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Googling Through Alphabet’s Bag of Bulging Businesses (Part I)

There appears to be a common thread running through Google's parent Alphabet's strategic vision, and execution across the markets it enters and operates. It is well known that Alphabet has been a highly disruptive force in online digital advertising, however, it appears this is not a one-off situation. There are several similar industry entry strategies, at varying stages of development within Alphabet's portfolio today.

– Amit Nath

Having observed Google’s parent Alphabet for several years, there appears to be a common thread running through its strategic vision and execution across the markets it enters and operates. It’s not a unique view that Alphabet has been a disruptive force in online digital advertising, having completely changed the basis of competition within that industry over the last ~20 years. However, it appears this is not a one-off, with several similar examples visible within Alphabet’s portfolio, at varying stages of development.

At a high level, Alphabet consistently gives away its infrastructure for free in order to attract users/developers/partners to its platform, where it extracts rents in parallel to often offering its own competing products. We have identified several examples of Alphabet operating under this framework and are outlined below:

Online Digital Advertising

  • The platform strategy is most clearly observed in “Google Search” which is the infrastructure that Alphabet makes available to the public for free, but charges advertisers to have their websites associated with desired words/ phrases. Advertisers can only buy these keyword associations directly from Google via auctions through “Google Ads”, Alphabet’s online advertising platform
  • In addition to Search results, Alphabet facilitates advertising on 3rd party websites and apps (aka publishers /content owners) who make space available on their user-interfaces for advertisements (banner/display/video ads). Google is extremely dominant in this space and reportedly holds “at least 70% market share” in 3rd party ad inventory according to the Wall Street journal. This inventory is placed on various ad marketplaces where advertisers’ bids are matched against ad inventory on Google’s “Ad Exchange” (aka AdX), which is the world’s largest marketplace with ~50% global market share and also offers non-Alphabet backed ad inventory as well 
  • Essentially Alphabet has established itself as a gatekeeper at every layer between consumers (the Google sites), advertisers (ad market places), and websites (ad inventory pipe) while retaining strong customer relationships and deep data pools of their behaviors /preferences

Android Operating System

  • Alphabet gives away its Android infrastructure (open source software) which now holds the largest mobile installed base in the world with >2 billion Monthly Active Users (MAUs). Alphabet’s monetization engine is the Play Store platform where developers pay 15-30% commission on apps sold. Alphabet also monetizes advertising tied to mobile web apps (Chrome, Search, Maps, YouTube, etc) which generally come pre-installed on Android devices
  • Alphabet also produces its own handsets (Pixel) but that is not a significant focus, with Samsung, LG, etc fulfilling the supplier role in the value chain adjacent to Alphabet’s platform. The Google Play Store has ~2.8 million apps available for download

Cloud Computing

  • Google Cloud Platform (GCP) holds the number three position in cloud behind Amazon (AWS) and Microsoft (Azure). Given the lead and vast, global infrastructure base AWS/Azure have, GCP appears to be using its infrastructure offering as a loss leader with multiple reports that GCP is pricing at levels AWS/ Azure won’t compete (not worth it). This is unsurprising given Alphabet’s possible strategy of giving away infrastructure and focusing on the platform layer 
  • Perhaps the clearest indication of Alphabet’s platform strategy in cloud came in mid-July at its virtual “Cloud Next 2020” event, when it announced its flagship cloud data warehouse engine, BigQuery Omni (security, AI, analytics, ML, etc) would be made available on any cloud infrastructure including AWS / Azure. Interestingly, Big Query Omni is the major competitor to Snowflake (SNOW), the recent, high profile, silicon valley IPO that Warren Buffet invested in

 

In part II of this series, we will look at four more areas that Alphabet is putting this platform strategy to work, namely TV advertising, autonomous driving (Waymo), eCommerce, and home automation.

At Montaka Global, we aim to focus our expert deep sector and market knowledge on selecting excellent businesses that are long-term winners coupled with robust valuation discipline. Alphabet firmly fits within these parameters.

Montaka owns shares in Alphabet.

Amit Nath is a Senior Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.

Our Montaka Active Extension strategy strives for maximised return over the long-term. Owning the Montaka long portfolio typically scaled up to approximately 130 percent - and the Montaka short portfolio typically scaled down to approximately 30 percent – this strategy results in a net market exposure of approximately 100 percent most of the time.

Our Montaka variable net strategy strives for significant downside protection – but with minimal upside reduction. Focused on owning the world’s great and growing businesses when they are undervalued, while managing a portfolio of short positions in businesses that are deteriorating, misperceived, and overvalued, this strategy is our flagship long-short

Our Montgomery Global strategy strives to act as a core, high conviction, global portfolio holding. Consistent with the long portfolios in our Montaka strategies, this offering is focused on owning the world’s high quality, undervalued businesses – and cash when appropriate – to outperform its benchmark. Branded as “Montgomery Global” in Australia to reflect a key.

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Our Montaka Active Extension strategy strives for maximised return over the long-term. Owning the Montaka long portfolio typically scaled up to approximately 130 percent - and the Montaka short portfolio typically scaled down to approximately 30 percent – this strategy results in a net market exposure of approximately 100 percent most of the time.

Our Montaka variable net strategy strives for significant downside protection – but with minimal upside reduction. Focused on owning the world’s great and growing businesses when they are undervalued, while managing a portfolio of short positions in businesses that are deteriorating, misperceived, and overvalued, this strategy is our flagship long-short

Our Montgomery Global strategy strives to act as a core, high conviction, global portfolio holding. Consistent with the long portfolios in our Montaka strategies, this offering is focused on owning the world’s high quality, undervalued businesses – and cash when appropriate – to outperform its benchmark. Branded as “Montgomery Global” in Australia to reflect a key.