Alphabet's Earnings Emphasize A Skewed Value On Monopolies

I was speaking with my colleague Fatemeh Khatibloo about the strong Q1 2017 earnings that Alphabet just announced this week (I mean Alphabet the parent company of Google here, not the soup or anything to do with Letter People).  Alphabet revenues are up 29%, due largely to growth in mobile search and video ad sales. And she made a profound observation: that today the success mindset isn't about thriving in a market with a set of worthy competitors.  It is about domination so extreme that you and you alone dictate market trends and there simply is no platform for innovative upstarts.

James Wang of ARK Funding Administration agrees.  He says, Alphabet's Q1 earnings underscore "a macro theme we are seeing in the internet space, which is that the bigger players are getting bigger and the smaller players are treading water or shrinking."

I don't like this.  I don't like this one bit because I'm always a fan of the underdog.  But also because it seems way too risky to tie so much market health to a small number of firms.  And because it creates a socialogical mis-perception of how much is enough.  I'll let you economists out there weigh in here; I'm interested.

And I will simply say that I don't expect Alphabet's advertising growth to continue in a similar habit because:

1) Advertisers are shifting away from quantity based strategies and toward quality based ones.  This means that Google's largest revenue drivers -- adwords and programmatic ads -- which emphasize reach will over time give way to premium blended content/ad experiences that are being developed by media companies who have to compete based on quality rather than reach.

2) Over time, search volumes in any medium will decline as intelligent agents begin to displace the need for active searches.  This will allow for the creation of alternative sponsorship and advertising opportunities (monetizing voice-based search queries, or optimizing placement in Google Now).  But it will also lead to extreme cuts in searches which make the inventory that is allowing for the lions share of GOOG's ad revenue.
 
3) Amazon is poised for significant competition with its own product listing ads.  We expect Google to feel this competition in full force by holiday 2017. 
 
Now, I don't expect Google to feel a pinch as much as a change in its revenue composition. By the time Google's paid search business starts to give way to intelligent agents just offloading decisions, its online video (youtube) ad products will take over as dominant revenue driver for the firm.  We project online video advertising to grow at a 17% CAGR between now and 2021 and that growth doesn't even account for emerging ad formats, streaming video or bundled ad products between television and digital content channels.

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