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Alphabet’s ad business is booming, but Google controversies continue to pile up

Alphabet’s ad business is booming, but Google controversies continue to pile up

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Illustration by Alex Castro / The Verge

As expected, Alphabet’s core ad business continues to grow at a remarkable pace, with the company’s third quarter earnings announcement coming in well over Wall Street analysts’ expectations on profit, although slightly under sales estimates for the quarter. The company posted revenue of $33.7 billion for the quarter, up 21 percent year over year, with a profit of $9.2 billion, or earnings per share of $13.02.

Much of this growth comes from its Google subsidiary’s ad business — ad revenue accounted for 86 percent of all revenue this past quarter. But Google continues to invest heavily in its cloud division to compete with Amazon’s AWS division and Microsoft’s Azure. It also continues to invest in hardware through its Pixel phones, Chromecast devices, and the expanding Home smart speaker line. Google’s “other revenues” section posted revenue of $4.64 billion, which is up nearly 30 percent from this time a year ago.

Though the growth is not as dramatic as the prior quarter’s nearly 37 percent year-over-year change, Google did just recently announce the new Pixel 3 and Pixel 3 XL phones, as well as additional smart home devices in its Home line. Rounding out its more prominent sectors is the “Other Bets” division, that includes self-driving car unit Waymo and life sciences company Verily, which is making slightly more money than it did a year ago, with $146 million in revenue. Yet Alphabet continues to spend heavily in its effort to discover new businesses, with losses in the division growing another 8.4 percent to $727 million.

Google is facing regulatory scrutiny in Europe and criticism for its secret plans in China

Despite that success, Alphabet is currently facing one of the most contentious moments in its history, as regulatory scrutiny has forced Google to make changes to Android and a mounting number of controversies around censorship and China threaten the company’s position in the eyes of both politicians and the public.

Of course, these won’t have a substantial effect on its business, not yet at least. The more immediate metrics like Google’s traffic acquisition costs (the amount of money it pays to, say, make Google search the default search engine for Apple’s mobile Safari browser) seem well within the line. Alongside Facebook, Google controls a vast majority of the online advertising business. However, not a week goes by these days that the company does not endure a litany of criticism and bad press resulting from its efforts to bring a censored search product to the China market, the accusations that its information products contain bias against US conservatives, and YouTube’s inability to properly police its platform.

Google recently made substantial changes to its Android licensing agreement in Europe, following a landmark antitrust decision from the European Commission in July that fined the company roughly $5 billion and demanded it alter the ways it bundles software like Chrome with its Play Store when licensing out its mobile operating system.

Google now plans to charge phone makers additional fees, in some cases up to $40 per device, to install the “Google Mobile Services” app suite that includes the Play Store and access to a vast majority of the existing Android mobile apps. However, Google may reduce those fees if company’s agree to pre-install Chrome and Google Search.

While we won’t see how this affects the company’s financials for some time, it’s reasonable to assume Google will extract more money under its new agreements. Effectively, the EU ruled it was anticompetitive for Google to bundle core services with Android with the intent of keeping Chrome, search, and the Play Store dominant in the Android ecosystem. Now, Google must charge money and give phone makers the opportunity to build or license competing services. However, few of those competing services exist, and none are as good as Google’s, so many Android handset makers may just pay up or cut deals to keep things business as usual.

Google CEO Sunday Pichai addressed the company’s ongoing compliance efforts in a call with analysts this afternoon. “On Europe, it’s early too say. We’re working on implementing the remedy in the next few weeks,” he said. “We’re focused on complying with the commission’s directive and we want to make sure that the transition for both our users and our OEM partners is as smooth as possible.” Pichai went on to say that Google is “focused on doing the right thing.”

Just today, Google responded to damning report about its handling of sexual harassment

Also overshadowing Alphabet’s consistent financial growth is an ever-growing series of internal and external controversies, the most recent of which is the revelation reported today by The New York Times that Google quietly parted ways with Android co-founder Andy Rubin in 2014 and paid him $90 million in the wake of sexual misconduct claims the company investigated and found to be credible.

Those claims include an instance where Rubin allegedly coerced another Google employee with whom he was having an affair to perform oral sex on him in a hotel room in 2013. Google CEO Sundar responded today by claiming it has fired 48 people for sexual harassment in the last two years, and that none of them received severance, though he did not offer an explanation as to why Rubin was given such light treatment five years ago.

Earlier this month, Pichai spoke for the first time publicly about Project Dragonfly, an effort to reintroduce a search and news product for the Chinese market that would be tailored to the government’s strict restrictions around freedom of information. Pichai told a crowd in San Francisco that China is “important for us to explore” because of “how important the market is and how many users there are.”

Critics and activists, including employees of the company and those who have resigned in protest of the project, fear Google may contribute to the Chinese government’s authoritarian rule by allowing it to dictate what information its citizens are allowed to access and what views they publicly express. Google’s prototype would reportedly tie people’s online accounts to phone numbers.

On the analyst call, Pichai addressed the company’s ongoing China plans. “We deeply care about serving Chinese users and we’ve been investing for years, particularly with Android,” he said in response to a question about Dragonfly. “We are constantly looking for ways by which we can better serve Chinese users.”

Update 10/25, 5:30PM ET: Added information from Alphabet analyst call.