Latest / The Dutch Investors / #63 | Alphabet Deep Dive | Will AI destroy Google’s search empire? w/ Secret Sauce Investing

Transcript

#63 | Alphabet Deep Dive | Will AI destroy Google’s search empire? w/ Secret Sauce Investing · The Dutch Investors

• 0:00
  SPEAKER_02: Could anyone do the same thing you did starting today?
• 0:04
  SPEAKER_02: The first rule of investment is don't lose.
• 0:07
  SPEAKER_02: And the second rule of investment is don't forget the first rule, and that's all the rules there are.
• 0:11
  SPEAKER_02: To give up what you're doing well because of guesses about what's going to happen just doesn't make any sense to us.
• 0:18
  SPEAKER_02: Mm-hmm.
• 0:18
  SPEAKER_02: We are going to be buyers of things over time.
• 0:21
  SPEAKER_02: What I needed to get ahead was to read against idiots.
• 0:24
  SPEAKER_02: And luckily there's a large supply.
• 0:30
  SPEAKER_02: Is it some early childhood exposure?
• 0:38
  SPEAKER_00: Hey, so we're back.
• 0:39
  SPEAKER_00: It's been a while.
• 0:41
  SPEAKER_01: Are you excited for Google today?
• 0:43
  SPEAKER_01: Absolutely.
• 0:44
  SPEAKER_01: I mean, it is one of my favorite companies to talk about.
• 0:48
  SPEAKER_01: And um, we just did like a full deep dive on the company.
• 0:52
  SPEAKER_01: The stock is at all-time highs.
• 0:54
  SPEAKER_01: I'm I'm a happy shareholder.
• 0:56
  SPEAKER_01: There's lots to talk about with the rise of AI and whether it's going to disrupt the company and stuff like that.
• 1:02
  SPEAKER_01: Earnings are coming out tomorrow.
• 1:04
  SPEAKER_01: So lots of lots to talk about.
• 1:06
  SPEAKER_00: Absolutely.
• 1:07
  SPEAKER_00: By the time this is released, let's see where the share price lies.
• 1:10
  SPEAKER_00: Um, but very exciting, especially for, as you've mentioned, shareholders.
• 1:15
  SPEAKER_00: Google, I think, is my third biggest position.
• 1:19
  SPEAKER_00: Uh I invested in it originally in 2021 when it was sort of the COVID peak, but have uh invested a few more times or picked up a few more shares when it's dipped in 2022, and actually recently in in April as well, topped up after the tariffs were announced.
• 1:35
  SPEAKER_01: What was your initial reason to invest in an alphabet?
• 1:39
  SPEAKER_01: Are you more of an Apple guy or more of a Google guy?
• 1:42
  SPEAKER_00: I I love Apple.
• 1:44
  SPEAKER_00: I've got an iPhone and probably would really almost refuse to move away from an iPhone.
• 1:50
  SPEAKER_00: However, I don't I don't have any shares in Apple, and there's maybe just never been the opportunity.
• 1:56
  SPEAKER_00: But for me, the and we will get on to this.
• 1:58
  SPEAKER_00: I love the innovation that Google has, and I'm not too sure that still exists within Apple.
• 2:04
  SPEAKER_00: I could be totally wrong.
• 2:06
  SPEAKER_00: It's you know, Apple was the first trillion dollar company and has just continued to blow everyone else out of the water almost.
• 2:11
  SPEAKER_00: But with Google, I'm excited to see what the future holds.
• 2:14
  SPEAKER_00: And obviously that, you know, listen, Google could also be disrupted, which we'll no doubt talk about today.
• 2:19
  SPEAKER_01: So, at a$3.2 trillion market cap, do you think there is still something to gain for shareholders?
• 2:27
  SPEAKER_01: Uh tell me what do you think about Alphabet and uh what excites you about the company before we dive in?
• 2:34
  SPEAKER_00: So for me, Google is interesting in the sense that I think we're about a 27 price to earnings ratio just now.
• 2:42
  SPEAKER_00: If you compare that to the rest stuff, it used to be the Fangs, but now they're called the Mag 7, I believe.
• 2:47
  SPEAKER_00: And Google is actually the cheapest out of all of them, if you just use on a pure PA ratio.
• 2:53
  SPEAKER_00: However, when I've invested in Google, especially over the dips, I think it's sort of been about a 20 or sub-20 price to earnings ratio.
• 3:02
  SPEAKER_00: Google has been just the undisputed king of search, and it's basically the window to the internet, which it has been for the last two decades.
