Why Google can’t stop investing

Google's parent, Alphabet, must keep investing heavily in the crucial growth area of cloud computing.

It seems "hard to quibble with the continued success of Google's advertising business", says Shira Ovide on Bloomberg Gadfly. Advertising revenue at Alphabet, Google's parent company, rose $12bn last year, meaning that "in a single year Google found new business that was equivalent to half of Facebook's total yearly sales".

But the firm has a potential weakness. Advertisement sales on third-party sites, where Google acts as a middleman, are growing much more slowly than those on its own sites (web search pages, YouTube, Gmail and so on). If Google's own sites were to decline in popularity, it would leave the firm vulnerable. Just look at once-dominant Yahoo to see how that can happen. "Technology changes quickly and can turn today's internet stars into tomorrow's internet losers."

Hence investors' views on how Alphabet should spend its cash are "strangely strict", says the Financial Times's Lex column. The firm's shares dipped 3% after it announced its results last week. Markets were unhappy that profits lagged behind revenues while capital expenditure surged more than 50% to $3bn. They're concerned that Alphabet is still "flinging money" about.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

But that's a very short-sighted view. Alphabet, like Amazon and Microsoft, must keep investing heavily in the crucial growth area of cloud computing. For these firms, the real risk is not profligacy. "The biggest danger is not spending enough."

FTSE 100 firms "say they must dole out vast amounts to their chief executives to stop them being poached by rivals", says Jim Armitage in the Evening Standard. That's a myth. "Hardly any big-name chief executives go from running one FTSE 100 company to another. Still fewer get helicoptered in from other industries." So the threat of them being lured away from a job that's likely to be the pinnacle of their career is tiny.

Take Imperial Brands' chief executive Alison Cooper, for example. "There are only three other global fags firms to whom she could defect even if there was a vacancy. And after BAT buys Reynolds, that'll become two." Cooper may be an excellent chief executive, but she's unlikely to be going anywhere soon. That's why shareholders thought her potential £8.5m pay deal looked so outlandish and wanted the board to ditch it which they now have. "That should send an earthquake through other boards." With Downing Street talking tough on fat cats, "this could be the year shareholders finally reset directors' pay to more rational levels."

Tracey McDermott, the former acting head of the Financial Conduct Authority (FCA), is the latest former regulator to step through the revolving door between the FCA and commercial banks, says Alistair Osborne in The Times. She's just landed her "dream job" at Standard Chartered as head of corporate, public and regulatory affairs.

"Maybe nobody cares that Ms McDermott was regulating her new employer only seven months ago but all looks far too cosy just as it did when Sir Hector Sants, chief of the regulator's discredited predecessor the Financial Services Authority, took his joke regulatory skills to Barclays." McDermott no doubt will behave with integrity, "but it would be far better if FCA managers were barred from taking a job at a regulated firm for at least two years".

Ben Judge

Ben studied modern languages at London University's Queen Mary College. After dabbling unhappily in local government finance for a while, he went to work for The Scotsman newspaper in Edinburgh. The launch of the paper's website, scotsman.com, in the early years of the dotcom craze, saw Ben move online to manage the Business and Motors channels before becoming deputy editor with responsibility for all aspects of online production for The Scotsman, Scotland on Sunday and the Edinburgh Evening News websites, along with the papers' Edinburgh Festivals website.

Ben joined MoneyWeek as website editor in 2008, just as the Great Financial Crisis was brewing. He has written extensively for the website and magazine, with a particular emphasis on alternative finance and fintech, including blockchain and bitcoin. 

As an early adopter of bitcoin, Ben bought when the price was under $200, but went on to spend it all on foolish fripperies.