Google Eyed

The Hoover Company’s vacuum cleaners once so dominated its market that people often still describe using any make of vacuum cleaner as ‘hoovering up’. Similarly, people ‘Google’ information from the Internet, even if they do not use Google. The only difference is that Google’s dominance of the Internet search market is far greater than Hoover had ever achieved with its vacuum cleaners. Earlier this year, Google’s search engine had an astonishing 92% of the market, with Bing, the next in line, owned by Microsoft, having barely 3%. This underpins its position as the world’s second largest private company by market capitalisation, at a massive $670bn on 29 September, and backs its seventy offices in forty countries. [1]

Google’s success in Internet search has been based on its speed and efficiency, things that have been supplemented by its maps and other products such as Gmail and Youtube. As with other Internet-based companies, these services are free to use, but come with a downside: as you use them, you build up a personal profile within Google’s system. This not only ends up delivering different search results to you than other people would get. More importantly, for Google at least, your profile is also used as a marketing tool for companies advertising their products.

Worldwide advertising expenditure last year was just under $500bn, with 36% of that, nearly $180bn, being taken up by digital adverts. Of the digital advertising, Google and Facebook together account for 54% of the global market, with Google the bigger player of the two, and alone accounting for more than half of the US market. Digital advertising is growing faster than for ‘offline’ advertising on television, radio and in newspapers, helping boost the value of Google on the stock market.

The Google base

Entering popular vocabulary has its commercial benefits. They have expanded this company so much and given it economic power so that it has changed its corporate structure twice in the past two years. In October 2015, Google was reformed as Alphabet, a holding company that had Google as its main component, the one acting as an umbrella company for its Internet operations. In September 2017, Alphabet created a new holding company, XXVI Holdings Inc, which now holds the Google operation and others. The rationale for these moves is varied, and will reflect its expanded operations and business strategy, but I will not cover this further. The Google Internet operation remains the predominant business, providing 99% of revenues, so is the relevant one to investigate

Google operates differently from Facebook. Facebook has two billion users signed up worldwide,  people who have supposedly given it their personal details, including their age, gender and location, and likely others, including their friends, relations and interests. Google, however, works at a more abstract level. It uses all aspects of a person’s Internet searching to build a profile that can be sold to advertisers.

Given that it also owns Youtube and Gmail, among other things, its ability to delve into an individual’s inclinations go well beyond simply figuring out if you might be in the market for a particular product. However, the vast volume of data at its disposal also argues against the notion that it is monitoring what an individual person is doing. It handles more than three billion searches per day! Of course, it could hand over your information to the state security services, like other Internet companies.[2] But its modus operandi is to use its huge mountain of data to feed the machine that offers advertisers on its system a likely audience of many millions of people.

In 2016, 88% of Alphabet’s total revenues – $79.4bn out of $90.3bn – came from advertising. These advertising deals, although generating larger revenues than for Facebook, ‘can be terminated at any time’. This shows a similar business vulnerability to Facebook, and one that has not been allowed for by capitalist markets. As usual, these markets find it difficult to imagine how a company that delivers your Internet ‘daily bread’ might be hit by a new trend among Internet users to use gluten-free products or switch from bread completely.

New technology

Developments in information technology have facilitated the growth of the Internet giants, but they also force these companies to move beyond their traditional revenue sources to maintain their prominent position. Who knows how the market might develop? So they buy up potential rivals – often using their own shares as the means of payment when the bill gets beyond a few hundred million dollars.

This is a game where bright sparks in the relevant area of technology advance what looks like an innovative application and wait for a Google, or Facebook, or Amazon, or Alibaba, or whoever, to show up with an attractive bid for their business, in the process making them multi-millionaires or better. Google has bought more than 200 technology companies from 18 countries since 2001, although most were from the US. These forays were into online advertising software, travel technology, artificial intelligence, facial recognition, visual search, robotics, photography, video, map analysis, mobile devices and many other fields. The reported value of these takeovers is some $30bn, and likely closer to $40bn, or more, allowing for the undisclosed amounts paid in many deals.

