Google on rough track

Due to a record fine from the European Commission, Alphabet’s profits have been significantly hit.

Google’s parent company saw its profits for the three months to the end of June, fall by 40%.

Background

In June 2017, the European Union antitrust regulators slapped Alphabet with a record $2.7 billion fine. The verdict was for the first of three investigations currently being conducted on the search giant.

The European regulator accused the company of using its dominance in the industry for pushing its own advertising business. Google, the EC has noted, uses its considerable clout to promote its own services at the cost of other businesses. At the time of the verdict, Google was given 90 days to address the issues or face larger fines.

Alphabet has said that it will challenge the fine and has denied the charges levied by the EC. Click here for more details.

Analysis

Despite the fine, Alphabet said that it made $3.5 billion in net income and saw sales of $26 billion in the second quarter. The profit would have larger had it not been for the fine. The year-on-year profits also fell by almost 30%.

However, the company has grown significantly in the second quarter. The revenue is up by 21% as compared to the same period in 2016.

Much of Google’s revenue comes from two advertising programs called AdWords and AdSense (Google’s annual revenue stands at $90 billion). Both programs have been under EC’s scanner since 2010.

Assessment

Our assessment is that Alphabet faces a problem that has little to do with its everyday business but could significantly affect the company’s future. There are two more cases of restricted trade practices pending with the EC. It would be hard for Alphabet to defend this and will stand to lose billions more in future lawsuits.

However, based solely on its performance, the company has exceeded expectations with its growth.