Google investors slightly spooked by free-spending execs

Revenues might well be booming again at Google, but it seems shareholders are slightly concerned by increased costs, which is one of the fastest growing columns in the spreadsheet.

Looking at the final quarter, revenues stood at $39.3 billion, up 22% year-on-year, though traffic acquisition costs (TAC), what Google pays to make sure it is the dominant search engine across all platforms, operating systems and devices, were up by over $1 billion. Cost-per-click on Google properties were also down. A glimmering ray of sunshine was higher-than-expected seasonal growth for premium YouTube products and services.

Total revenues for 12 months ending December 31 stood at $136.8 billion, up 23% over 2017, while net income was back up to the levels which one would expect at Google, raking in $30.7 billion. The company is not growing as quickly as it used to, while expenses are starting to stack up. Investors clearly aren’t the happiest of bunnies as share price declined 3.1% in overnight trading.

“Operating expenses were $13.2 billion, up 27% year-over-year,” said Alphabet CFO Ruth Porat. “The biggest increase was in R&D expenses, with the larger driver being headcount growth, followed by the accrual of compensation expenses to reflect increases in the valuation of equity in certain Other Bets.

“Growth in Sales and marketing expenses reflect increases in sales and marketing headcount primarily for Cloud and Ads followed by advertising investments mainly in Search and the Assistant.”

Headcount by the end of the last period was up by more than 18,000 employees to 98,771. While CEO Sundar Pichai was keen to point out the business is continuing to invest in improving its core search product, diversification efforts into areas such as the smart speaker market, cloud and artificial intelligence are hitting home. Perhaps investors have forgotten what it’s like to search for the next big idea.

For years, Google plundering the bank accounts with little profit to offer. These days are a long-distant memory, but it is the same for every business which is targeting astronomical growth. You have to perfect the product and then scale. A dip in share price perhaps indicates shareholders have forgotten this concept, but Google is doing the right thing for everyone involved.

Some businesses search for differentiation and diversification when they have to, some do it because they have ambition to remain on top. Those who are searching because they have to are most likely reporting static or declining numbers each month and did not have the vision to see the good days would not last forever. Google is pumping cash into the next idea so when growth in its core business starts to flatten, something else can pick up the slack and pull the business towards more astronomical growth.

This is what is so remarkable about the ‘other bets’ column on the spreadsheets. It might have costs growth every single year, as does the wider R&D column, but having graduated the cloud computing business and most recently Loon, there are businesses which will start to contribute more than they are detracting. This is a company which never sits still, and this is why it is one of the most admired organizations from an entrepreneurial perspective. Shareholders might do well remembering this every now and then.

Looking at joy around the world for the final quarter, US revenues were $18.7 billion, up 21% year-over-year, while EMEA brought in $12.4 billion, up 20% and APAC accounted for $6.1 billion, up 29%. Revenues in LATAM were $2.2 billion, up 16% year-over-year. APAC and LATAM were subject to negative FX fluctuations, particularly in Australia, Brazil and Argentina.

In the specific business units, Google Sites revenues were $27 billion in the quarter, up 22%, with mobile collecting the lion’s share, though YouTube and Desktop contributing growth also. Cloud, Hardware and Play drove the growth in the ‘other’ revenues for Google, collecting $6.5 billion, up 31% year-over-year for the final quarter.

Although these diversification efforts are growing positively, there are also some risks to bear in mind. Firstly, the cloud computing business is losing pace with Microsoft and AWS. Google is making investments to attempt to buy its way through the chasm, but it will be tough going as both these businesses make positive steps forward also.

Secondly, some properties and developers are choosing to circumnavigate the Google Play Store, instead taking their titles direct to the consumer. This is only a minor segment of the pie for the moment and there will be a very small proportion of the total who actually have the footprint to do this (Fortnite for example), though it is a trend the team will want to keep an eye on. Perhaps the 30% commission Google charges developers will be reconsidered to stem dissenting ideas.

Finally, the data sharing economy which will sit behind the smart speaker and smart home ecosystem is facing a possible threat. Google will not make the desired billions from hardware sales, but it will from the operating systems and virtual assistant powering the devices. Collecting referral fees and connecting buyers with sellers is what Google does very well, though this business model might be under threat from new data protection and privacy regulations.

The final one is not just a challenge to the potential billions hidden between the cushions in the smart home’s virtual sofa, but the entire internet economy. GDPR complaints are currently being considered and potential consequences to how personal data is collected, processed and stored are already being considered. The Google lawyers will have to be on tip-top form to minimise the disruption to the business, and wider data sharing economy.

Costs might be up and while there are dark clouds on the horizon, Pichai and his executives are moving in the right direction. The lawyers can lesson the potential impact of regulation, but the exploration encouraged by the management team in the ‘other bets’ segment is what will fuel Google in the future. Costs should be controlled, but spending should also be encouraged.