One of the Google takeovers reflected its links with the US security establishment. This was of Keyhole Inc in 2004, a company owned by the CIA-linked In-Q-Tel. Keyhole specialised in satellite mapping software, funded by the CIA, and went on to become Google Earth in 2005.

Such takeovers are one way in which an existing monopolist is able to use the financial system to consolidate and extend its market power. This is just as well for Google, since it recognises that getting extra revenues from its traditional search business is under threat.

Revenues, profits and no dividends

As a relatively new business, Google/Alphabet has had strongly growing revenues and net income. Both nearly doubled in the four years to 2016: revenues to $90.3bn and net income to $19.5bn. But this kind of growth is necessary for a company that, as a matter of policy, has never paid any dividends to holders of its common stock and does not plan to do so. Capitalist investors in Google/Alphabet shares must be satisfied with the growth of the business if they receive no direct income from it, hoping that such growth will encourage the share price to rise. In other words, the capital gain from just holding the shares must look good enough to offset the lack of income from them.

So far this has worked. From around $160-170 in early 2009, the share price rose to just over $1000 by June 2017, and was still around $960-970 last week. Nevertheless, the prospect for future rapid revenue growth does not look as good. The Google/Alphabet 2016 annual report notes that advertising revenues from Youtube ‘monetise at a lower rate than traditional desktop search ads’ and that ‘we generate our advertising revenues increasingly from mobile and newer advertising formats, and the margins from the advertising revenues from these sources have generally been lower than those from traditional desktop search’.

Larry and Sergey gave Mark some ideas

Google/Alphabet has some similarities to other Internet-related companies. The lack of dividend payments and reliance on capital gains through a rising share price matches what Facebook and Amazon do, although Amazon was ahead of Google with the ‘initial public offering’ (IPO) of its shares in 1997, compared to Google’s IPO in 2004. The Facebook IPO was in 2012. However, Google appears to have set the precedent for Facebook’s ownership/voting structure.

The two main founders of Google were Larry Page and Sergey Brin, former PhD students at Stanford University in California. While they had to attract funds from other investors by issuing shares, they still ended up maintaining control of the company. Now they may own only around 12% of the total stock, but that includes the most important shares – the ones with the special extra voting power. In the same way as Facebook, some years later, they own most of the 'Class B' shares, which have 10 votes each and are held by the company’s initial founders, compared to the A shares with one vote and the C shares with no votes at all.[3] Hence, ‘Larry and Sergey’ together control around 57% of the voting power of all shares in the company, despite owning barely one-eighth of the total shares outstanding.

Facebook’s Mark Zuckerberg has also built a big personal mountain with other people’s money. He alone controls 60% of his company's votes while owning less than one-third of the shares, a feat enabled by him having a big chunk of the B shares that also give 10 times the voting power of the A shares!

You would think that people with loads of money to invest would have the nous to recognise that B might be better than A. Maybe they do, but the B shares are not traded on the stockmarket, so capitalists wanting to get in on the action can do little about it if they are not one of the founders already owning B shares. They can only buy the A or C shares. To the extent that they realise that C is worse than A, this is currently reflected in a discount of just 1-2% for the zero-vote C shares compared to the one-vote A shares. But that small discount also shows how money capitalists are mainly bothered about getting a return on their investment – in this case via share price gains only – rather than really wanting to get involved in voting on, so deciding, what the business actually does.

Conclusion

This article completes my review of some of the world’s major corporations. Probably. Earlier articles have covered Alibaba, Amazon, Apple and Facebook, each of which is currently among the top six or seven world companies by market capitalisation. What they all have in common is their distance from what is normally considered to be the productive sphere of the economy, the one producing goods and services that people need.

