At Google, Soaring Spending Worries

TAC for traffic acquisition costs (cost of acquisition of traffic in French). In recent quarters, however, it has become a source of concern for Wall Street. In 2017, the sharp increase in these expenses resulted in a lower operating margin. What provokes, Friday, February 2, a fall of 5.3% of the action of the giant of the Web.

24% of advertising revenues

In the fourth quarter of 2017, TACs reached $ 6.5 billion, an increase of 33% year-on-year. They now account for 24% of Google’s advertising revenue, compared to 22% in 2016. If these costs should continue to increase, “the pace of growth should slow down after the first quarter of 2018,” tried to reassure Ruth Porat, financial director of Alphabet, during a conference call on Thursday on the sidelines of the publication of the results.

The TACs consist of commissions that Google gives to its partners. These are websites that display their sponsored links or banner ads, and are paid for each click; YouTube video creators participating in the advertising revenue sharing program; and some Internet browsers, like Mozilla, the designer of Firefox, or smartphone makers, like Apple, paid for Google to be their default engine.

Mobile weight

According to Porat, the soaring TAC is mainly due to “partnership changes” – Google signed a new contract with Mozilla last year and became the default search engine of Siri, the voice software of Apple – and by the “current transition to mobile”. Since 2015, smartphones represent the majority of searches done on Google. This proportion continues to increase. But “mobile searches have higher TACs,” says Porat.

On PC, the majority of Internet users use Chrome, the browser of Google, to surf the Web. In the United States, the combined market share of Safari Apple and Firefox is less than 20%, according to data from Statcounter. In contrast, Safari accounts for 46% of smartphone traffic, compared to only 45% for Chrome. This means that a much higher percentage of searches go through a partner. According to estimates by broker Bernstein, Google has thus paid $ 3 billion in 2017 to Apple, against one billion in 2014.

Other expenses

In addition to TACs, a second factor weighs on margins: the increase in marketing expenses. For two years, Google has indeed displayed its ambitions in hardware. The group launched Home speakers, Pixel smartphones, virtual reality headphones, headphones, and even a computer. During the end of the year holidays, he multiplied advertising campaigns. As a result of these two developments, the operating margin fell to 23.5% over the whole of 2017, compared with 26.3% in 2016.

To calm down the markets, the Mountain View company gave, for the first time, an indication of the performance of its activities in cloud computing, which have a quarterly turnover of over $ 1 billion. “According to public data, we believe that Google Cloud is showing the strongest growth in the industry,” said Sundar Pichai, managing director of the search engine. Google also welcomes the “solid performance” of YouTube, despite many controversies.

In the cloud, Google wants to turn the page of its controversial contract with the Pentagon

“I’m not talking about Maven” Diane Greene immediately cuts short the conversation. The boss of the cloud division of Google refuses to return to the controversy over his participation in this project led by the Pentagon. At a conference held July 24-26 in San Francisco, California, the search engine focused on turning the page, highlighting the growth of its business in cloud computing and new features to fill its delay on Amazon and Microsoft.

Internal crisis

The subject is indeed sensitive. “Things go wrong when I talk about Maven,” says Greene. At the beginning of the year, it caused a major crisis in the Californian society. Internally, this collaboration with the US Department of Defense led to a huge protest movement. More than 4,000 employees have signed a petition calling for its abandonment. And a dozen employees have chosen to resign to protest against the use of artificial intelligence for military purposes.

Launched in autumn 2016, Maven aims to improve the analysis of video images filmed by UAVs using machine learning software (automated learning) provided by Google, which is one of the most advanced companies in this field. Its leaders saw above all in this contract of ten million dollars a gateway to other projects with the army or intelligence agencies. A promising market that is also coveted by rivals Amazon and Microsoft.

Ethical framework

Initially, Google officials had defended participation in the Maven project, described as “non-offensive”. In addition to Ms. Greene, Sundar Pichai, the Executive Director, and Sergey Brin, one of the two co-founders, spoke. At the beginning of June, however, the company gave in, renouncing the extension of the contract after its expiry in March 2019. A few days later, it published an ethical framework, committing itself in particular not to contribute to the development of weapons or monitoring tools.

“You have to be very careful about how you use these very powerful technologies,” says Greene. Google does not give up working with governments or armies. “Their projects will have to respect our artificial intelligence principles,” says Paul-Henri Ferrand, president of cloud business activities. However, the company does not specify which safeguards will ensure that its customers respect its principles.

Tools for companies

Despite the controversy, Google continues to rely on artificial intelligence. It has just unveiled new tools to allow users of its cloud offering to easily create their own image recognition, conversation or translation algorithm. “The demand is huge, from big companies to start-ups,” says Fei-Fei Li, head of artificial intelligence at Google Cloud. Many customers do not have the necessary expertise in machine learning “.

Faced with Amazon and Microsoft, Google hopes to take advantage of investments made for years to improve its own products. And his reputation in the field. The road is still long. The company generates $ 1 billion in revenue per quarter by combining the infrastructure cloud with its G Suite software suite (Gmail, Drive, Calendar). It’s ten times less than Microsoft. And six times less than Amazon, which does not market software, unlike its two competitors.

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