• 3:11
  SPEAKER_00: It's got this unbelievable advertising engine, which powers the company and powers all the other bets they make.
• 3:17
  SPEAKER_00: And beyond that, you know, there's obviously the likes of Waymo, which we'll maybe talk about, you know, Google Cloud, and obviously the launch of Gemini as well to ultimately take on the likes of ChatGBT.
• 3:29
  SPEAKER_00: But is Google still good value?
• 3:31
  SPEAKER_00: I personally wouldn't be investing at this rate, but yeah, I'm I'm I'm sure, you know, I'll I'll I'll be wrong in my investing career many times and and I'll get to doubt could be proven wrong again.
• 3:42
  SPEAKER_01: Well, let me start off by saying that I mean it would be wrong of us not to mention the three acquired episodes.
• 3:50
  SPEAKER_01: I mean, if you really want to go very deep into the alphabet and Google history, they have three episodes, we'll put them in the description.
• 3:58
  SPEAKER_01: 12 hours, I mean, there is so much information in there.
• 4:02
  SPEAKER_01: It it it's you gotta be a little nerdy to like it, but it goes so deep and it's uh it's it's very good.
• 4:07
  SPEAKER_01: And I liked it a lot.
• 4:09
  SPEAKER_01: Listen to the entire 12 hours, but we can kind of take like the the highlights out of those episodes from the history itself, from the books we read.
• 4:19
  SPEAKER_01: Yeah, hopefully we can compress it to like five minutes, which makes absolutely no sense, but I'll try to do that anyway.
• 4:26
  SPEAKER_00: Yeah, no, look at avoided it.
• 4:28
  SPEAKER_00: I think the guys that acquired obviously they sort of did like a past, present, future episodes, but yeah, in total agreement, absolutely fantastic listening.
• 4:37
  SPEAKER_01: I mean, it all begins in 1996, where these two Stanford PhD students, Larry Page and Sergei Brynn, were actually working on a research project they called Backrup.
• 4:51
  SPEAKER_01: And it was basically a new way to rank web pages, and not by how many times a word appeared, but by how important each page was based on links from other sites.
• 5:05
  SPEAKER_01: So the idea became like the foundation for what we now call page rank, and it completely changed how people found information online.
• 5:15
  SPEAKER_01: I have a trivia question for you, Sunny.
• 5:17
  SPEAKER_01: Let's see.
• 5:18
  SPEAKER_01: Do you know, and I th you might know if you listen to the episodes, but why are the Google search results called pages?
• 5:27
  SPEAKER_01: You're gonna have to enlighten me.
• 5:29
  SPEAKER_01: Well, it sort of has a double meaning because of web pages, of course, but also because of Larry Page.
• 5:36
  SPEAKER_01: So PageRank was using uh the system he, Larry Page, invented, so they called it pages.
• 5:43
  SPEAKER_00: Wasn't aware of that at all.
• 5:44
  SPEAKER_00: I think, as you've already rightly touched on, we've got sort of 10 plus hours of acquired episodes, and I don't think obviously I took that in when I was listening.
• 5:52
  SPEAKER_01: Uh oh.
• 5:53
  SPEAKER_01: Well, gotcha.
• 5:54
  SPEAKER_01: Well, anyway, fast forward to 1998, the year I was born, and Google is officially founded in a small garage in California.
• 6:05
  SPEAKER_01: And it's funny to remember that Google wasn't the first search engine, far from it.
• 6:10
  SPEAKER_01: There were already players like Yahoo, Alta Vista, Lycos.
• 6:16
  SPEAKER_01: But what made Google stand out here was the speed, the simplicity, and the relevance.
• 6:21
  SPEAKER_01: I mean, just think about it.
• 6:23
  SPEAKER_01: Even today, Google, when you go to google.com, it only has like a white background and a search box with a with a magnifying glass.
• 6:31
  SPEAKER_01: It's it's very simple if you think about it.
• 6:34
  SPEAKER_01: And the search results were just far better, and uh people started to notice.
• 6:40
  SPEAKER_01: Then, about a year later in 1999, the company moved to Paulo Auto and raised its first major venture from someone pretty well known to investors, Sequoia Capital, and that money sort of helped Google build out its servers and expand the engineering team.
• 7:00
  SPEAKER_01: Then we go another year, the year 2000, and Google launches AdWords, and that would be the business model that define the next two decades for the business.
• 7:12
  SPEAKER_01: It was very simple, but kind of a brilliant and perhaps the most effective flywheel ever invented.
