Breakingviews- Google’s owner starts to look like Alphabet soup

Silhouettes of laptop and mobile device users are seen next to a screen projection of Google logo in this picture illustration taken March 28, 2018. REUTERS/Dado Ruvic/Illustration

NEW YORK (Reuters Breakingviews) - Google’s owner Alphabet is starting to look like alphabet soup. The tech group’s $9.4 billion of earnings in the first quarter came with new noise after it adjusted the way it accounts for investments like ride-hailing app Uber, moved some smart-home appliances into Google and started stressing “impressions” over clicks. Investors wanting concrete measurements are getting squishy ones instead.

New rules on how companies report the value of firms in which they invest in has a big effect on Alphabet – because Google’s investments are many. In the past, when an invested company’s value changed it showed up in the balance sheet, or in the case of privately held ones, maybe not at all. Now, changes in the value of Uber, 23andme, Cloudera and others will go through the income statement every three months. That means more information, but more confusion too. Private market valuations can be more suggestive than realistic, and will be volatile, leading to big profit swings – such as a $2.4 billion gain in the first quarter.

The second change – merging its Nest and Google hardware units together - has strategic rationale. The former produces things like thermostats, and the latter speakers and other gadgets. Consolidation means less duplication. Yet Nest is now lumped in the same reporting division as Google’s cloud and app store businesses. There’s no obvious reason why hardware - normally a low-margin affair - should be combined with high-growth web services and the highly-profitable business of taking a chunk of app sales on smartphones that use Google’s Android operating system. This amalgamation obscures value in three promising businesses.

The final change is more concerning. Google will no longer break out clicks and how much it makes from them on ads placed on third-party websites. The company is emphasizing “impressions,” or the number of times an ad is seen, because that is what’s providing growth. Perhaps, but clicks are easy to measure; an “impression” much less so. Also, the amount Google receives per click has steadily fallen over the past three years. Alphabet’s new look makes sizing up Google’s prospects only tougher.


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