That may seem incorrect or unfair. After all, Apple produces smartphones, among other things. However, Apple’s ‘production’ turns out to be more a way to design a set of products that others produce and that it can sell within a monopolistic and tightly controlled marketing structure, one buoyed by a huge financial operation. Alibaba and Amazon are more simply in the commerce business, acting as a platform for selling what others make and taking a cut from the producers, although Alibaba has a big subsidiary in finance, while Amazon is also big in cloud computing services. Google/Alphabet, like Facebook, has provided Internet services to attract advertising revenues, with their ‘raw material’ provided by the users of their systems. All these companies also build on their resources to branch out into other areas.

What they have in common too, with the exception of Alibaba, is that they are based in the US. The predominance of the US as a home for these top companies is based upon its large, relatively prosperous population. It offers both a big market in which a ‘start up’ can evolve into a major corporation and a ready supply of very rich individuals able to advance money to what looks like a good idea – and one that will enrich them further. Even today, the US accounts for nearly half of Google/Alphabet’s revenues. Here is one mechanism by which existing privilege helps secure future privilege. Alibaba’s China has a much bigger population, but this is offset in many respects by the relative poverty of its audience.

These reviews should offer some insights for those interested in analysing imperialism today. Hopefully, they will also be of interest to the more general reader who wants to find out how the world economy works.

Tony Norfield, 1 October 2017

Note added late on 1 October: the above text has been amended in some places more clearly to express what I wanted to say, although no point has been changed.

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[1] This is the market capitalisation for the Alphabet holding company, not just Google. See below for the company links, but the key point is that Google accounts for the vast bulk of Alphabet’s revenues. In what follows below, I will use the term ‘Google’ to refer to Alphabet’s core business in Google, unless otherwise stated.

[2] The official statement is: “Google cares deeply about the security of our users’ data. We disclose user data to government in accordance with the law, and we review all such requests carefully. From time to time, people allege that we have created a government ‘back door’ into our systems, but Google does not have a backdoor for the government to access private user data.”

[3] At the end of 2016, there were only 67 ‘holders of record’ for the Class B shares, compared to more than 2,000 for each of the Class A and Class C shares. Outstanding shares held were: A, 294.2m; B, 48.9m and C, 344.7m.

Facebook’s Advertising Machine

When Mark Zuckerberg is interviewed, the founder of Facebook can barely put a sentence together without using the word ‘connect’. This looks like a case of Tourette’s syndrome that spouts business buzz words not curses. But it is based on his understanding of the source of his company’s revenues and almost all of these come from advertisers. They pay to put their offerings to Facebook’s two billion users, since it claims to know about these people and what they like. This is Facebook’s business model: to monetise connections to its platform.

In this way, Facebook has made it into the top 10 of corporations on global stock markets. Its business throws light on the way the imperialist economy works.

The advertising game

It is not much good making a product or service for sale if people do not know about it and buy it. Hence, advertising. From TV commercials and sponsorships, to pages in newspapers, to the ubiquitous logos on sportspeople, on billboards, on the clothing people buy and on images online, this is no small business. Global advertising expenditure in 2016 was estimated at $493bn.[1] A huge sum of money is available for the right destination.

Advertising is key feature of the capitalist market, especially when that market is global and not just down the road. Major corporations use advertising to put their brands in the public eye and fight for their market share. Spending millions or billions on advertising is a necessary part of becoming, and staying, a monopolist, since economic power is about market domination.[2]

But the right destination for advertising spending can still be difficult to determine. In general, the bigger the audience for advertisers, the better, although it still might be the wrong audience for what is being sold. As the business cliché puts it: ‘half of our spending on advertising is useless, but we don’t know which half’. This is where the growth of online media has become more important in the past decade or so: it can claim to provide a better answer to that question.

Television, with the largest audience coverage, still dominates ‘offline’ sales of adverts, totalling $186bn in 2016. A long way behind television advertising revenues are those for print media and radio. Offline advertising also accounts for the bulk of total revenues, with last year’s share estimated at 64%, or $315bn. But offline advertising growth has been stagnant in recent years, and is being rapidly caught up by the newer digital media.

From a small starting point, spending on digital media has been growing quickly. Digital advertising now accounts for 36% of the total spending, at $178bn, and its share will grow further, especially on mobiles and especially via search, such as Google, and on social applications, such as Facebook.