France fines Google for being vague

The French regulator has swung the GDPR stick for the first time and landed it firmly on Google’s rump, costing the firm €50 million for transparency and consent violations.

The National Data Protection Commission (CNIL) has been investigating the search engine giant since May when None Of Your Business (NOYB) and La Quadrature du Net (LQDN) filed complaints suggesting GDPR violations. The claims specifically suggested Google was not providing adequate information to the user on how data would be used or retained for, while also suggesting Google made the process to find more information unnecessarily complex.

“Users are not able to fully understand the extent of the processing operations carried out by Google,” the CNIL said in a statement.

“But the processing operations are particularly massive and intrusive because of the number of services offered (about twenty), the amount and the nature of the data processed and combined. The restricted committee observes in particular that the purposes of processing are described in a too generic and vague manner, and so are the categories of data processed for these various purposes.”

This seems to be the most prominent issue raised by the CNIL. Google was being too vague when obtaining consent in the first instance, but when digging deeper the rabbit hole become too complicated.

Information on data processing purposes, the data storage periods or the categories of personal data used for the ad personalization were spread across several pages or documents. It has been deemed too complicated for any reasonable member of the general public to make sense of and therefore a violation of GDPR.

When first obtaining consent, Google did not offer enough clarity on how data would be used, therefore was without legal grounding to offer personalised ads. Secondly, the firm then wove too vexing a maze of red-tape for those who wanted to understand the implications further.

It’ll now be interesting to see how many other firms are brought to the chopping block. Terms of Service have been over-complicated documents for a long-time now, with the excessive jargon almost becoming best practise in the industry. Perhaps this ruling will ensure internet companies make the legal necessities more accessible, otherwise they might be facing the same swinging GDPR stick as Google has done here.

For those who are finding the NOYB acronym slightly familiar it might be because the non-profit recently filed complaints against eight of the internet giants, including Google subsidiary YouTube. These complaints focus on ‘right to access’ clauses in GDPR, with none of the parties responding to requests with enough information on how data is sourced, how long it would be retained for or how it has been used.

As GDPR is still a relatively new set of regulations for the courts to ponder, the complaints from NOYB and LQDN were filed almost simultaneously as the new rules came into force, this case gives some insight into how sharp the CNIL’s teeth are. €50 million might not be a monstrous amount for Google, but this is only a single ruling. There are more complaints in the pipeline meaning the next couple of months could prove to be very expensive for the Silicon Valley slicker.

UK news media want tech giants to pay them annual license fees

A UK governmental review into threats to the press, principally from the internet, has led to calls for tech giants to pay for news content that appears on their platforms.

The Cairncross review asked for submissions on the matter earlier this month and has so far received them from the News Media Association, press regulators IPSO and IMPRESS, and the National Union of Journalists. The NMA one is headed “NMA Calls For Licence Fee Agreement With Tech Giants”.

“A fair and equitable content licence fee agreement would ensure that news media publishers are appropriately rewarded for the use of their content by the tech giants, safeguarding the future of independent journalism which underpins our democracy,” opened the NMA press release.

“The primary focus of concern today is the loss of advertising revenues which have previously sustained quality national and local journalism and are now flowing to the global search engines and social media companies who make no meaningful contribution to the cost of producing the original content from which they so richly benefit.”

On one hand this smacks of special pleading by an industry that has found its business model rendered obsolete within a generation. But on the other there are good arguments that the press should receive special treatment given their democratic role in holding power to account and informing the population. This is also a good time to be trying to extract money from tech giants, following the approval of tough new digital copyright rules by the EU.

Given the virtual impossibility of tracking every news link published on every digital platform, the plan seems to be to come up with some kind of arbitrary license fee, essentially a special tax, and impose it on any tech company that is perceived to be profiting from news stories in any way. This cash would then be handed over to news media organisations according to a formula yet to be determined.

One of the potential variables for determining how much of a kick-back a given title would get could be the highly subjective concept of ‘quality. The NUJ and the regulators all dwell on this a fair bit but seem to all have their own definitions of quality.

“The union believes that the best definition of what constitutes ‘high quality journalism’ is work that complies with the NUJ’s long-established ethical code of conduct and the NUJ’s submission to the review highlights that NUJ members work hard to produce quality content for websites and newspapers in extremely challenging circumstances,” said the full stop-averse NUJ.

“Another problem with the move towards accessing our news online is the proliferation of fake news, often disseminated through social media,” said IPSO. “Without a thriving press, there’s little antidote to online disinformation – and the effect this might have on the public’s ability to participate meaningfully in society should be of concern to us all.”

IMPRESS wants the UK government to “create a new legal identity – ‘Public Interest News’ – for the publishers of high-quality journalism. This identity would be distinct from charitable status, so that publishers could still publish political news and comment, but it would have some of the benefits of charitable status.”

