Alphabet – All the wrong moves.

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I am increasingly troubled with the outlook for Google.

• The outlook is becoming increasingly uncertain as Google is running out of growth and its moves to rectify the situation are not convincing in any regard.
• Google, or Alphabet as we must now call it, has unfurled three new strategies to halt the inevitable decline in its growth rate and unfortunately, I don’t think that any of them are going to work.
  • First: China. After leaving the market 5 years ago, Google needs to get back in because growth elsewhere is drying up.
  • Unfortunately, during that time 4 local giants have emerged each of whom have already built a very sizeable position in the home market.
  • Furthermore, I continue to believe that even if the Chinese allow Google back into the market, it will be competing with one arm tied behind its back (see here).
  • Google has missed this opportunity and strategic investments (such as Mobvoi) are very unlikely to help.
  • I see the Chinese market as Chinese ecosystems for Chinese users with very little foreign presence other than Apple.
  • Second: Video. Google has followed in Axel Springer’s footsteps (see here) and launched a subscription service called YouTubeRed for YouTube which will be free of all advertisements.
  • To sweeten the deal, users will be able to download videos for offline viewing.
  • This is Google simply allowing users to pay with cash for the YouTube service rather than with personal data and advertisements.
  • The weakness of this strategy is that the subscription at $9.99 per month is so ridiculously expensive that I think that it will get no traction.
  • Third: Enterprise. Google has launched a promotion for the enterprise whereby companies that switch to Google Docs do not have to pay until their current contracts expire.
  • Google Docs currently costs $50 per employee per year which could amount to a very significant discount for a company with hundreds of employees.
  • I think that this would have been attractive 2 years ago when Office was only available on Windows and was very expensive.
  • Now Office is available for free on smartphones and tablets with screens under 10” in size and includes most of the basic editing functions that are possible on those devices.
  • Office is much more widely used and despite claims to the contrary, the fidelity of converting an Office document to Google Docs and back again is poor.
  • Furthermore, Office 365 offers much more than just documents with enterprise class communications, cloud storage and collaboration.
  • Gmail and hangouts can hardly be described as enterprise class either in terms of their functionality or their robustness and stability.
  • I think that this push from Google is coming too late as Microsoft has already done enough to remove the incentive to use anything else.
  • Its huge installed base which regularly share documents with each other is another major barrier to switching.
• The net result is that I don’t think that these three strategies are not going to drive a resurgence of growth which consequently remains almost completely dependent on Android.
• This is where I get worried because RFM research (see here) has found the first signs of a weakening in Google’s ability to control Android.
• If this continues, then Google will no longer be able to dictate terms to Android device makers meaning that its revenue growth Android may well come under pressure.
• When I take this on-top of the other challenges that Google is facing in Android and the recent rally in its share price, I completely lose my enthusiasm.
• RFM estimates that the shares are worth $636 if nothing goes wrong with its revenue growth from Android.
• Hence, it all looks like downside from here.
• Selling Google to finance a position in Microsoft, Facebook or even Samsung looks like a sensible move.