Alphabet’s ad autopilot heads for profit and bother

The near duopoly with Facebook risks an antitrust face-off

FILE PHOTO: A Google search page is seen through a magnifying glass in this photo illustration taken in Berlin on August 11, 2015. REUTERS/Pawel Kopczynski/File Photo

Alphabet is eating the advertising market along with Facebook. The $610 billion Google parent racked up another strong quarter with a 22% revenue increase to $24.8 billion in the first three months of 2017 compared with a year earlier. The deepening of the company’s digital-ad duopoly with Facebook helps make growth more predictable but may also bring the companies closer to a face-off with antitrust watchdogs.

U.S. digital-ad spending jumped 22% last year to $72.5 billion, according to the Interactive Advertising Bureau. Online ads now account for around 40% of the overall market, and that proportion is growing. Alphabet and Facebook are the big beneficiaries. Together, they already share over three-quarters of the American online ad market. They captured 99% of the industry’s growth in 2016, Pivotal Research Group reckons.

Network effects

So-called network effects have a lot to do with it.

Facebook’s nearly 2 billion users make it by far the best place to find friends and acquaintances, encouraging more users. Google’s dominance in search helps it continually provide faster and better answers. In turn, the ever-increasing trove of user data allows both companies to target ads more successfully than rivals. It’s a virtuous circle for the two giants, and the gap with the rest is widening.

The pattern in the United States applies in many other countries, too.

Alphabet, perhaps by dint of its greater age, has already found itself in the cross-hairs of antitrust authorities overseas. The European Commission, for example, has claimed that the company abuses its market power in search and operating systems to favour its own services and apps.

Facebook has largely avoided similar problems to date, but regulators are asking increasingly pointed questions about how Mark Zuckerberg’s company handles user privacy and controls the potentially undesirable content its algorithms sometimes promote.

Financial muscle

The companies do their best to forestall regulatory action. Alphabet got a break when a U.S. probe was dropped in 2012, for example. The companies’ profitability — Alphabet made $5.4 billion in the first quarter alone — allows huge sums to be spent on lobbying and social projects that buff their public images.

The growth of Alphabet and Facebook in the ad market looks to be on autopilot. The risk is that the course is set not just for more profit but for trouble with regulators, too.

( The author, Robert Cyran is a Reuters Breakingviews columnist. The opinions expressed are his own )