By definition a free press should be unshackled by external quality control. The European Commission has recently indicated it would like to regulate newspapers to prevent them criticising it and campaigning organisations such as Hacked Off (which supports IMPRESS, incidentally), want to restrict the press according to their own systems of weights and measures.

But that doesn’t mean we should ignore this issue. Google and Facebook account for a very high proportion of all ad spend in most places they operate and a lot of the traffic they monetise is driven by content produced by professional journalists. Even alternatives to mainstream media are dependent on tech platforms such as YouTube and Twitter. While this internet tax has many flaws it is at least a reminder to the tech giants that if they don’t do more to ensure a healthy and diverse news media environment, governments might take matters into their own hands.

Trump declares war on Google

US President Donald Trump has tweeted that Google search results about him are biased in favour of leftwing media.

Leaving aside whatever Machiavellian motives Trump has for tweeting for the time being, this move seems to mark an escalation in the debates over the role the big internet companies play in controlling the flow of public information and discussion. Being openly accused of acting in bad faith by such a powerful person is not something Google can afford to ignore.

Here are the tweets in question, which have apparently been slightly revised since they were first published.

Unsurprisingly Google rejects these accusations. At time of writing it didn’t seem to have published a blog, or whatever, on the matter, but it has sent statements to a bunch of media. In keeping with the theme of this piece here’s an NBC Politics tweet containing the statement.  

Trump isn’t the first to flag up perceived leftwing bias from internet giants such as Google and Facebook, and may well be opportunistically riding that wave ahead of US midterm elections in November, in which all of the seats in the House of Representative and a third of the seats in the Senate are up for grabs. At the very least it seems likely he’s trying to swing search results in his favour at this critical juncture.

This is also a sensitive time for Google, especially on this topic. Its claims not to let its search results be affected by political ideology come just a few days after it had to deal with internal concerns that it’s planning to do just that in order to get back into the Chinese market. There is huge pressure on internet giants to censor undesirable content from their platforms, but if they accept the role of censor then they can’t be surprised if they also get accused of bias.

So much for ‘Don’t be Evil’ as Google bows to China censorship – sources

Many of the internet giants managed to put principles before profits when dealing with China, but willpower does seem to be fading as Silicon Valley attempts to work around the Great Chinese Firewall.

Search giant Google is seemingly the next to sacrifice freedoms of modern society in pursuit of the fortunes promised in the Chinese market. According to the Intercept, Google is currently developing a news-aggregation app for use in China which will comply to the governments strict censorship rules. While this is only a news app for the moment, it is a foot through the door; once present, it might be easier to launch further services.

Bowing to the demands of the ‘inquisitive’ Chinese government is not uncommon, though many of the internet players have resisted to date. LinkedIn did cave, and while it did seem Facebook was getting closer after years of wooing, including a very smoggy run around Tiananmen Square from CEO Mark Zuckerberg, though the failure to retain a business registration suggests the team was not willing to submit completely.

Google has reportedly been working on the app since early 2017, with the project codenamed ‘Dragonfly’. The first versions of the app have already been shown to officials, while the final version could be launched in the next six to twelve months, pending final approval from the government. The app would allow the government to block what is deems unfavourable content on topics such as political opponents, free speech, sex, news, and academic studies.

Content banned in China of course includes anything which directly criticises the ruling party, though also past events. Any references to the 1989 Tiananmen Square massacre as anything more than a Western myth are banned for instance, while any content which is focused on bringing down the establishment also hits the firewall. Both 1984 and Animal Farm by George Orwell have been banned. Sites which have been banned include social media such as Twitter and Facebook, but also the BBC, Wikipedia and the New York Times.

One question which might be worth asking is whether this is too little too late. Google left the country eight years ago, refusing to succumb to the censorship demands, though in the void, Baidu emerged. This has been the case for all the Silicon Valley companies who deserted China, a domestic alternative appeared. As reported in the quarterly earnings earlier this week, Baidu is doing well. Google might be the dominant search engine everywhere else, but people are creatures of habit; before it can make any money it will have to convince Chinese consumers to leave the familiar and engage with a distant memory.

The app itself will not only automatically block websites which feature on the Chinese sh*t list, but also complete searches. Certain words and phrases will be caught by the filter blocking any results from appearing on the page. The development of the app has been limited to a couple of hundred employees, though the majority are unlikely to receive the news well.

Google’s work with the US Defence Department to aid the accuracy of drone strikes with its AI technology was not well received, with a few thousand employees threatening to leave the business unless ‘Project Maven’ was ended. These employees at least maintain the principles of Silicon Valley, seemingly still living to the “Don’t be Evil” mantra of Google, even if it has been removed from the official code of conduct, and we suspect they will not receive news of the censored app favourably.

Google has a very positive image around the world. Despite making billions in profit each quarter, dealing with data in a questionable manner and constantly being investigated by the European Commission for antitrust violations, the brand has managed to maintain this friendly and upbeat persona. Whether censorship impacts this image remains to be seen.