Alphabet (Google) is the next IBM.

Oh how the mighty will fall.

I started writing this about two months ago and have just been sitting on it ever since. But The Wall Street Journal has had some interesting articles recently that further illustrate my point and has renewed my motivation to finish writing this. The first one is on SearchGPT, and the second is on slowing growth in ad sales.

Alphabet is the next IBM

“…the bulls are optimistic with joy over the state of business affairs, which is steadily favorable to them; and their attitude is so full of unthinking confidence that even less favorable news does not impress them and causes no anxiety…”

— Joseph de la Vega, 1688, Confusion De Confusiones

This time, I am writing a bear case for a business. So consistent is human behavior that what is happening now was accurately described in 1688. Anytime one writes a bear case, it will immediately make many people angry and yield quite a large amount of hostility. Money has the unique ability to make people emotional rapidly. Anger and heightened emotions have an immediate adverse impact on cognitive reasoning. That is why it is of the highest importance for investors to remain dispassionate about their business.

But this is why the first thing I need to do is unpack my very short opening sentence. Alphabet, aka Google, is the next IBM. What I am referencing is how, in the 1990s, IBM managed to completely lose its dominant position in computing, being supplanted in both hardware and software by competitors. It is a famous example of a business falling from grace. However, IBM still exists to this day and is still, by any measure, a massive corporation, one with a market cap in excess of $100 billion. IBM hardly disappeared, and it certainly did not die. Alphabet will be around for years to come, but it is facing a stunning fall from grace. The objective isn’t to disparage Alphabet for its own sake but ideally to stop people from losing money.

As a person who highly values fundamental analysis, I find it bothers me quite a bit when I don’t spend any time on it. However, my thesis here is not based on Alphabet’s current financial strength. They are doing just fine at the present moment. But out of all the tech giants, Alphabet is the big loser from the rise of AI, not the winner.

Alphabet derives around 75% of its revenue from advertising. This is the center of my concern about Alphabet. Despite Alphabet’s best efforts to diversify its business, advertising through Google Search and YouTube is its largest source of revenue by a wide margin. Alphabet is an advertising company first and foremost. They have never been able to change that.

Their internet search monopoly may very well get taken out at the knees by ChatGPT, Copilot, and other similar products from rivals. Alphabet has benefited from its brand for a long time. The very name Google is synonymous with search, and nothing exemplifies this more than the term “Google it,” which entered the lexicon a long time ago. This is what has made it so hard for competitors to gain market share in online search. It’s extremely easy to switch, but people have decades of habit built into using Google search. You “Google it” after all. You don’t “Bing it” or “DuckDuckGo it.”

It's not as though Google hasn’t been playing defense, however. They pay Apple billions to be the default search engine on iOS. But this is where the trouble starts. Until now, no other tech company has been able to get in between the consumer and the Google search engine, but now they can. Apple is releasing iOS 18 in September, which will bring a big upgrade to Siri. Siri will now have ChatGPT integrated into it. Siri stands to be the world’s first fully functional AI assistant down the road. Microsoft is integrating Copilot into the Windows operating system as well as the full suite of Microsoft Office software. Both of these enjoy a position of supreme dominance in their markets and have held this position for decades. How critical is the Windows operating system to the world? Well, one bad update from Crowdstrike that was woven into the Windows operating system crippled parts of the world economy. Alphabet doesn’t have any product with that kind of power.

Why this is so critical is that now Alphabet’s rivals have viable means of getting in between the consumer and Google search. Why open a web browser and go to Google when a Copilot icon is sitting on your desktop or in the corner of Microsoft Word? Why open a web browser and go to Google search when you can just say “Hey Siri” and get an accurate and helpful response?

Then there are the enterprise implications for this as well. AI is quite a benefit to me. As a therapist I don’t need to spend hours looking for the right research article with Consensus AI. With my substack, if there’s a technical term that’s used by a business that I don’t understand ChatGPT 4o can explain it. It will even search the web for an answer to my question, provide the answer, and the link to where it found the information. I can also bounce ideas off of ChatGPT and ask it to make a bear and bull case for and against a business. It can summarize recently published analysts' forecasts for a stock. I can even use the Socratic method with ChatGPT 4o to arrive at a specific answer to a precise question about a business or an economic forecast. ChatGPT 4o quite frankly replaces a lot of my need to use a traditional search engine. The Adobe AI helps me chew through large PDF files rapidly as well.