The economics of those media companies relying on the offline advertising market is being slowly undermined by digital communications, especially in the case of newspapers. In the digital advertising world, Google and Facebook are the dominant forces, together having more than half the digital advertising revenues. Google has a much bigger share than Facebook, and also has a stock market capitalisation of around $650bn compared to Facebook’s at just below $500bn, helped by the fact that its system accounts for 90% of all Internet searches. But Facebook is a sizeable member of this giant duopoly.[3]

Facebook has two big advantages over offline media. It can just provide a platform, and rely upon other people to produce the content that is shared on its system, rather than having to produce that content itself. It also has a more detailed view of the profile, likes and inclinations of its users than is possible for television companies or newspapers. This is the core value it offers to potential advertisers: not just a big and growing audience, but one differentiated by age, gender, location and likes.

The big connector

Facebook differs in a number of respects from the other major corporations covered on this blog in recent months – Apple, Alibaba and Amazon. It has far less investment in financial securities and derivatives than Apple, and I will not cover these aspects here.[4] It also has a more geographically diverse client base than either Alibaba or Amazon. However, one feature of its business that is critical, as for Apple and Amazon, is that it was founded in the large and rich US market.

In mid-2017, Facebook’s average revenue per user in the US and Canada was $19.38, nine times that for Asia, which was just $2.13. But Facebook’s audience in Asia is growing fastest, and accounted for 34% of the average daily number of users by mid-2017, compared to 14% for the US and Canada and 20% for Europe.

The US market evidently has a powerful influence on social trends elsewhere in the world. It has been shown not only by the popularity among youth of wearing low-hanging trousers and baseball caps backwards – although, thankfully, these trends have, like, faded – but also by how a system designed for an elite US university, Harvard, could end up becoming the world’s largest social media site. The Bullingdon boys of Oxford University in the UK have not come anywhere close to this, although they have distinguished themselves on a much smaller scale by providing politicians who help fill the UK news media.

With 97% or so of Facebook’s revenues derived from advertising, and with the bulk of those advertising contracts being subject to cancellation within one month, one would think that financial markets would look upon this business model as very shaky indeed. That impression would be endorsed by the fact that Facebook has not paid any dividends on its shares since these were issued to investors in 2012. But the share price has nevertheless risen dramatically and an early investor would have made a stupendous capital gain from holding them. When they were first sold publicly in May 2012, the initial share price was around $18; it rose to more than $50 by early 2013 and was over $160 in the past week or so.

Valuing people

Facebook had less than 500m monthly active users of its system in 2010; by mid-2017 it had hit two billion users. Even if one allows for duplicate/fake profiles and for company accounts, that is almost a quarter of the world’s population and the number is still growing rapidly. Those figures do not include many users of other Facebook-purchased companies, WhatsApp and Instagram, although there will be some overlap. While the popularity of social media websites can be short-lived, especially among young people, there is no sign yet that this is happening to Facebook.

Strong customer growth and potential market domination have been features of several big, US-based, tech-related companies. Since the 2007-08 financial crisis, low interest rates have helped boost all equity prices, because low yields on government bonds and low interest rates from bank deposits look less attractive to investors by comparison. But these companies’ valuations have also jumped more than the market average. The returns from the equities of established blue-chip companies – from their dividends and share price growth – cannot compete with the prospect of buying into a relatively new global market winner. That applies even for one that pays no dividend at all, as has also been true for Amazon.

Facebook has a similar value on the stock market to Amazon. Amazon is favoured for its potential to be the market in which goods and services are bought and sold, setting the price and taking a cut from suppliers – although it also has a key revenue source from its web services operation. Facebook, like Amazon, has to expand its clientele, and this is an even bigger imperative since almost all its revenue comes from selling advertising based upon this audience, one investigated and filtered by its algorithms. Hence Zuckerberg’s focus on how everyone should ‘connect’ via Facebook, which is Facebook’s attempt to maximise market coverage.

