Silicon Valley – and Wall Street – have a new king. Alphabet, the company formerly known as Google, looks set to become the world’s largest publicly traded company on Tuesday thanks to a spike in its share price, following exceptionally good results and a decision to come clean on how its makes and spends its money.
Less than a year after it stormed past Berkshire Hathaway, ExxonMobil and Microsoft on its way to the top, the company’s value has passed Apple. Tuesday will see whether it can hold on to those gains but the battle is on.
In the past six months alone, since Google restructured to become Alphabet, its cap has risen by $200bn (£139bn), almost doubling its total value. That’s all the more astonishing given that, in that period, Alphabet’s products have remained much the same as they always have been. There’s no breakout new hit to thank and no major victory in the legal, political or commercial realm. It’s just solidly, steadily bringing in billions of dollars a year.
Commercially, when we say Alphabet, we really mean Google. The old company still represents the vast majority of Alphabet’s revenues, and almost all of its major businesses (including search, maps, YouTube, advertising and Android) still sit under Google and its new chief executive, Sundar Pichai. The rest of Alphabet may represent the bets on the industries of the future but for today, it’s Google that pays the bills.
And it’s not just old Google that pays the bills at the new Alphabet – it’s also the oldest parts of old Google. The Google segment’s revenues topped $74.5bn in 2015 and it made profits of $23.4bn. While it has a profitable and popular advertising network, placing ads on other sites, the majority of the advertising revenue it gets still comes from its own websites: $13.037bn of it, to be exact.
It shows how strong the foundations are in the house that Larry Page and Sergey Brin built. Search is still the jewel in Google’s crown, still the thing it does best, and still an enormous money-spinner.
That’s down to two main reasons, one heavily discussed, the other rarely noted, but both with their roots in the early days of Google. The former is PageRank, the invention that sparked the whole company. Dating back to Page and Brin’s days at Stanford, it replaced the clunky search indexes of the age with a slick algorithmic approach. Rather than manually vetting the internet, as the earliest search engines had done, or simply ranking every page by how many times the search results appear on it, as the next generation did, PageRank sees a link to a page as a vote. The more links a page has to it, the more respectable it is. And the algorithm is recursive: a link from a page that itself has a lot of links is more valuable than a link from an unknown page.
That meant that on launch, Google’s search experience was astronomically better than any of the competition – and it paid off. The company was founded in August 1998, and a month later had 10,000 searches a day. Six months after it was founded, it had 500,000; three years later, it had 150m. According to the most recent figures, it now receives around 3.5bn searches a day.
But the other facet of Google’s success came from something that was only realised once it had already achieved that dominance: there is nowhere more valuable to advertise than on a search results page.
By definition, if you search for something, you are interested in finding out about it. That makes you more valuable to advertisers than almost any other pair of eyeballs. Yes, advertisers want to win over people who have never even considered their product but more than that, they want to generate sales. If you search, for “holidays” or “laptops” or “penis enlargement” or “fake Facebook friends” – and Google doesn’t judge – then you demonstrate yourself more likely than anyone else to be on the cusp of opening your wallet and paying.
So advertisers are willing to hand over huge amounts of money to appear on the search results page: the most expensive keywords, on searches for things such as lawyers and health insurance, can cost up to $50 per individual click.
The realisation of the value of search is what led Google to so aggressively safeguard the key experience. Compared to early–00s competitors, such as Yahoo and Ask.com, the Google homepage was, and still is, a serene affair. Moving from Page and Brin in the early days, custody of the homepage ended up with Marissa Mayer, now CEO of Yahoo. In a 2005 profile in Fast Company magazine, she was described as the company’s high priestess of simplicity. Her job, she said, was as a gatekeeper: “I have to say no to a lot of people.
“Google has the functionality of a really complicated Swiss army knife, but the homepage is our way of approaching it closed,” she said. “It’s simple, it’s elegant, you can slip it in your pocket, but it’s got the great doodad when you need it. A lot of our competitors are like a Swiss army knife open – and that can be intimidating and occasionally harmful.”
