Alphabet (GOOG, Financial) (GOOGL, Financial) is on a mission to become the worlds largest company if it can manage to turn each and every letter of the alphabet into an entity. While some will be looking to see how those letters are turned into businesses, more scrutiny will be focused on how the company benefits by integrating its several business units.
Alphabet already faces stiff competition in the software industry with its Android OS for smartphone closely challenged by Apples (AAPL, Financial) iOS in the US. This is despite the fact that Android is a freeware used by multiple smartphone manufacturers while iOS is only available on Apple devices. The companys search engine, Google, is pretty much a lone ranger with Facebook (FB, Financial) now being its closest challenger.
On the other hand, YouTube, its video streaming business continues to be the preferred streaming service for many people and companies while its mail service is still trying to make inroads into company offices.
Alphabet has excelled in many ways in the technology sector, but now it finds itself fighting against all odds to dislodge office support services leader Microsoft (MSFT, Financial) from the top of the pack.
Alphabets ad-supported mail service, Gmail, has been one of the best internet mailing services since dislodging Yahoo! (YHOO, Financial) mail about a decade ago. However, its office service dubbed Google Apps for Work has failed to match the success of Microsoft office tools, with Office 365 still the undisputed leader in the market.
The companys cloud-based office services face various hurdles when compared to Microsofts Office 365. For instance, every Office 365 subscriber gets a storage space of 1TB while for Google Apps for Work, storage space for an entry level user starts at 30GB. This is despite the fact that both services attract roughly the same fee of about $5 per month.
Now, Gmail for work is one of the apps in Google Apps for Work that people gain access to once they subscribe via the packages offered. The companys service is common amongst individuals and small businesses.
This means that when you add this client base to the numbers the company attracts on other services, you have hundreds of millions that could come looking for Gmail technical support once something in their email account appears to be problematic.
So what does Google do to solve such problems? First, there is no official Gmail support number, but you can come across several of those, which are provided by various online support platforms. However, the company has developed a series of interactive FAQs that can be used to virtually find a solution to whatever problem a user is experiencing.
The company has been criticized on several occasion with regard to its stance on customer support, but from an investing perspective, there is no way that Alphabet would stand a chance against the likes of Microsoft and Apple if it chose to provide personalized support to each and every customer on their menu. Apple (AAPL, Financial) and Microsoft (MSFT, Financial) enjoy far better profit margins than Alphabet, whose revenues mainly come from advertising.
On the contrary, Apple sells smartphones and computers while Microsoft sells computing software alongside other office software applications, which yield good profit margins.
As demonstrated in the chart above, Apple and Microsoft have had operating margins better than Google's for most of the last five years. Apple remains the better performer of the three, while Alphabet only beat Microsoft in the last two years.
These numbers come despite the fact that Alphabet compromises very much on customer support in the process of eliminating a lot of SG&A costs.
Alphabets office support services will continue to trail Microsofts in the foreseeable future because as the name suggests, its a support service, which requires a human touch in order to compete with the rest.
It appears that Alphabet deems this type of support as an impediment to the scalability of its business, especially given the thin profit margins it gets from its advertising network service. Publishers who display Google ads on their websites keep 68% of the revenue generated while Google takes home just 32%.
The bottom line is that Alphabet faces an uphill task to replicate its dominance in search and smartphone OS on Google Apps for Work, which currently trail Microsofts Office 365.
Disclosure: I have no position in any stock mentioned in this article.
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