A recent article in Barron’s is suggesting that analysts are raising their price targets for Alphabet. It seems the parent company of Google is in no danger of losing online ad revenue. And the holiday season has historically provided a tailwind for shares of GOOGL stock.
But a recent book I read enlightened me to a growing threat to our fascination with, and reliance on, Google. It goes beyond the corporate culture problems highlighted by InvestorPlace contributor Dana Blankenhorn.
This is a problem that is integrated into the core of Google’s famous “system of the world” where information is centralized and free. This may not be a threat that affects Alphabet stock any time soon. But as an investor, I would be paying close attention.
Here’s Something for Your Holiday Reading List
The book I’m referring to is Life After Google by George Gilder. It seems hard to remember a life before Google, so I was curious to read what the author was talking about.
The book is written in a way that even the less technically inclined (like me) can understand. Gilder makes a compelling case for what he terms “Internet 2.0.” The central tenet of the book is that the emerging blockchain technology is the antithesis of the Google model. And in that regard is its greatest threat.
Google Created a “System of the World”
When the internet was first birthed, security was not a primary concern. In its most basic state, the internet was a medium of information. And since that information was (mostly) readily available in a variety of other forms, there was no reason to make security an essential feature.
In fact, Google itself was founded on the idea of “communication first” and that “information wants to be free.” And that’s the stated reason that Google provides access to their services for free. However, that’s not the only reason.
Although Google offers its services for free, they are not a charity. The company makes money by selling ad space. Just as Google revolutionized search, they have also used that search to transform the way they charge for ad space.
The idea is pretty simple. Our search history provides information about our personal interests. This gives Google and its big data artificial intelligence (AI) the ability to target us with “predictive” ads (i.e. ads for items that we may be looking to buy).
But Gilder’s book points out two flaws with Google’s system of the world. And those flaws are where I think investors should pay attention.
It Turns Out, Consumers Don’t Want Ads
In 2015, Apple (NASDAQ:AAPL) introduced an ad block in its iPhone. This was a direct threat to Google’s mobile ad revenues. However, as Google ran the analytics, they found that consumers liked the idea of blocking ads. This forced Google to introduce its own ad blocker. However, they were only going to block ads that were targeted by the Coalition for Better Ads. That didn’t include Google’s own ads.
But this is not taking care of the problem. Technology blogger Daniel Colin James has written that ad blocking is on the rise. Between 2015 and 2016, ad blocking rose 102%. What’s worse is that the intentional response rate was 0.03%. That can’t be a sustainable model for advertisers or for Google.
So why are online ads still growing? It’s simple math. They’re still cheaper than “traditional media” advertising. And many businesses still believe that they have to advertise online even though evidence suggests that more intentional search is moving away from Google. In fact, as of 2017, Amazon (NASDAQ:AMZN) had 52% of the product-search market. That number is undoubtedly higher today.
The Internet Is Now a Medium of Commerce
This gets to the core of Gilder’s premise. The Internet was not designed to handle e-commerce. This has spawned the creation of usernames, passwords, CAPTCHAS, and other verification devices. But despite the best efforts, true online security is really the responsibility of the user.
And security is at the core of the emerging blockchain technology. Unlike the Google model that makes security a function of a centralized network, blockchain puts security first. This puts the safety of a user’s identity, devices and property in their hands.
But for this revolution to work, individuals have to be willing to pay for that security. And as more businesses adopt blockchain technology for their supply chains, it won’t be long before individuals will demand, and willingly pay for the security that blockchain provides.
Alphabet Is Not Going Away
I fear I’m not doing Gilder’s book justice. And I’m admittedly only scratching the surface of what he predicts. But let’s be clear. Alphabet is not going away. Alphabet has the second highest market capitalization of any business in the world. Only Apple has a higher market cap. Internet search has fundamentally changed the world and will continue to provide benefits for society.
But it wasn’t so long ago that the idea of “cutting the cord” would never happen. And why would we ever need to have a computer in our pocket? If, as Gilder predicts, the blockchain economy supplants the “big data AI” paradigm that Google is built upon, then Google may have a much smaller reach into our lives. And that would bode poorly for Alphabet stock.
Should investors be worried about Alphabet during this holiday season? No. But Life After Google is an interesting book that provides a thoughtful look into the origins of Google and its potential future.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.