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The Core of Alphabet Inc (GOOGL) Stock Is at Risk

Multinationals' ad strike against Google and YouTube directly threatens the company's business model and GOOGL stock

GOOGL - The Core of Alphabet Inc (GOOGL) Stock Is at Risk

As the weather has begun to warm, some of our best writers here at InvestorPlace have turned a little cautious on Alphabet Inc (NASDAQ:GOOGL), the artist formerly known as Google.

GOOGL stock “carries some risks,” wrote Lawrence Meyers. Chris Tyler and Nicholas Chahine recently suggested option trades on the stock, rather than an outright buy, and Tyler even offered a bearish strategy. Even I recently put an “if” in the “Google $1,000” prediction.

All these stories were written before the latest news to hit the company.

That news is the Google “ad strike,” which is highlighting the Achilles heel of the company’s entire business model. It threatens GOOGL stock, and it will take more than cosmetic surgery to fix.

Algorithms Killed the Publishing Star

The problem lies in Google’s “programmatic advertising” model, which uses intrinsic targeting to decide which ads to place in front of readers.

With an intrinsic model, ads are placed based on the demographics and browsing history of users, rather than content they are looking at. Any website can get the ads, even if your page has a jihadi video on it, or anti-gay hate speech, or something else an advertiser might find objectionable.

Content that YouTube will take for upload might not be the kind of content Enterprise Rent-a-Car, which recently joined the strike, wants its ad to appear next to.

GOOGL stock chart

Between them, Google and Facebook Inc (NASDAQ:FB), which also uses programmatic computer-driven advertising, should take 46% of all digital ad spending this year, over $100 billion. The global market for online ads is approaching $600 billion, nearly 40% of all advertising.

Google has been aware of the danger for some time, and its efforts to correct it by taking ads off certain sites can be as ham-handed as its advertising policy. That’s because banning decisions are still being made by computers, not by people.

People are good at gaming systems, and artificial intelligence isn’t foolproof.

The Real Problem Is Bigger

GOOGL is not going to get any support from publishers here, because it’s publishers who have been getting killed by programmatic advertising.

The whole point of publishing is to create a premium audience, aggregating people based on their location, their industry or lifestyle, and seek a premium price for reaching those people. Programmatic advertising destroys this model, allowing advertisers to pick off readers one by one, buying access to them all at a run of network price.

Thus clickbait, whether “fake news” or not, is crowding out real news. No one is maintaining standards. The standard for what can be published is different from the standard of what an advertiser wants his soap suds sold next to.

Phone Companies Make Things Worse

This is not a question that “more data” is going to fix.

The recent move to kill Internet privacy, allowing Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T) — both of which have joined the ad strike — to sell their data on consumers just throws more data on the pile, without doing anything to solve the problem.

The problem is that advertisers want to control where their message goes. Each advertiser has its own standards and practices in this area. From a technical perspective, it would require the creation of thousands of blacklists for advertisers and keeping ads off sites that violate standards, even if the content is legal. This creates more trouble, as sites with legal content dispute computer decisions over their acceptability.

There is another solution. Create a premium tier of highly-qualified sites and pay them premium prices for their audiences. That’s what the big publishers want. It’s a strategy that would keep small publishers from the Web advertising pie, because they would not be able to pay for the vetting, but it sure would make the New York Times Co (NYSE:NYT) happy.

This is a mess that goes to the heart of what GOOGL is all about, self-service content meeting self-service advertising. Self-service is the goose that laid Google’s golden eggs — no other unit of the company can take up the slack.

Investors need to take this as seriously as a heart attack.

Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he was long GOOGL and FB.

 


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/alphabet-inc-googl-stock-risk/.

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