longer); Waymo (its self-driving car service—currently embroiled in a legal battle over its intellectual property with Uber, while also trying to launch its first ride-hailing service in Arizona); Fiber (its struggling high-speed internet service); and Nest (the connected-home device company that currently accounts for the majority of the “Other Bets” revenue).

Any one of the moonshots Alphabet is working on has the potential to generate even more than its advertising business does today. But none is a sure thing. So until then, look to see whether the company’s advertising business is still healthy, and whether anyone is buying any other Google-branded products.