Google and Facebook look for life beyond advertising

In 2015 Google shocked Wall Street when it announced it was changing its name to Alphabet and splitting its money-spinning search engine off from its sloppy smorgasbord of moonshot projects ranging from life preservation, space travel and driverless cars.

Despite this, it always seemed that the search engine - which last year generated $98.1bn (£74.7bn) in revenue and is the lifeblood that keeps the Alphabet show running - had remained the company’s anchor. But this could be about to change.

Google looks increasingly as though it may be weaning itself off from advertising as antitrust investigations, privacy fines and consumer complaints about the amount of personal data Google is collecting to feed its advertising algorithms piles up.

Google learned the hard way earlier this year that advertising budgets are often the first to go in challenging economic climates, and Covid-19 had a devastating effect on the overall market, which in turn saw Google’s revenue decline for the first time ever. Yet its emerging cloud computing business - a business that has paid off for Amazon and Microsoft, seemed immune to the virus.

Advertisers have since returned, helping Alphabet deliver $11.2bn in profit in the third quarter, but on a call with investors on Thursday, chief executive Sundar Pichai was was keen to sell its on-demand cloud computing service as one of the most exciting parts of the company.

The cloud division, which will get its own designated accounting segment as of next quarter, made $3.4bn in the third quarter of 2020, compared to $2.4bn the year before. While insignificant compared to search revenues of $26bn in the same period, the cloud business is growing considerably faster.

Aware of this opportunity, Google has been investing heavily, and while most companies have put the brakes on hiring the company has taken on more than 4,000 engineers and project managers in the past three months, the majority of which will work in its cloud department.

Play, the app store that serves Google-owned Android and where Google takes a cut from developers, has become another profit spinner. In the last quarter, around a fifth of Alphabet's revenues came from non advertising sources.

Facebook's foray out of advertising

Facebook chief executive Mark Zuckerberg sold a similar vision to investors on Thursday.

“The goal is to build out a commerce platform around messaging, so that any small business will be able to set up a shop and automatically establish a presence on [our] services,” he said on a conference call. “This is a big priority.”

Indeed, Facebook’s e-commerce tech has accelerated this year: vendors can now sell items directly on Facebook, Instagram and its TikTok clone Reels, while teachers and performers can run ticketed events on Facebook Live. For now, fees are waived due to the pandemic; that won't be the case forever.

Even the famously un-monetised WhatsApp, acquired for $19bn in 2014 and barely squeezed since, is finally digging towards paydirt, announcing last week that business customers will soon be able to sell products inside the app and store their messaging logs on Facebook’s servers – for a fee. More than 40m people now view a catalogue on WhatsApp every month.

Facebook's controversial unification of messaging services – which will merge the plumbing of WhatsApp, Messenger and Instagram direct messages behind the scenes – now appears to be part of these plans, with Zuckerberg boasting that businesses will be able set up on one service and instantly have access to customers on the others.

Google and Facebook's desire to look further afield for revenue could be due to a real threat from competitors. Amazon has emerged as a major competitor to the digital advertising duopoly enjoyed by Google and Facebook, as merchants on the shopping giant’s website pay up for valuable positions in its search results.

On Thursday, the company said its “other” segment, a division separate from its retail and cloud computing arms, grew sales by 51pc on a year ago to $5.4bn. This is largely made up of advertising income from sellers who pay for “sponsored” listings when people search for products on the site.

Growth in Amazon’s advertising business has been partly down to more shoppers starting to search for products on the site itself in recent years, instead of searching Google or price comparison sites.

Whether the titans can exist without advertising is already up for question. Despite its high-profile gallop into selling home hub devices and virtual reality headsets, Facebook's non-advertising revenue has actually shrunk since the same time last year from 1.5pc to 1.2pc. In the past, analysts have regarded it as institutionally incapable of improving the outcome.

Movements made by Google into other markets like hardware and artificial intelligence should be taken with a pinch of cynicism too, as many of its acquisitions act as conduits for its first and most valuable product.

A thinly veiled confirmation that much of Google's hardware sales were an attempt to put its trust search engine in the hand of consumers came from Pichai as he spoke with investors after results were out. He divulged that the company had some phone and gadget announcements to make next year, the shipping of which had a clear goal: "to make sure information is at people's fingertips".