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The 25-year-old Google is facing a trough in its development history

The main business of search engines has been challenged, advertising revenue has been declining, the proportion of cloud computing business is still low, and the field of artificial intelligence has lost to Microsoft. The 25-year-old Google is facing a rare trough in its development history.

The 25-year-old Google is facing a trough in its development history
The 25-year-old Google is facing a trough in its development history


One wrong answer will “deduct” the market value of 100 billion

“What new discoveries can I tell my 9-year-old about the James Webb Space Telescope?”

For Google, this is a problem worth more than $100 billion.

On February 8, in response to ChatGPT’s challenge to the field of artificial intelligence, Google officially disclosed its chat robot product Bard to the outside world at the AI ​​conference held in Paris. In one of the demonstration videos, Bard answered a question about the new discovery by the James Webb Space Telescope, saying it had “taken the first pictures of an exoplanet.”

However, some astronomers soon discovered that Bard had made a factual mistake: the first photo of an exoplanet was taken by the Very Large Telescope System in Chile, not by James Webb.

Google paid a high price for Bard’s erroneous output. On the evening of February 8, after the US stock market opened, Google’s stock price fell 7.68%, and its market value evaporated by 105.6 billion US dollars overnight.

In recent months, after ChatGPT was born, it quickly became popular all over the world, and discussions about the subversion of search engines also followed. Some analysts believe that more than 80% of Google’s revenue comes from advertising, and the search results page of its search engine is the most important part of displaying advertisements. Therefore, once AI-generated results replace the search engine’s results page, it will be fatal for Google.

Recently, Paul Buchheit, the former 23rd employee of Google and one of the creators of Gmail, publicly stated that the ChatGPT artificial intelligence chatbot will destroy Google, “just like the search engine completely killed the Yellow Pages phone book.”

Just the day before the Google press conference, Microsoft also held a press conference, announcing the launch of the search engine Bing (Bing) and the browser Edge equipped with AI technology. Questions can be asked directly and answers generated through search engines.

It is worth mentioning that Microsoft is currently the largest investor in ChatGPT, with a cumulative investment of more than 10 billion US dollars, and it is also the largest shareholder of ChatGPT. This is obviously not good news for Google.

According to public information, Bard is based on the large model LaMDA (Dialogue Application Language Model) released by Google at the 2021 I/O Conference, and has been developed within Google for several years. In addition, in the company’s 2022 financial report, Google has stated that it will launch a large-scale artificial intelligence-based language model similar to ChatGPT in “the next few weeks or months.”

However, it may be that the popularity of ChatGPT is too high, or it may be that Microsoft is pressing every step of the way. In the end, Google chose to rush into battle, but the result was counterproductive.

Of course, it would be a bit of an exaggeration to say that Google’s stock price plunge was just a result of a wrong answer from Bard, but investors’ concerns about Google’s search competitiveness are not unfounded. What’s more serious is that in addition to facing the challenge of ChatGPT, Google Search is also facing pressure from short videos, supervision and other aspects. The instability of the basic market may be the root cause of the sell-off of Google’s stock by investors.

The basics of advertising are the enemy

On February 2, U.S. time, Alphabet, the parent company of Google (hereinafter still replaced by Google), released its financial report for the fourth quarter and full year of 2022. The financial report shows that Google achieved operating income of US$76.05 billion in the fourth quarter, a year-on-year increase of 1%, lower than analysts’ expectations of US$76.53 billion; net profit fell 34% year-on-year to US$13.624 billion, the largest decline in eight quarters.

The advertising business has become a major reason why Google’s fourth-quarter performance fell short of expectations. In the fourth quarter of 2022, Google’s advertising business revenue was US$59.042 billion, a year-on-year decrease of 3.6%. This is the second time that Google’s advertising revenue has declined since it went public in 2004. Prior to this, in the second quarter of 2020, Google’s advertising business experienced an 8% year-on-year decline, when the epidemic caused some major customers to suspend advertising spending in areas such as travel and consumer products.

