July 23, 2018 / 9:41 PM / 5 months ago

Breakingviews - Europe can’t stop Alphabet profit machine

The neon Google sign in the foyer of Google's new Canadian engineering headquarters in Kitchener-Waterloo, Ontario January 14, 2016. REUTERS/Peter Power

NEW YORK (Reuters Breakingviews) - Europe can’t stop the Alphabet profit machine. Regulators have tried to throw sand in the gears of the internet goliath, but blowout quarterly figures show Google’s parent is in a strong position. Europe will need more than stringent data rules, giant fines, and hearings to slow the company’s growth.

Google and Facebook dominate internet advertising, and that’s providing a massive tailwind to Alphabet, with its market capitalization of roughly $830 billion. Revenue grew 26 percent to $32.7 billion in the three months that ended on June 30. Digital advertising revenue still accounts for less than half the $628 billion worldwide ad market, according to eMarketer, so there are potentially years of growth left ahead. Moreover, the massive amounts of data Alphabet collects, and the technical experience it has gained in running its network, gives the company a leg up in competing in new businesses, such as those based on machine learning and cloud-based services for enterprises.

Sure, Europe has given Alphabet a slap. The fine it levied against the firm for using its Android system in an anti-competitive manner to entrench itself in search and other markets reduced earnings by $5 billion. The fact the company offered figures excluding fines for both the second quarter and the same period last year is telling: such things aren’t limited to any one quarter. Europe’s new General Data Protection Regulation, which oversees consumers’ privacy and strictly limits how internet firms use their data, also came into force during the quarter, but had no noticeable effect.

Stripping out the fine to look at what’s actually happening to its business, Alphabet earned $8.3 billion and blew past analysts’ earnings estimates by over 23 percent. Even though these numbers were puffed up by new accounting rules on equity investments, Google is churning out extraordinary amounts of profit. Europe and other regulators will have to bring out bigger guns if they hope to disrupt Alphabet’s dominance.

Breakingviews

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