• 7:21
  SPEAKER_01: I mean, relevant ads, write to the people who wanted to see the ads, the better the ads are, the more likely people are going to click, the more satisfied they are.
• 7:33
  SPEAKER_01: It's just such a good business model.
• 7:35
  SPEAKER_01: And uh, it became like a money printing machine.
• 7:39
  SPEAKER_01: And in 04, Google went public, one of the biggest IPOs in decades, about 23 billion in market cap, and that was considered quite expensive at the time, just uh pretty nuts if you think about the$3.3 trillion it is today.
• 7:56
  SPEAKER_01: Today we know how the story played out.
• 7:58
  SPEAKER_01: Google grew into one of the most powerful companies in the world with search, YouTube, Android, a whole ecosystem of billion user products.
• 8:07
  SPEAKER_01: In 2015, another important event happened.
• 8:12
  SPEAKER_01: The company restructured under a new parent company called Alphabet, kind of separating the core business from experimental moonshots like Waymo and um Ferrigh, and of course all the acquisitions they did over the years.
• 8:29
  SPEAKER_01: Then I think this would be stupid to leave out, but in 2017, Google researchers published papers that become the foundation for all modern language models, including ChatGPT.
• 8:45
  SPEAKER_01: So they kind of invented AI in a way, which is pretty nuts if you think about it.
• 8:49
  SPEAKER_01: They kind of disrupted themselves if you believe in the disruption uh story.
• 8:54
  SPEAKER_01: I mean, Sonny, from a Stanford project to a$3 trillion company in less than three decades, it's not bad, right?
• 9:02
  SPEAKER_00: No, not at all.
• 9:03
  SPEAKER_00: I think we've seen so many companies like Microsoft or Apple and how long they've taken to become trillion dollar companies, maybe outside of Meta.
• 9:11
  SPEAKER_00: Google is obviously one of the most impressive.
• 9:13
  SPEAKER_00: One of my favorite learnings uh from this when we were going through it was the fact that Jeff Bezos was one of the early investors in Google.
• 9:23
  SPEAKER_00: Did you pick that up?
• 9:24
  SPEAKER_01: Yeah, weird, if you think about it, right?
• 9:26
  SPEAKER_01: I mean, he was just he was very early.
• 9:31
  SPEAKER_00: I think his shares would be worth several trillion.
• 9:33
  SPEAKER_00: I did research and find that I think he had sold them.
• 9:36
  SPEAKER_00: And I think also when I was researching it, Google was one of the few companies, or has been one of the few companies, that its share price has never ever dipped below its IPO price.
• 9:46
  SPEAKER_01: I I'll have to fact check that, but I I I believe you.
• 9:49
  SPEAKER_01: That's pretty nuts, okay.
• 9:52
  SPEAKER_01: And and to think about, I mean, Sonny, think about this.
• 9:55
  SPEAKER_01: Larry and Sergei are still not in their 60s.
• 9:59
  SPEAKER_01: I mean, how weird is that?
• 10:01
  SPEAKER_00: But then it what gives me confidence is that Larry Page and Sergei Brin are still there.
• 10:06
  SPEAKER_00: You know, they're they're always sort of that almost invisible hand behind the scenes.
• 10:11
  SPEAKER_01: I would say Sergei and Larry are both big opportunities in a way.
• 10:17
  SPEAKER_01: I mean, the skin in the game is immense, but at the same time, they control all the voting rights.
• 10:24
  SPEAKER_01: So I mean, if they decide to take it somewhere else or decide to gamble with Alphabet, they are also sort of a risk factor.
• 10:34
  SPEAKER_01: It's just something um we thought about during our research.
• 10:38
  SPEAKER_00: Cool.
• 10:38
  SPEAKER_00: So with that, should we jump onto the business model?
• 10:41
  SPEAKER_00: Yeah.
• 10:50
  SPEAKER_01: Um, how about you uh take us through the business model and uh some of the numbers behind uh this exceptional company?
• 10:59
  SPEAKER_00: With Google, I think there's two prongs here.
• 11:02
  SPEAKER_00: First of all, Google, when they're reporting, they segment the revenue, but I think it's also worth pointing out the number of users Google has across their various services.
• 11:11
  SPEAKER_00: So we'll jump into that.
• 11:12
  SPEAKER_00: Google's largest segment to this day, it remains their Google search.
• 11:17
  SPEAKER_00: Obviously, the implementation of AI and Gemini, that's uh revenue-wise, is about 56.6% as of sort of 2024 numbers.