The advertising business is Google’s core business, accounting for about 80% of its revenue. According to the latest division, Google’s advertising business is mainly composed of three parts: search, YouTube and network alliance advertising. Among them, search and other business revenue was US$42.604 billion, a decrease of 1.6% from the same period of the previous year (US$43.301 billion); YouTube advertising revenue was US$7.963 billion, a year-on-year decrease of 7.8%. There was a year-on-year decline in the quarter; network business revenue was US$8.475 billion, a year-on-year decrease of 8.9%.

For a long time, search engines have been in a monopoly position in most parts of the world (except for a few countries such as China and Russia). For example, in the domestic market of the United States, Google accounts for 81% of the desktop search volume in the United States and 94% of the mobile search volume, while the market share of Bing and Yahoo is only in single digits.

At the same time, Google has also built an extensive search advertising matrix through Google Search, Google Play, Map, Gmail and other products, and Google search advertising has always been the first choice of advertisers. The data shows that from Q1 2021 to Q1 2022, the growth rate of Google search advertising revenue will maintain a year-on-year growth rate of more than 20%.

However, with the downturn of the global macro economy and the rise of short video platforms such as TikTok, the pressure on Google search advertising is also increasing. Especially since the second half of last year, the willingness of advertisers to launch has decreased. In the third quarter of 2022, the growth rate of Google’s search advertising business dropped sharply to 4.25%, and in the fourth quarter there was a year-on-year decline.

In the third-quarter earnings conference call last year, Alphabet executives said on the conference call that advertising spending related to insurance , loans, mortgages, cryptocurrencies, and gaming industries has all decreased, which has inhibited the company’s digital advertising in the third quarter. increase. In this earnings conference call, Google executives said that compared with the third quarter, many advertisers’ spending on search declined further in the fourth quarter.

In the past few years, YouTube has been one of Google’s most powerful advertising growth engines, especially in the context of search advertising increasingly facing the erosion of information flow advertising, YouTube has played a very good role in filling the gap.

However, under the influence of unfavorable factors such as intensified competition in the industry and Apple’s IDFA policy, the pressure on YouTube’s advertising business is also increasing. Data show that in the third quarter of last year, YouTube’s advertising business achieved revenue of US$7.1 billion, a year-on-year decline of 2%. This quarter’s revenue decline further expanded to 7.8%, becoming the hardest hit area for Google’s advertising business.

Like YouTube advertising, Google’s network affiliate advertising business also encountered the embarrassment of year-on-year decline for two consecutive quarters. What’s more, the future of Google affiliate advertising is even more murky as the US government believes that Google is using its advertising technology to illegally monopolize the digital advertising market.

On January 24, 2022, the U.S. Department of Justice, together with eight states including New York and California, jointly launched an antitrust lawsuit against Google, accusing it of illegally monopolizing the digital advertising market and requiring it to spin off its advertising technology business.

According to Insider Intelligence data, Google’s share of the U.S. digital advertising market will be about 28.8% in 2022 and is expected to drop to 26.5% this year.

Compared with the digital advertising market, Google has stronger “monopoly competitiveness” in the field of tools and products used by publishers and advertising companies. According to data from the US Department of Justice, Google’s “DoubleClick for Publisher” ad server has a market share of more than 90%, and the ad trading platform business (Google AdExchange) has a market share of more than 50%.

Some analysts believe that once Google is forced to spin off the company’s Google AdManager and other departments due to regulatory pressure, the commercial closed loop of its advertising business will be broken. Investment, incubation of innovative businesses such as artificial intelligence, etc. will all have adverse effects.

Google Cloud is the only bright spot

On the whole, the three segments of Google’s advertising business have experienced year-on-year declines, which is very rare in the company’s history, and the instability of the basic market has become Google’s biggest concern. However, the performance of cloud computing business, which is regarded as Google’s second curve, is still stable and has become the only bright spot in Google’s financial report.

From the perspective of revenue composition, Google’s main business is divided into three parts: Google Services, Google Cloud, and Google’s other investments (artificial intelligence, robotics, self-driving cars, medical care); Google Services is further divided into advertising business and Google’s other (Google Play , hardware, YouTube subscription revenue) in two parts.

