July 23, 2018 at 6:30 PM
Shares of Google’s parent company, Alphabet, jumped Monday in aftermarket trading after the company reported its second-quarter earnings, despite a drop in profit from a record $5 billion fine imposed by the European Union.
Alphabet reported $3.2 billion in profit, compared with analysts' estimate of $6.72 billion. Revenue was $32.7 billion, an increase of 26 percent over the same period last year.
Increased advertising sales on Google’s YouTube video service and the web helped drive sales growth. Alphabet chief financial officer Ruth Porat said that investment in new machine learning technology is helping the company sell better ads, and more efficiently. Alphabet also said that it reduced the cost of fees paid to competitors such as Apple to direct their search queries to Google by default.
But the company said its growth was primarily driven by ads sold on mobile devices — the very piece of Google’s business that is the target of the latest E.U. complaint. Regulators say that Google unfairly requires smartphone makers that use its Android mobile operating system to drive users to its own services, such as search, its Play app store and its Chrome browser. Google allows companies to use Android for free in exchange for loading those Google-owned apps.
Google has more than 90 percent of search traffic globally, according to StatCounter. The Android operating system has around 80 percent of the world’s market share of smartphones, with Apple taking nearly all of the remainder.
It’s not yet clear how the company may have to change its operating system to comply with the E.U.'s complaint that Android too heavily promotes Google search. Sundar Pichai, chief executive at Google, said on an investor call Monday that the company is committed to finding a way for Google to continue making Android “available at scale to users everywhere."
He added that Google’s free model has allowed device makers to offer lower prices. “You can clearly see there’s robust competition. There’s a lot of innovation," he said. “I think overall it’s created more choice for everyone, not less.”
Google has said it will appeal the order.
Shares of Google were up significantly after hours, rising 5 percent immediately after the numbers were released. The company’s stock took a slight hit after news of the fine broke last week, but it was trading at $1,211 per share at market close, up 7 percent over the past month.
It’s hard to know how increased pressure from European regulators will affect the company in the long-term, said analyst Brian Wieser of Pivotal Research. A strict new privacy law in Europe aimed at curbing companies’ data collection may even strengthen Google’s dominant position in the short-term as smaller companies work to comply with the new rules, he said.
But the full effect of regulation, beyond the fines, won’t be clear until Google outlines how it will change its business to comply with the E.U.’s demands.
“It’s like a parking ticket,” he said. “It has little effect unless it makes a behavioral change.”
Last year, Google also took a hit to its second-quarter earnings because of a fine — $2.7 billion — from the European Union for favoring its own shopping search products.
On Thursday, President Trump said in a tweet that the European Union has “taken advantage” of U.S. companies such as Google, saying that the fine is the latest evidence of unfair trade practices between Europe and the United States.
The relationship between Google’s search power and its command of the smartphone and advertising market has been examined by U.S. regulators before. The Federal Trade Commission investigated Google in 2013 but opted not to take action. Since the E.U. fine, some lawmakers such as Sen. Richard Blumenthal (D-Conn.) have called for American regulators to pursue new action.
FTC Chairman Joseph Simons, who was appointed by Trump to lead the independent agency this year, said in a hearing Wednesday that U.S. regulators will read what the E.U. is saying “very closely.”