Business growth and WhatsApp

Facebook’s business growth shows the success of the company’s strategy so far. Revenue jumped from $7.9bn in 2013 to $27.6bn in 2016. Net income after various costs and taxes grew more than sixfold, from $1.5bn to $10.2bn over the same period. The background to this growth reveals some interesting points.

As one might expect, Facebook has invested a lot in research and development, committing more than 20% of its total revenues to this, amounting to nearly $6bn in 2016. Like other large corporations, Facebook has also tried to secure its market position through takeovers of companies that could complement its business, or ones that might in future be troublesome competitors in areas that it needs for further growth. Since 2005, Facebook has taken control of more than 60 companies in 10 countries – including India, Israel, Canada, the UK and Ireland, although most were from the US. These company acquisitions cost anything from a few hundred thousand to many billions of dollars.

Facebook’s biggest acquisition by far was in October 2014, of WhatsApp, the smartphone messaging, voicecall and video service. This underlined Facebook’s aim to get into this rapidly growing form of social connection – and of potential advertising revenue.

There have been conflicting media reports of the total price paid for WhatsApp, but it spent ‘only’ $4.6bn in cash. A much larger amount was also paid for the takeover in terms of Facebook shares, probably worth close to $15bn, giving a total of around $19-20bn. This shows how a key ‘social media’ company was well versed in using the financial system to establish its market power. That might surprise those who are critical of capitalist financiers, but who pay little attention to how the capitalist system actually works.

The WhatsApp acquisition was striking in another way. Facebook’s extravagant price for WhatsApp was despite that company having made losses in previous years. At the end of 2014, the ‘acquired users’ of the WhatsApp system were valued at $2bn, ‘trade names’ were valued at close to $450m and ‘acquired technology’ was nearly $300m, but there were tax liabilities of around $900m that made the net assets acquired equal a mere $1.9bn. The remaining $15bn or so that Facebook paid was accounted for as ‘Goodwill’.

Goodwill is a feature of company accounts that reflects the value of something that cannot be pinned down in terms of the business assets acquired. It is defined not as a physical asset, eg buildings and equipment, or even technology and existing customer business. It boils down instead to the ‘business reputation’ or ‘brand value’ of the company, and basically to its ability to generate revenues as a trusted enterprise. More precisely, it represents the capitalist market’s valuation of a company’s market presence and potential power, one that is especially highly valued as a takeover target by a budding monopolist with access to funds, like Facebook! The term Goodwill sounds like a transient favourable opinion; it reflects the monetary assessment of contemporary imperialist markets.

Staying on top of the sugar mountain

Business books have long discussed how managers might control a company although they do not own it, or perhaps have only a small stake in its equity. Marx raised this point in Capital and it was popularised in James Burnham’s 1941 book, The Managerial Revolution. Mark Zuckerberg offers an interesting take on this phenomenon.

Zuckerberg has managed to overcome the usual capitalist norms, where the money invested in a company’s shares determines how much power the owner has in company decisions. Such capitalist rules still mean that a small group of larger shareholders can determine the outcome if they can get more than 50% or more of the total. This is not difficult when there is often a very large group of very small shareholders who have negligible voting power. But Zuckerberg has gone much further, as shown by Facebook’s issuance of different kinds of shares with very different votes, something also done by other capitalists in the technology sector and elsewhere. [5]

Zuckerberg owns mainly Class B shares, with 10 votes each. The bulk of Facebook’s marketed shares, the ones listed for trading on Nasdaq, are Class A shares. These might sound better, since everyone prefers A to B. However, the A shares have just one vote each. The outcome is that Zuckerberg controls 60% of the voting power of Facebook shares although he owns ‘only’ 28% of the company. Facebook’s 2016 annual report is at least honest enough to spell out that he is

“able to exercise voting rights with respect to a majority of the voting power of our outstanding capital stock and therefore has the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets.”