The homepage has survived almost 20 years, but while desktop search is still a huge money-spinner for the company, it’s also the past. The future of advertising is in two very different areas: mobile and video. And in two acquisitions a little more than a year apart, Google sorted out how it would deal with those trends.
One came in October 2006, when Google bought YouTube for $1.65bn. Founded in February 2005 by Chad Hurley, Steve Chen and Jawed Kari, the site had already established itself as the leading destination for online video by the time of its acquisition. Content was watched on YouTube 100m times a day. Now, that’s up to “billions” every day.
At the time of acquisition, YouTube didn’t really have a revenue model (cofounder Hurley said the company was exploring “lots of options”; both he and Chen ended up leaving Google shortly after the acquisition, while Kari had already left the company soon after its creation). But Google did: advertising. Both preroll video ads and popup still ads exist on the site now, as does a subscription tier for those who want ad-free viewing and exclusive content.
It’s paid off. Ad industry analysts estimate that YouTube’s ad revenue grew 40.6% last year, reaching $4.28bn worldwide. “As Google continues to diversify its ad offerings, we expect YouTube to play an increasingly important role to Alphabet’s earnings,” said eMarketer analyst Martín Utreras.
But the more important acquisition came quietly, a little more than a year before Google splashed billions on YouTube. In August 2005, Google spent $50m on Android, a mobile operating system being developed by former Apple, Microsoft and Philips employees led by Andy Rubin. Android had been in development since 2003, but wouldn’t reveal its first product until November 2007, two years after the Google acquisition. These days, the system is so linked with Google that it’s difficult to imagine it having a prior existence.
Compared to YouTube, Android might look like an underperforming investment. In its entire lifetime, the platform has generated just $31bn in revenue, from mobile advertising and from taking a cut of sales of apps and media. But that comes from the Google strategy of giving the operating system away for free, rather than trying to profit from the sales of handsets (as Apple does), or from the license fee for the software (as Microsoft does, in a strategy that saw it doomed to irrelevance in the mobile age). It may not generate cash, but it paid dividends for Google in another way: there are now 1.8bn Android phones in the world, four times as many as there are iPhones. Picked at random, any given smartphone is probably running Google’s software.
In the mid–00s, Google was buying companies in preparation for the battles of the following decade. That’s a strategy which it has continued today. In January 2014, Google bought DeepMind, a London-based “deep learning” startup, for £400m. The company was founded by former child chess prodigy and neuroscientist Demis Hassabis, who had built a career in gaming with developers Bullfrog in the 1990s, and has no smaller a goal than developing computers that think like humans.
The sort of technology DeepMind builds is already working its way into Google’s services, from image searching that can recognise the contents of a picture to voice recognition technology that can understand the meaning of a sentence rather than just its keywords, but the flagship products from the acquisition still veer heavily to the pure research end of the scale. In January 2016, it made headlines with the first computer that was capable of beating a professional player of the ancient Asian boardgame Go, a feat many had considered a decade away.
DeepMind still sits under Google proper in the Alphabet structure, but other branches of the firm have the freedom to spread their wings. One example is Tony Fadell’s Nest, a home automation company famous for its smart thermostat and smoke alarm. Founded by Fadell, who is famous for his contribution to the development of the iPod at Apple, it’s developing a reputation for hardware design that Google itself still lacks. It also embraces the distance from the more privacy-invading aspects of its sibling company: for many, the idea of inviting Google into their homes still seems unappealing.
While Alphabet is on the up, there’s another factor at play in how it came to be the biggest company in the world: the downward trajectory of Apple. Where Alphabet has put $200bn on to its market cap, Apple has lost the same, the victim of fears that the iPhone, iPad and Mac all seem to be stumbling in the marketplace at the same time (with the Apple Watch, the company’s fourth major product line, still apparently a minor force in revenue terms).
For Alphabet to stay above Apple, then, isn’t just up to what Brin, Page and Eric Schmidt do; it also relies on a continuing shakiness down the valley in Cupertino. Apple still makes vastly more money than Alphabet, and takes more profit. But the consensus as to who owns the future has shifted – for now.