August 5, 2024
Google: 1998 — 202?
Dear Reader,
Alphabet is undisputedly one of the biggest and most influential businesses on the planet. For now, at least.
The holding company controls a group of tech firms that turn over $300 billion a year — about as much as the Finnish or Portuguese economies, and a fair chunk more than New Zealand’s, where I’m from.
Chief among Alphabet’s subsidiaries, of course, is Google.
Google has dominated the internet search landscape since the turn of the millennium and — for now — controls about 90% of the market.
Alphabet’s campus (source)
I say ‘for now’ because, like all stati quo, Google’s dominance is under threat.
This week’s edition of The Benchmark takes a look at the tectonic shift threatening Google’s place at the top of the tech pecking order.
Because now that the initial hype around artificial intelligence has receded, the reality of this new technology’s deep, permanent disruptive potential is dawning on big tech.
‘Senator, we run ads.’
To understand how Google attained its omnipresence, you have to understand its business model.
When you understand Google’s business model, you can understand why analysts think the company could be in trouble.
In 2018, this happened:
Source
Meta Platforms (née Facebook) founder Mark Zuckerberg (pictured above, smiling smugly) answered 84-year old Utah senator, Orrin G. Hatch’s question ‘how do you sustain a business model in which users don’t pay for your service?’ with the now infamous ‘senator, we run ads’.
The Facebook platform, of course, isn’t really free. Nor is Google’s search service. Or its email service. Or its mobile app store. The list goes on.
Alphabet makes about 77% of its money from advertising.
The model is to provide massively useful things to massive amounts of consumers for free, and then capitalize on this critical attention mass by selling it to business customers.
Google’s 90% of the search market equals 90% of the search advertising market. And, again, this dominance accounts for 77% of the parent company’s revenue.
Zooming out, Statista estimates that Google owns about 39% of the total global advertising market.
How long will that last?
The search wars begin
Large language model, or LLM, AI hit the mass market in the form of ChatGPT in November 2022.
Today, you have ChatGPT, Claude, Gemini (owned by Google, it’s worth noting), Perplexity, Bing AI, and more by the day.
And of course AI is hardly limited to chatbot form — it’s transforming pretty much every market and industry.
But where the AI revolution poses a problem for Google’s business is that LLMs mean people no longer need to manually use a search engine.
Hence headlines such as these:
Why sift through a search engine result page, clicking links and visiting pages to find what you’re looking for (viewing several paid ad placements while you do so)…
When you can get an LLM like ChatGPT to do that ‘manual search labour’ for you, and serve you the exact answer you want in seconds?
One of the signals that Google had prevailed in the early 2000s search engine race, was the company’s name became a byword for searching.
You don’t ‘search’ for something. You ‘Google’ it.
The same thing is happening with AI.
If you’ve not heard it already, it won’t be long before you hear someone tell you they ‘ChatGPT’d it’.
And Google’s search market and advertising market share isn’t just under threat from other companies and their AI tools.
It has, naturally, been forced to join the AI race itself, with its ChatGPT competitor, Gemini.
Which means that one part of Google’s business could soon threaten the part that’s made them one of the biggest companies on the planet over the past 25 years.
And it’s not just Google under threat.
Stack overflow, a tech forum, had its search traffic cut in half once its users realized there was a faster, more direct way to find what they needed:
Source
What does the market think of this?
AI sends investors hunting for small-caps
AI, as you probably know, has played a huge role in the so-called Magnificent Seven’s (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla) massive run-up over the past few years.
Take a look:
Source
Tech stocks well and truly took the share of the market’s gains.
NVIDIA even grew to be the eighth biggest country in the world.
Now, it seems, the market is rebalancing a little.
In part, this looks to be about investors feeling that the mania surrounding AI has sent some of these tech giants a little too high.
But also, per the Bloomberg headline below, it seems that AI is creating even more exciting disruptive opportunities at the other end of the market.
Source
According to Axios, the Russell 2000 small-cap index spiked by more than 11% over just five trading sessions. The S&P 500 information technology sector sank 8%.
And, small-cap stocks remain well below their 2021 highs.
But the big tech stocks have made new highs for many months, almost forming their own market.
Watch this rotating, evolving, potentially status-quo shattering, space.
Quote of the week
‘Innovation accelerates and compounds. Each point in front of you is bigger than anything that ever happened.‘
— Marc Andreessen
That’s it for The Benchmark this week.
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Until next week!
Thom
The Benchmark
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