So, the owner with 28% of the shares has complete control of all company decisions! If this were not enough of a challenge to the capitalist market’s supposed ideology of equal status before money, Facebook/Zuckerberg managed to top this in 2016. Helped by Zuckerberg’s own voting power, Facebook took the decision to issue a new class of shares with no voting rights at all. These were Class C shares, ones that, this time, should give investors a clue that they will now be sitting in the bad seats.

Zuckerberg’s plan is to issue these new Class C shares in exchange for Class A and B ones, including ones that he holds. This would allow him slowly to sell his shares and thus, piece by small piece, to donate funds to his Chan-Zuckerberg charity, so chipping away at his $100bn-plus mountain of wealth, but still retaining control of decisions at Facebook. The latter charity is his family’s philanthropic initiative; based upon him having more money than any sane person could ever possibly spend.

Zuckerberg’s charity scheme is one of many examples where a few of the ultra-rich ‘give something back’, from John D Rockefeller, to Howard Hughes, to Bill Gates, George Soros and Warren Buffett. The donations go to what the plutocrat happens to like, not according to what society needs.

Adverts, just for you!

The personal details of its two billion users are the raw material from which Facebook creates an attractive platform for advertisers. Filtered further by Facebook tracking ‘likes’ and clicks into other Internet sites, it can offer a defined audience far better than news media and TV companies, so it can claim to focus more than others on the relevant age group and inclinations of consumers.

The traditional media has not managed to keep up, even when it has gone online, as shown in the problems newspapers have had deciding whether to set up paywalls for their content, or whether to try and maximise viewers and boost advertising revenues by giving free access to that content. Even though Facebook’s ‘click through rate’ from the advertisements it shows is very low, with younger people better at ad blocking, so far that has not been a problem for the growth of its advertising revenues.

Nevertheless, Facebook does worry about future revenues. Has the core site now reached ‘saturation point’ for advertising? Will new ventures into virtual reality products, via its acquisition of Oculus for $2bn in 2014, help out? Can the WhatsApp acquisition generate enough money when it starts charging users?

Conclusions

Facebook’s core area of business has been the US and Canada, from which roughly half its global revenues are generated. The availability of wealthy US investors to fund Facebook’s early investments and growth has also been critical for the company.[6] As in the case of Amazon, this highlights how the global success of a commercial enterprise is boosted by it starting up from a big, rich country, with the US having the pre-eminent position.

Facebook's growth has absorbed some of the advertising revenues of other businesses and helped undermine them. But it is a better example of capitalism’s conflict between the forces and relations of production. The forces – the development of an easy global transmission for all kinds of data, ideas and information – are channelled by a system that accumulates the personal and social information of billions of people for private profit. Facebook is basically an advertising platform, and advertising is intimately related to the rise of mass production and the generation of monopolies, even in areas of new technology.

Tony Norfield, 1 September 2017

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[1] See the MAGNA Global Advertising Forecast report, December 2016.

[2] Even the advertising sector, paid to publicise the goods and services of industry, commerce and finance, has become monopolised. Just five big players run it. In order of size by revenues, they are: WPP (UK), Publicis (France), Interpublic Group (US), Omnicom (US) and Dentsu (Japan). Each of them has tens of thousands of employees and lots of subsidiaries in many countries.

[3] In the text here I use the better known company name ‘Google’, although the company was reorganised in 2015 and its holding company is now called Alphabet. Google takes more than half of the digital advertising revenues in the US in 2016. Facebook is the junior partner in this game, with just 20% or so of US revenue, but it has been growing at least as fast as Google.

[4] Nor will I discuss the question of ‘fake news’ on Facebook, its abuse of privacy or its filtering of news. These issues have been covered in many reports, ones that often miss the more important points about what Facebook represents.

[5] Facebook is far from being the only company that has sold shares with different voting rights. News Corp, for example, runs a similar scheme so that Rupert Murdoch’s family has a higher percentage of votes on decisions than its share ownership would indicate. The Facebook/Zuckerberg ploy seems to follow the 10-1 scheme of Google/Alphabet’s founders.

[6] See the 2012 report, http://whoownsfacebook.com/