If I were to use an old-school search engine, this would take much more time and effort. Google search is fast becoming an out-of-date technology. This would be where I hear a counter-argument about how great Gemini is, Alphabet’s AI, from bulls. The problem is Alphabet lacks a meaningful product ecosystem to integrate Gemini into. Why is anyone going to pay for Gemini when ChatGPT and Copilot will integrate into many more products that people use more often? The only thing going for Gemini is that it will power the AI in Samsung products. But again, thats a weak position since nothing forces Samsung to continue to use Gemini in the future. Samsung could switch to another AI, and there would be nothing to stop it. It could be said that Alphabet needs Samsung more than Samsung needs Alphabet.

Let’s look at what services and products Alphabet offers aside from ads on YouTube and Google search. Well, they have the Pixel smartphone and watch, Nest, Chromecast, Chromebook, Google Maps, YouTube TV, Google Workspace, Pixelbook and Tablet, Google Home, Chrome OS, and Google Cloud Platform. I am leaving some products and services out; however, this constitutes the majority of Alphabet's non-advertising-related offerings. None of these products are all that relevant and don’t capture much market share. The big one missing from the list is the Android operating system, which stands as the only alternative to iOS. However, Android is open source, and companies can use it and modify it for free. More on Android later…

Pixel products, smartphones, watches, laptops, and tablets have market share in the single digits. For laptops, Windows has about 72% of the market, macOS is in second place with about 15%, Linux has around 4%, and Chrome OS comes in behind Linux at around 3% of the market share. Getting beaten by Linux is embarrassing. The Pixel Smartphone comes in at 4.6% of the market. The last time I spoke with my cell service provider, they tried to give me a Pixel for free, and I said no.

Nest is a bright spot with their smart thermostat, home security system, and other smart home offerings. YouTube TV is also holding its own in the new age of cord-cutting with around 30% of the market share. But this is where the good news ends.

Google Cloud holds third place in the cloud computing marketplace with an 11% market share, behind Microsoft’s Azure with 25%, and AWS with 31%. Then, finally, Google Workspace goes head-to-head, and the results are a mixed bag. Microsoft 365, which includes Word, Excel, and PowerPoint, has a near monopoly when it comes to paid users. Microsoft 365 has 345 million paid users, while Google Workspace only has 8 million paying users.

Circling back to Android. The problem is the fragmented nature of the non-iPhone smartphone market. With an Android phone, the hardware and the software are all created by different people. The product ecosystem is much more of a confederation than one concerted push by a central organization to make the best product. Thus, there are multiple corporations negotiating against one another in the process of building a complete product. This eats into profit margins.

Then there's Alphabet’s problem of angering half the country by taking repeated progressive political stances. I have no idea why these people have forgotten that they run a business. The point of running a business is to make money, and everybody’s money is green, even if it is coming from a Republican. One of the most notable blunders was releasing Gemini when it refused to create images of white people, explicitly stating that the skin color was bad. What is more stunning is the thought that not a single person within Alphabet who was testing this product prior to its release noticed this flaw. That shows fairly deep organizational rot. With few exceptions, businesses should not take political stances. I would say the exact same thing about a corporation taking right-wing political stances as well.

It is important to note that Alphabet's revenue has been rising for the last decade. So the doom that I am predicting is likely not arriving anytime soon. My view is that Alphabet will be worse for the wear by 2034 as the company begins to contract. Because, at the end of the day, their main business is going to get squeezed.

Microsoft and Apple both have stronger product ecosystems, and by integrating Copilot and ChatGPT into their products, they can finally get between the customer and Google search. Tim Cook also hit the nail on the head back when he said that Google has a fundamentally creepy business model. Every time Apple speaks out about user privacy, that is a direct shot at Alphabet. The exact term would be counter-positioning. Alphabet's whole business model is based on tracking everything you do and selling that information to advertisers. Now Microsoft and Apple can offer you privacy, which Alphabet can never do, and direct you away form Google search.

Where is the upside here? I don’t see it. I see a gradual decline for Alphabet where they will still be a major corporation with products that continue to be used by consumers. But this is their ceiling, and it's all downward from here.

My Portfolio:

AAPL, JPM, PG, TMUS, CCB, GD, ALG, SPGP, MOAT, ITB.

*Disclaimer*

You can and will lose money in the stock market. You can lose all of your money. I can and will be wrong. I have been wrong in the past. I have lost money in the past. Investing in stock is risky and should never be considered safe. Invest at your own risk.