Big tech is embracing privacy. That’s bad news for the competition, and it is going to get much worse.
And much of this push is thanks to Apple (AAPL) CEO Tim Cook. He began a user privacy crusade two years ago with a speech in Brussels. According to a CNBC report, Cook took thinly veiled swipes at Facebook (FB) and Alphabet (GOOGL). Without mentioning names, he derisively branded their business models as “surveillance capitalism.” He asked regulators to ban software that tracked users’ browsing history.
But this privacy push, meant to protect users, will actually serve to strengthen established companies. Smaller firms and start-ups won’t be able to compete. After all, they rely on third-party tracking software to reach their target audience.
Enacting adtech barriers helps the biggest firms, while pummeling the smaller players. Cook inadvertently started a movement that will put many Facebook and Google competitors out of business. Ultimately, these firms will become even more dominant.
Related post: Apple, Alphabet & the Privacy War
Five key advertising associations wrote a letter of opposition last week. They claim the new changes are “a systemic threat to the economic foundation of consumer Internet services.” They believe consumers, as well as start-ups and smaller adtechs, will suffer in this new internet landscape.
But Apple has an unexpected ally in this fight. Google, once targeted by Apple for its lax privacy regulations, is also looking to eliminate third-party tracking software — commonly known as cookies. Last week, Google announced its goal of making third-party cookies obsolete by 2020.
Killing cookies may hurt smaller start-ups, but it’s a massive win for Alphabet shareholders.
It took a while for managers and investors to see this opportunity. After all, Alphabet shares sank below $1,000 in the aftermath of Brussels. The prospect of regulation, and later political plans to break up Facebook and Alphabet, all led to investor gloom.
But this pessimism was misplaced.
In a national poll of trusted brands released last week, Morning Consult and Brand Intelligence found consumers placed Google third, behind the United States Postal Service and Amazon.com (AMZN).
Given the constant attacks from competitors, pundits and politicians, these results might come as a surprise. However, in the real world, Google has earned consumer trust to do the right thing. Say what you will about Google — people trust its software. And this trust puts Alphabet in an enviable position.
At $1,479 at the end of trading last week, Alphabet shares crossed the $1 trillion valuation milestone. Ad Age notes that its Chrome internet browser has 69% of the desktop market. It helped the firm account for $58 billion in revenue in 2019, an increase of 17% year-over-year.
Justin Schuh, the director of Chrome engineering, wrote in a blog post on Jan. 14 that the initiative to remove third-party tracking software will make the web more private and secure for users. It will also give users more control of their personal data. It’s hard to argue against that.
More importantly, it puts Google on the right side of the privacy debate. It forces Google critics into the unenviable position of defending tracking software from mostly unvetted third-party vendors — a losing argument.
For shareholders, this is a gift. Without browser tracking, adtech competition is dead. Ultimately, this will mean larger margins for Google and even larger market share.
The transition comes as the company is also moving to grow new revenue streams outside of its core advertising business. Waymo, its self-driving car business, is in full autonomous trials in Arizona. And Google Cloud has set ambitious sales growth goals through 2023.
Related post: Real Autonomous Cars Hit the Road in Arizona
Despite the share price strength, Alphabet shares still trade at only 27x forward earnings and 6.5x sales. Given what is possible in its biggest business within two years, these metrics are inexpensive.
Smart investors can see the writing on the wall. Once Google gains a larger market share, profits will soar. For now, you should keep buying into any weakness.
Best wishes,
Jon D. Markman
