Amazon and Google make loads more money

Another quarter has passed for the internet barnstormers and once again we are writing about how much money they have made. This time there is a bit of a twist, investors are disappointed with one of them…

Some people are never happy. Google-parent company Alphabet reported revenues of $32.323 billion for the fourth quarter, an increase of 24% year-on-year, but missed analyst expectations sending share price down a couple of dollars. Amazon brought in $60.5 billion, a 38% increase year-on-year, beating analyst expectations and setting itself in a very solid position for new revenues.

Let’s start with Alphabet.

“Our business is driving great growth, with 2017 revenues of $110.9 billion, up 23% year on year, and fourth quarter revenues of $32.3 billion, up 24% year on year. Our full year operating income growth continues to underscore our core strength, and on top of this, we continue to make substantial investments for the long-term in exciting new businesses.”

The problem with making ridiculous amounts of money each year is that when you make a lot of money not a ridiculous amount people are disappointed. This is where Google finds itself right now. It has made a lot, but success makes people greedy. They expect the best and silver is never good enough despite it being a remarkable achievement.

One of the reasons Google missed expectations was down to Traffic Acquisition Costs, in other words, paying companies like Apple to ensure Google is the default search engine on peoples devices. The total spent on these partnerships over the last three months was $6.450 billion, roughly 24% of the total Google advertising revenues. The proportion spend versus revenues achieved through these partnerships in the same quarter of 2016 was 22%. Google expects the amount it pays third parties to increase as well.

Elsewhere in the Google business, costs are going up as well. Over 2017 R&D increased to $16.625 billion from $13.948 billion in the previous year, while sales and marketing was up to $12.893 billion from $10.485. Rising costs in R&D and marketing should not be seen as particularly unusual for any company, but such expenses will be a pain for investors.

That said, increased sales and marketing cost could be completely justified in the long run. The Google brand was everywhere prior to Christmas promoting its new smartphones and also the Google Home device. Marketing costs should probably be expected to rise again as promotion of the smart speaker will continue over the next couple of months, but it is crucial to make sure Google’s virtual assistant is in as many lives as possible.

The search advertising business model relies on scale. Google has to spend money to ensure partners are setting it as the default search engine, so if these costs go up so be it. The Google business doesn’t exist otherwise. And the same could be said of the smart speaker. Google will make advertising revenues off these devices, but it has to make sure they are in as many homes as possible first. Scale is critical, so Google cannot be cheap.

Now over to Amazon.

Revenues stood at $60.5 billion, a 38% increase year-on-year, beating analyst expectations. Operating income increased 69% to $2.1 billion as well. AWS posted a 45% rise to $5.1 billion for the three months. Subscription sales for Prime and other subscriptions (such as audiobooks) increased 49% to $3.177 billion as well. Amazon didn’t detail how many smart speakers it actually sold, but it will be at least on par with Google if not winning. As with Google, Amazon has been going big on its smart speaker over the last couple of months in anticipation of a new marketplace.

“Our 2017 projections for Alexa were very optimistic, and we far exceeded them. We don’t see positive surprises of this magnitude very often – expect us to double down,” said Jeff Bezos, Amazon CEO.

“We’ve reached an important point where other companies and developers are accelerating adoption of Alexa. There are now over 30,000 skills from outside developers, customers can control more than 4,000 smart home devices from 1,200 unique brands with Alexa, and we’re seeing strong response to our new far-field voice kit for manufacturers. Much more to come and a huge thank you to our customers and partners.”

The team noted the number of people shopping through their speaker using the voice UI exceeded their expectations. Perhaps the marketplace of tomorrow, where a mobile device is secondary and all our interactions will be conversational, is closer than we think.

But that is the battle of tomorrow, one which will be bitterly fought with Google as the march for scale and customer touch points continues, today Amazon is flying. It is showing the world how to do content properly with it original productions, Amazon.com continues to be the world’s most popular eCommerce site and AWS is leading the way in the cloud computing market.

Amazon and Google are currently dominating the digital rankings and with the effective moves already made in the smart speaker world, their virtual assistants will dominate tomorrow’s voice enabled market place as well. If you can name a company which is better positioned to make even more money moving forward we’ll buy you a drink.