• 11:27
  SPEAKER_00: However, what's interesting is that's actually been slowly coming down.
• 11:32
  SPEAKER_00: There is more revenue coming from different segments.
• 11:35
  SPEAKER_00: So then with YouTube, obviously, this is YouTube ads only, and it's not linked to YouTube Premium, but YouTube ads makes up about 10% of the company revenue, which um again, you know, if we look at Google search, about 3.6 billion users.
• 11:52
  SPEAKER_00: YouTube is about 2.7.
• 11:54
  SPEAKER_00: As part of my research, I did see that YouTube is actually superior to Netflix in terms of viewers and sort of watching time.
• 12:02
  SPEAKER_00: Beyond that, we've got Google subscriptions, platforms, and devices.
• 12:06
  SPEAKER_00: This is about 11 or 11.5% of revenue.
• 12:09
  SPEAKER_00: Again, we're sort of sitting at 2.7 billion users.
• 12:12
  SPEAKER_00: So these are crazy numbers considering that almost half of the global population.
• 12:17
  SPEAKER_00: That includes Google Play, YouTube subscription, Google Drive, Google Photos, and also Google Workspace.
• 12:24
  SPEAKER_00: Beyond that, we've got the likes of the Google Network, where um this is obviously ads out with Google, so non-Google websites, and this is driven by the likes of Chrome and Android.
• 12:35
  SPEAKER_00: That's about uh 8.7% off revenue, and again, user-wise, you're still sort of one to two billion.
• 12:42
  SPEAKER_00: And then lastly, Google Cloud, which is really interesting because for maybe the past decade, you know, it's really lagged behind the likes of AWS and Azure, but we're starting to see some real promise with Google Cloud.
• 12:56
  SPEAKER_00: Um, obviously, that includes this this segment includes the likes of Google Workspace as well, um, you know, Google Docs, Google Meet, and so on.
• 13:04
  SPEAKER_00: Um, but it also overlaps with the likes of Gmail and Drive.
• 13:08
  SPEAKER_00: So we'll no doubt come onto that.
• 13:10
  SPEAKER_00: A few mentions, obviously, which aren't directly broken out into the revenue segments by the likes of Android, which obviously is the open source soft software which almost powers every single phone outside of iPhone or that you know, basically Samsung's and so on.
• 13:26
  SPEAKER_00: But that's got about 3 billion users.
• 13:27
  SPEAKER_00: Chrome, we're probably sitting around 2.5 to 3 billion users as well.
• 13:32
  SPEAKER_00: Gmail, again, probably 2.5 billion users.
• 13:35
  SPEAKER_00: I use Gmail on a daily basis.
• 13:37
  SPEAKER_00: So Google just has this massive reach that it's you know, it's difficult to put the numbers or comprehend the numbers behind it.
• 13:46
  SPEAKER_00: And it's also interesting that actually, you know, again, we'll look at this, but go so Google obviously has Google search and is so reliant on it, but actually, there is other opportunities there that probably aren't being monetized as much.
• 13:59
  SPEAKER_00: You know, Google is set up in a way that every single piece of software, you know, whether it's Android, Chrome, Gmail, everything drives towards Google Ads and delivering those to customers.
• 14:10
  SPEAKER_00: So yeah, it's on a scale, it's like almost like no company in the world.
• 14:17
  SPEAKER_01: It's it's unbelievable.
• 14:19
  SPEAKER_01: I mean, if you think about, I think the only way to really look at a company like Alphabet, and if you want to like really figure out what the competitive advantages of the company are, I think you really have to divide the company into different segments, which you just did.
• 14:34
  SPEAKER_01: I think you really have to look into Google Search.
• 14:37
  SPEAKER_01: I think you have to look into YouTube, Google Cloud, Android, and Google Play, the devices, and the other bad segment.
• 14:45
  SPEAKER_01: I think that's I will go through them, but that's probably those numbers are immense.
• 14:53
  SPEAKER_01: And all of these different segments kind of work together.
• 14:58
  SPEAKER_01: I mean, combine them and you have the craziest global network effects.
• 15:02
  SPEAKER_01: You have intangible assets, you have economies of scale, you have cost advantages, you have switching costs.
• 15:07
  SPEAKER_01: I mean, it's it's unbelievable.
• 15:10
  SPEAKER_00: Yeah, I mean, obviously, we mentioned that Google has seven products, you know, with over a billion users.
