If you have been reading my recent articles, you may have noticed that I am a bit ambivalent when it comes to Alphabet (GOOG, Financial)(GOOGL, Financial).
On the one hand I admire the company for building a huge moat around its advertising business using Android, Google Apps, Chrome and a vibrant advertising community – not to forget the world’s largest public video platform in the name of YouTube.
On the other hand I hate the fact that the company, despite its legions of tech minds, is little more than an advertising company when it could have been so much more. Alphabet’s Other Bets is still a collection of moonshots, as Alphabet executives themselves call them, with no commercially viable product having come out of that stable after so many years.
Nevertheless Google remains the company to beat when it comes to advertising dollars. Facebook (FB, Financial) is trying its best to get close to it but has a long way to go in terms of the revenue differential.
Out of nowhere Verizon (VZ, Financial) has built a content empire that has made it the third piece of the online advertising puzzle, and it has positioned itself in a way that someday it will be able to take on Facebook and Google, but for now that remains an unknown quantity. The good news for all three companies is that online advertising is still growing.
We’ve all been lucky to have witnessed the growth of the Internet first hand, and it is this growth that has led advertising dollars to follow that path. Before the Internet boom – in the '90s – television was the craze, and even today it is the one of the best mass advertising media.
But the age of online advertising is dawning, and it is getting brighter every year. You only have to look at Google’s $75 billion annual revenues to see that.
According to Telegraph.co.uk, the average adult spends more than 20 hours a week online, and that figure goes up to 27 hours for young adults. People are spending twice as much time online as they did 10 years ago, and that has doubled the opportunity for advertisers.
The data around time spent online is not at all surprising. How many of us had a smartphone or tablet 10 years ago? Probably a small percentage of those who today consider it an extension of their arms – and that was the time of BlackBerrys and PDAs. Twenty years ago there were only desktops that boasted “high-speed” connections of 56 Kbps! Today the average speed of broadband Internet connections in the U.S. is 54.97 Mbps – that’s almost 1,000 times faster than 20 years ago. And with video streaming now growing like wildfire, that adds a whole new dimension to user habits.
TV advertising is on its way out. As more original content makes its way into our devices, the time we spend watching TV is going to dip dramatically. That may not happen next year or five years from now, but it is inevitable. Today, it’s not a question of “when we get online” because we’re always online. Our emails have become like real-time notification alerts. Our messaging apps are our mouthpieces. Our news channels all have a .com at the end of their names.
Today if people want to watch a Thursday night NFL game they can log on to their Twitter (TWTR, Financial) accounts or the league’s own app, NFL Mobile. Twitter, by the way, saw nearly a quarter of a million people tune in to the Jets-Bills game on Thursday, and it was Twitter’s first live-streamed football game. If you want to watch a movie or a TV show you have a choice of Netflix (NFLX, Financial), Amazon (AMZN, Financial) Prime Video, HBO Now, YouTube Red and so many more providers.
So, obviously, one of the biggest casualties of all this is going to be traditional cable and satellite television. Why would advertisers stick with that medium when they can be laser-targeting their core audiences online through Google, Facebook, Verizon and the rest?
Granted, the content available for streaming video may not be good enough to kill TV altogether, but the Internet has already changed the way we consume our data, our shows, our movies, our sports and everything that can be watched.
McKinsey expects digital advertising to grow at 12.7% between 2016 and 2017, and it’s not really a surprise to see advertising dollars make a beeline for premium audiences.
Alphabet’s Google can only get stronger from here despite the increasing competition from Facebook and now Verizon’s web properties. We’re not going to see a dip there any time soon. What that means is that Google is still an investable option by any measure. Other Bets doesn’t even have to bring in a single dollar for the company to keep growing.
But this growth in digital advertising cannot go on forever. It will last a few years because of increased video content but at some point it has to peter out just like the heydays of TV advertising. That’s where Google’s ad revenues will start to level off. It needs to have something tangible coming out of its Other Bets division by then, or else it will become the kind of sluggish corporate entity that Alphabet’s senior management has eschewed until now.
So to answer the question I raised in the article's title, Google's advertising revenue is certainly sustainable, but the growth thereof is not.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
Start a free seven-day trial of Premium Membership to GuruFocus.
