Logic in Alphabet’s AI ambitions

Gmail offers to finish your sentences. Critics compare it to an overfriendly waiter. Its Silicon Valley parent puts it in more grandiose terms: “smart compose” is an example of Alphabet’s efforts to bring the benefits of artificial intelligence (AI) to everyone, it says.

This ambition has logic. Staying at the leading edge of technology should help it hold on to its dominant position. But the costs are high. Research & development led to a steep increase in spending in 2018. That knocked three percentage points off operating margins, which fell to 21%. The outlay rattled investors briefly. Even so, the shares are priced at 24 times 2020’s earnings, a fifth above its 10year average.

Alphabet’s results are light on detail. But its spending fits a purpose. Its experts use AI to automate marketing campaigns for small and medium-sized businesses. That will increase Google’s potential market. AI is also boosting newer businesses like cloud computing.

Google’s popularity worries some governments. The network effects it exhibits can create deep moats. Australia is the latest to call for more regulatory oversight, slamming Google’s “near monopoly” position in internet search. Brussels forced Alphabet to pay $5.1bn in fines in 2018. Alphabet’s absence at a US Senate hearing in September prompted calls for it to be broken up.

For now though, there is nothing to suggest Google’s advertising business is under threat. True, it already has a big share nearly a third of the digital market. Revenue growth should slow from this year. Amazon’s digital advertising business is small but growing quickly. But challenging the dominance of Google, and to a lesser extent Facebook, is tough. Recent job cuts at Vice Media, BuzzFeed and Huffington Post show the difficulty faced by start-ups wanting to disrupt the industry. In the absence of government intervention, expect Alphabet’s spending to entrench its advantages. /London, February 6