• 15:14
  SPEAKER_00: So let's jump into those a little bit more and give the listeners some context because obviously that's some of this revenue data is publicly available, other parts are not.
• 15:24
  SPEAKER_00: But with search, and you know, is ultimately the engine behind the company, it's handling over 90% of global search queries, it's been around that for probably more than two decades, as we've already touched on.
• 15:36
  SPEAKER_00: You know, it makes up about 56% of revenues.
• 15:38
  SPEAKER_00: And Google's in this funny position where you've already touched on it, but you know, these guys essentially invented modern-day LLMs, but they're now in a position where they're trying to catch up with the likes of Chat GPT and they're trying to integrate Gemini into search in a way that doesn't ultimately affect their core business.
• 16:01
  SPEAKER_00: So this is just a it's in a really it's a really interesting point for Google, and I'd be curious if the market wasn't at all-time highs, whether Google shares would be more depressed, because the narrative around it seems to be that Chat GPT, Anthropic, and so on, you know, that out there there is the the search killer.
• 16:21
  SPEAKER_00: I don't think that's the case, but I'm sure we'll we'll get onto that.
• 16:24
  SPEAKER_00: So, do you want to add anything about search or do you want to jump onto YouTube?
• 16:29
  SPEAKER_01: Yeah, you know, the funny thing is the founders originally hated advertising.
• 16:33
  SPEAKER_01: They thought most of it was useless pollution, like those expensive Super Bowl ads commercials you see, and you don't want anything to do with it.
• 16:42
  SPEAKER_01: They believed advertising should be relevant and useful to the user and not intrusive or inefficient distraction.
• 16:49
  SPEAKER_01: But kind of ironically, that anti-advertising attitude is exactly what built like the most successful ad flat platform ever.
• 16:56
  SPEAKER_01: It's it's pretty just funny to think about.
• 16:58
  SPEAKER_01: Google search has a lot of brand power.
• 17:01
  SPEAKER_01: To Google something has become a verb, it's it's become embedded in everyday life.
• 17:06
  SPEAKER_01: And I kind of describe it as the front door to the internet.
• 17:10
  SPEAKER_01: Wherever you go, you you go through Google, sort of.
• 17:13
  SPEAKER_00: I think Google is funny as well.
• 17:14
  SPEAKER_00: You know, people just there's been so many um other search engines out there that I know the technology is way more advanced than sort of a window to the internet, but people start on Google because they trust it, they trust the results.
• 17:29
  SPEAKER_00: I can't remember who the exact company was, um, but I I first researched Google back um back in in 2022, and there was a uh search engine that um was on an episode of Invest Like the Best, and the there was a basically the company was called Neva, and it was an ad-free private search platform.
• 17:52
  SPEAKER_00: And this was back in 2022, you know, it sounded really exciting, but in uh research for this episode, I woke these guys up and they've gone out of business since then.
• 18:01
  SPEAKER_00: So it just shows you that Google as a has you know this massive search monopoly that is people have been predicting for decades that it's going to be destructed, and it's it's just still, you know, that 90% ownership of the market.
• 18:14
  SPEAKER_01: Sometimes having a better, faster, more efficient software program, product doesn't mean you're going to win.
• 18:25
  SPEAKER_01: There is something in human behavior that just we are species of habit, you know, so we we don't like to change things up.
• 18:34
  SPEAKER_01: If something works, fine.
• 18:36
  SPEAKER_01: We don't really wanna learn something new and wanna switch.
• 18:40
  SPEAKER_01: I I caught myself sort of having this same like struggle to try new things and switch.
• 18:48
  SPEAKER_01: And I don't I've always tried I've all I've always used Google Chrome, and I just don't want to use anything else.
• 18:55
  SPEAKER_01: I might be a bit biased, of course, but yeah, I don't know.
• 18:59
  SPEAKER_00: Yeah, I would agree.
• 19:00
  SPEAKER_00: You know, using that example, I left a company that switched from Gmail to Microsoft, and as soon as I moved on from that company, I went straight back to Gmail.
• 19:11
  SPEAKER_00: I was it was only gonna be one email for me.
• 19:15
  SPEAKER_01: Yeah, it was a weird dynamic.
• 19:17
  SPEAKER_01: So shall we move on to YouTube?
• 19:19
  SPEAKER_01: Do you want to run us through that?
• 19:21
  SPEAKER_01: Oh yeah, yeah, yeah.
• 19:21
  SPEAKER_01: I'm excited about this one.
• 19:23
  SPEAKER_01: I I think YouTube is okay, but you might not like it, but maybe just hear me out.
