The Outlook for Alphabet and Amazon: 4Q's Short Shadow, Crypto's Long One

AMZN shares have outperformed GOOGL shares over the past year and the reaction after 4Q results continued this trend Since 1117 AMZN shares are up 91 and GOOGL shares are up 41 on Friday after the companies reported 4Q results on Thursday after market close AMZN shares were up 3 adding almost 20bn in market cap while GOOGL shares dropped 5 chipping over 40bn from Alphabet39s market cap Bright spots in 4Q for AMZN included 1 its advertising business contained in its other net sales and thus likely up 60 yearyear and 2 its operating margin reflecting upside surprise in scaling efficiencies in the holiday quarter Operationally the main concern for GOOGL was the continuation of the negative surprises in its operating profit margin owing in particular to higher traffic acquisition costs TAC for its core advertising businessI39ve predicted problems for GOOGL in the past and some have shown up and others haven39t TAC39s pressure on profitability I called right Last February the title of one of my reports on GOOGL said it all quotA Closer Look Reveals Sites TAC Pressures Could Be Worse Than Expectedquot A year ago Wall Street expected Sites TAC amp8202 namely the TAC for Google Sites primarily Google search and YouTube as a share of Google Sites ad revenueamp8202 to tick up by about 1 percentage point over the course of 2017 I thought it would go up by more than twice that The actual increase was even greater It is valuable to look as well at the change in Sites TAC as a share of the change in revenue quotSites new TAC quot which measures the share of Sites revenue growth going to Sites TAC and can be a leading indicator for Sites TAC I expected Sites new TAC to keep climbing in 2017 and had the 4Q17 figure about right Wall Street actually expected Sites new TAC to shrink in 2017TAC as of GOOGL39s Ad Revenue Has Been a Negativeamp160Surpriseamp160TAC39s Share of Revenue Growth Kept Rising In 2017 Defying Street ExpectationsThe share of GOOGL39s ad spending going to distributors will continue to rise reflecting changes in search39s valuation proposition GOOGL has nearterm visibility into Sites TAC based on its distribution agreements which are usually multiyear This gave GOOGL management the confidence on its 4Q earnings call to guide to a slower pace of growth in Sites TAC after 1Q18 The rise in Sites TAC reflects changes in the leverage of GOOGL39s search engine with its distributors GOOGL has a commanding share of search traffic even higher on mobile than on desktop For example according to Merkle GOOGL39s 4Q share of US search traffic was 92 overall and 96 on mobile Nevertheless this dominant position has not stopped the rise in Sites TAC which suggests potential for longerterm pressures on profitability which we now addressStanding on the shoulders of insight into TAC and looking through a lens biased by attention to blockchain technology and cryptocurrencies let39s make another prediction more longterm tokenization will be more of a threat to the economics of GOOGL39s business than AMZN39s Three reasons stand behind this view 1 the sea change in media monetization which crypto could represent 2 blockchain39s greater potential to disrupt less bundled consumer experiences and 3 the greater lure to crypto projects from industries with higher marginsAs to the first reason one promise of tokenization is commodifying unpriced externalities which are more apparent in the use of consumer data in marketing and advertising than in consumers39 purchases of products services and subscriptions in ecommerce Cryptocurrencies present a sea change for media monetization models and a major thesis behind many blockchain projects is the commodification of consumer data The market cap of the tokens of just a sampling of the blockchains pledging transfers of value to consumers for use of their data is 4 billion A growing number of projects focused on creating markets in consumer data is in the ICO pipeline Thus while TAC now only goes to distributors crypto TAC could go both to distributors and consumers themselvesamp160GOOGL is still an advertising company GOOGL has launched and poured investment into an array of nonadvertising products and services cloud services Google Play Pixel phones Google Home devices and YouTube subscription services to name a few and yet this has only nudged advertising39s share of GOOGL39s revenue down to 86 in 2017 from 92 in 2013 Moreover the profitability of the new nonadvertisingbased initiatives is lower than that of GOOGL39s advertising business Thus even now GOOGL39s mix of profits from advertising although not disclosed is probably well nigh 100By contrast on top of its core ecommerce market Amazon has built a subscription business model both of which reflect pricing based on direct consumer demand Indeed Amazon Prime is wrapped tightly around the company39s pumping heart its ecommerce business By contrast GOOGL has built no meaningful subscription business model Moreover GOOGL39s subscription businesses have little to do with its core search businessOn to the second reason for our prediction the more a service depends on integration of multiple features and offerings into a compelling user experience the more difficult it is to decentralize through crypto AMZN offers a bundle of services that is relatively less susceptible to decentralization Amazon has an easy ordering interface data on customer purchases associated product recommendations integrated with product availability lowcost shipping free for Prime members a massive fulfillment and shipping infrastructure which is increasingly supported by Amazon39s own transport infrastructure and in the case of groceries at least its own brick ampamp mortar retail distribution And oh yes Amazon Prime bundles all this with an SVOD offering rivaled only by Netflix By contrast GOOGL39s paid search ads stand somewhat separately from the organic search interface Consumers advertisers and investors have all been tracking the continuing encroachment of ads on the search engine results page The growth of sponsored ads on Amazon39s ecommerce platform is itself a sign of the portability of the paid search ad experienceLet39s close with reason three the greater the margins of a centralized service the greater the opportunity for disruption by decentralized services Advertising generally is a highermargin business than ecommerce AMZN39s operating margins were 35 in 4Q and 10 in 2017 while GOOGL39s were 237 in 4Q and 236 in 2017 Thus from tokenization GOOGL39s margins are ultimately more at riskThe opinions and points of view expressed in this content are exclusively the views of the author andor subjects and do not necessarily represent the views of MediaVillagecomMyersBizNet Inc management or associated writers

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The Outlook for Alphabet and Amazon: 4Q's Short Shadow, Crypto's Long One

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James Dix

"About That with Carl Mayer": Involved Media Connected Audience Fall 2024 Report (Episode 5) - By Carl Mayer

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The Outlook for Alphabet and Amazon: 4Q's Short Shadow, Crypto's Long One

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James Dix

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