For the whole year of 2022, Google services contributed US$253.5 billion in revenue, a year-on-year increase of 7%, accounting for about 90% of revenue, of which Google advertising business achieved a total revenue of US$224.5 billion, accounting for about 80% of revenue; Google Cloud contributed Revenue was US$26.3 billion, a year-on-year increase of 37%, accounting for about 9% of revenue; other businesses achieved revenue of US$1.07 billion, and hedging income contributed about US$2 billion in revenue, accounting for about 1% of total revenue.

It is not difficult to see that although Google’s business system is relatively complicated, its core business is mainly advertising business and Google Cloud, which together account for 89%. Among them, the advertising business is Google’s main source of revenue and profit, and Google Cloud is the infrastructure supporting these businesses, and is also regarded as the company’s second growth curve.

Former Google CEO Eric Schmidt is generally considered to be the first to propose the concept of cloud computing. Unfortunately, due to the lack of To B genes, Google Cloud has neglected to invest in the key field of cloud infrastructure, and its market share lags behind Amazon, Microsoft, and Alibaba.

Google, which first proposed cloud computing, has no choice but to become a chaser in this competition. After several coaching changes, former Oracle product development president Thomas Kurian became the new CEO of Google Cloud.

In February 2019, Kurian made his public debut as the CEO of Google Cloud at the Goldman Sachs Technology and Internet Conference held in San Francisco, and formulated a radical five-year plan for Google Cloud: “Google Cloud wants to become the second in the world, That means we have to move beyond Microsoft Azure and close the gap with market leader Amazon AWS.”

Under the leadership of Kurian, Google Cloud has increased its investment in data center construction and quickly launched Anthos, a hybrid cloud platform. With Anthos, Google Cloud customers can not only deploy Google Cloud in their own data centers, but also freely manage workloads running on third-party platforms such as AWS and Azure. Through this open strategy, Google Cloud has successfully leveraged the power of its partner ecosystem to drive adoption and growth of its products across the enterprise.

At the same time, Google Cloud has also spent billions of dollars to acquire a series of cloud computing startups, especially the acquisition of CloudSimple, which allows Google Cloud customers to easily transfer VMware workloads from local data centers to public clouds. In addition, Google Cloud has further enhanced the AI ​​strength of its cloud platform by acquiring startups related to AI chips and AI algorithms such as Cerebras, Fiddler Labs, Graphcore, and Supervisely.

Through heavy blows in multiple fields such as products, technology, and capital, Google Cloud has gradually gained the strength to fight against competitors such as Google and Microsoft, and its revenue scale has also maintained a relatively high growth rate. Since 2021, Google Cloud’s year-on-year growth rate has remained at around 40%. In the fourth quarter of 2022, Google Cloud achieved revenue of US$7.3 billion, a year-on-year increase of 32%, showing signs of a slight slowdown.

Data show that for the full year of 2022, Google Cloud achieved revenue of US$26.3 billion, a year-on-year increase of 37.3%, and an operating profit margin of -11.3%, an increase of 5.2 percentage points compared to 2021 (-16.5%).

In comparison, in 2022, Microsoft Cloud’s revenue will be US$101.2 billion, a year-on-year increase of 26.5%, and its gross profit margin will be 72%. %.

From the above data, it can be seen that compared with the two giants Amazon and Microsoft, Google Cloud still maintains a leading position in terms of revenue growth, but there is still a large gap in terms of revenue scale and gross profit margin.

The latest data from Synergy Research shows that in the third quarter of 2022, Google Cloud’s market share in global cloud infrastructure will be 11%, significantly surpassing Alibaba Cloud (5%), but far behind Amazon AWS (34%) and Microsoft Azure (21%). %) still has a large distance.

Some analysts believe that under the helm of Kurian, Google Cloud has achieved rapid development through differentiated competition and ecological layout, and has successfully developed from the original “data analysis cloud expert” to a first-class enterprise cloud platform. In the future, can Google Cloud overcome the two mountains of Amazon AWS and Microsoft Azure, and regain its own glory and status? Judging from the current situation, Google Cloud is still a long way from its goal of “the world’s second”.

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