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Alphabet Eyes a Plan B to Its Advertising Dominance

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Vulnerability of Alphabet

Although Alphabet (GOOGL) reported strong revenue and profit growth in 1Q17, the results also showed its vulnerability: continued overreliance on advertising at a time when competition for online advertising spending is becoming intense.

Of Google’s $24.8 billion in revenues in 1Q17, advertising contributed $21.4 billion, or ~86.3% of the company’s total revenues. This revenue contribution compared with ~85.9% of revenues coming from advertising sources in 4Q16. Advertising revenues in the latest quarter increased ~18.0% annually. Google and Facebook (FB) dominate the global advertising industry.

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Eyes on non-advertising businesses

What happens if Google loses its advertising dominance? Investors and analysts have been looking to the company’s non-advertising operations for answers. Although Alphabet’s non-advertising businesses like Other Bets are growing at a decent pace, their contribution to the top line remains tiny. As a result, Alphabet may struggle to grow if the competition dilutes its advertising dominance faster than it can grow its non-advertising operations.

Revenues from Other Bets came to $244.0 million in 1Q17, up 48.0% from 1Q16. Google’s Other Revenues, including hardware sales, totaled ~$3.1 billion, up 50.0% annually. As such, Alphabet’s non-advertising operations brought in less than ~3.4 billion in revenues in the latest quarter.

What makes Alphabet vulnerable?

The challenge for Alphabet in the advertising market is that as a dominant player, it has the most to lose to the competition. Additionally, marketers showing their willingness to support smaller players like Twitter (TWTR), Snap (SNAP), and Amazon (AMZN) to challenge the duopoly of Google and Facebook in the digital advertising industry.

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