Google Inc., which is now known as Alphabet Inc., is actually a holding company that trades under two different ticker symbols: NASDAQ: GOOGL and GOOG. Alphabet is similar in structure to Warren Buffett’s Berkshire Hathaway (NYSE: BRK.B).
Like Berkshire Hathaway, it has a large number of subsidiaries that operate in a wide variety of businesses. Another thing Alphabet has in common with Berkshire Hathaway is that it offers two classes of stock: Class A, known as GOOGL, and Class B, which trades as GOOG.
The core of Alphabet’s business is the Google search engine, which is still the world’s most popular search tool. The head of Google’s search engine, Amit Singhai, claims that Google does 100 billion searches a month. The next biggest competitor, Microsoft’s Bing, only performed 35 billion searches, or about one third of Google’s. Google’s business efforts are incredibly profitable; it reported having around $69.8 billion in the bank on June 6, 2015.
Google makes its money by charging for advertising that appears with its searches. It is also increasingly involved in ecommerce, including sales of products such as insurance and financial services. Alphabet also owns a wide variety of companies involved in research and development. These include some high-profile projects such as self-driving cars and robotics.
Google’s management team radically reorganized the company in July 2015 by creating the Alphabet holding company. Naturally, such a move could make Google very vulnerable to changing political, economic, social, legal, technological and environmental, or PESTLE, conditions. Therefore, it is a good time to see how PESTLE could affect this tech giant.
Political Factors That Could Affect Alphabet’s Future
There is widespread criticism that Google is a monopoly. This has led to antitrust action, particularly in Europe. There have been calls for Google to be broken up or for it to change the way it conducts searches.
There has also been some criticism that Google has too much control over the flow of information. Social scientists Robert Epstein and Ronald E. Robertson have even made the claim that Google’s search results could influence the outcome of elections. This could lead to calls for nationalization or stricter government oversight of Google.
Google is one of many U.S. companies that stashes cash in foreign bank accounts to avoid high American corporate income taxes. There is growing political pressure in the United States to force these companies to bring that money into the country. If this occurs, it could cut Google’s cash flow. This could also force Google to make costly foreign acquisitions just to avoid taxes.
Additionally, Google has not been able to enter some potentially lucrative markets, such as China, because of political reasons. This could limit the company’s future growth.
Economic Factors That Could Affect Google
Alphabet has accumulated a huge amount of cash, which makes it very vulnerable to inflation. A sudden drop in the value of a currency could reduce the company’s value.
The large amount of money Google keeps overseas makes it very vulnerable to exchange rates and the currency market. If the dollar is strong, Google could lose a lot of money if it is forced to bring a lot of cash back into the United States. The company could also lose money if the dollar is weak because it could be forced to exchange a stronger currency for a weak dollar.
A sudden drop in Alphabet’s high stock price could hurt the company by reducing its market capitalization.
Social Factors That Could Affect Google
- A decline in the use of traditional laptop and desktop computers, which historically have been the most popular means of accessing Google. Tech Crunch reported that more searches were done from mobile devices than computers for the first time during the summer of 2015.
- Growing use of social media solutions such as Facebook and WhatsApp for activities traditionally done on the Internet. This includes search, streaming video, shopping and money transfer.
- Google has not been able to translate its success in traditional search to other segments of the market, including the vital shopping search. Amazon is now the top search tool for online shoppers, Forester research reported. Around 30% of all online shoppers start their search at Amazon. That makes it hard for Google to cash in on such transactions.
- A decline in traditional media such as television is forcing content providers such as TV networks and movie studios to develop their own content delivery platforms that compete directly with YouTube. Some companies such as Amazon are now offering video content that cannot be accessed via YouTube.
- Popular suspicion and distrust of Google. Many people view Google as sinister and too powerful. Some web users now deliberately seek out alternatives such as Duck Duck Go simply to avoid contact with Google.
Technological Factors That Are Changing Google’s Business
- Growing use of mobile devices to access the Internet. Some of these devices, including Apple products, have proprietary search engines that compete with Google.
- Some competitors; notably Amazon and Microsoft, have devised search algorithms that are as popular and effective as Google’s. Amazon has been able to dominate shopping research with its solution. There is a strong possibility that a competitor could devise a better search solution than Google’s at some point.
- Growing sophistication of social media solutions and instant messaging. Solutions like WhatsApp and Facebook Messenger can now be used to send news, audio messages and even streaming video. Programs like Venmo and WeChat can be used to make financial transactions. This provides an alternative to Google’s products that is not computer based.
- The growing sophistication of apps. It is easier than ever for designers to come up with alternatives to Google’s products.
- Many companies are now designing proprietary apps to allow customers to bypass search engines. Examples of this include shopping apps.
Legal Factors That Could Affect Alphabet’s Business
- Google is increasingly entering heavily regulated fields such as finance, insurance, telecommunications and automobiles. This could place severe restrictions on its operations.
- Liabilities and legal costs could increase as Google enters fields like insurance and experiments with delivery services.
- Successful antitrust action in Europe could give rise to similar efforts elsewhere, particularly in the United States. This could lead to expensive litigation and efforts to change Google’s business model.
- Established players in industries like insurance could use litigation in an effort to keep Google out. This could increase legal costs and lead to court rulings that could limit Alphabet’s expansion.
- Alphabet owns large numbers of patents. This invites litigation because of disputes over ownership.
Environmental Factors That Could Affect Alphabet’s Future
- Google’s business model is heavily dependent on data centers and other Internet infrastructure that use large amounts of electricity. Efforts to control global warming by encouraging the use of costlier green energy sources to produce electricity could raise Alphabet’s operating costs. At some point Google might not be able to offer free services as it has in the past.
It remains to be seen whether Alphabet’s new business model will insulate it from these factors. If it can successfully protect the company, Google could be more profitable than ever.