• 19:31
  SPEAKER_01: I think YouTube is one of the perhaps after search, but maybe with the rise of AI more so.
• 19:39
  SPEAKER_01: YouTube is the strongest part of Alphabet.
• 19:42
  SPEAKER_01: I think it is the perfect flywheel effect business.
• 19:48
  SPEAKER_01: Its scale creates such a powerful network effect, a huge audience attracts creators, more content, drives more viewers, and just this loop just strengthens every single time.
• 20:01
  SPEAKER_01: And I think they can monetize this a lot more.
• 20:05
  SPEAKER_01: It has an exceptional powerful brand, it has global reach.
• 20:11
  SPEAKER_01: I don't think unless governments intervene, there is going to be another platform as successful as YouTube.
• 20:20
  SPEAKER_01: YouTube ads now bringing 38 billion in revenue annually, at 100 plus million YouTube premium subscribers, and this will grow.
• 20:30
  SPEAKER_01: YouTube Music bringing in another roughly 11 billion annually.
• 20:35
  SPEAKER_01: It has 2.7 billion monthly users, 122 million daily users across 100 plus countries.
• 20:44
  SPEAKER_01: The perfect business.
• 20:59
  SPEAKER_00: I mean, do you want to talk us a little bit through that?
• 21:02
  SPEAKER_01: Yeah.
• 21:03
  SPEAKER_01: The weird thing is that YouTube subscribers are less profitable, they kind of want you to stay free.
• 21:11
  SPEAKER_01: 99% of YouTube users are still free users, and they don't mind it because the advertising bismuth of YouTube is a lot more profitable.
• 21:21
  SPEAKER_01: But the YouTube premium service is a lot more stable revenue.
• 21:30
  SPEAKER_01: I mean, it fluctuates a lot less.
• 21:32
  SPEAKER_01: The overall quality of the platform improves a lot because you don't get any advertisements, the YouTube music becomes a lot better, so the overall user experience improves a lot, which is like a byproduct of uh of premium.
• 21:47
  SPEAKER_01: I would say YouTube becomes a lot less profitable if everyone became a paid subscriber.
• 21:52
  SPEAKER_01: But I I that that won't happen, so yeah.
• 21:56
  SPEAKER_00: No, I think I would agree with that, but I also think there is probably an element of Of there's a nice blend somewhere that you've I don't know if you've obviously seen this on Netflix, that Netflix now have advertising for the lower tiers.
• 22:08
  SPEAKER_00: And with that, YouTube probably fits in there somewhere that there might be a diversity across the annual subscription price.
• 22:16
  SPEAKER_00: And it could be the case that actually was there still is, and I and I I'd no doubt there will be continually free users, but there's probably somewhere that people are paying for YouTube but also still receiving ads.
• 22:28
  SPEAKER_01: Oh, absolutely.
• 22:29
  SPEAKER_01: I mean Prime is doing the same stuff now.
• 22:31
  SPEAKER_01: I I I hate it.
• 22:32
  SPEAKER_01: I pay for Prime and now I get like 90-second ads, and I have to pay three euros a month more to get rid of the ads.
• 22:40
  SPEAKER_01: Eventually, YouTube is going that route as well.
• 22:43
  SPEAKER_00: I also think just with YouTube, you've you've touched on it as being sort of the perfect product outside of search.
• 22:49
  SPEAKER_00: For me as well, YouTube is just a platform that lends itself so well to the future of AI.
• 22:56
  SPEAKER_00: We're seeing so many AI videos starting to come out, and I think the real uh disruptors for YouTube, and I don't I think they're way off, but would not be another video platform, they would be a short platform like TikTok or Instagram that is disrupted through Rails because everyone tends to watch a lot of these uh these platforms through their phone.
• 23:18
  SPEAKER_00: So, from my own perspective, I I think YouTube's so far ahead of these guys because obviously it's watched on desktop, TV, and mobile.
• 23:25
  SPEAKER_00: Whereas if you think about Instagram and TikTok, they're both just typically watched on mobile.
• 23:30
  SPEAKER_01: At the end of the day, it all comes down to fewer time, whatever kind of like entertainment platform you are Netflix, YouTube, TikTok, Instagram, there's only 24 hours in a day.
• 23:42
  SPEAKER_01: You gotta work, you gotta eat, you gotta sleep.
• 23:45
  SPEAKER_01: So that leaves you with about six hours a day to about 10 hours a day with fewer time, and these companies are just fighting for attention, and at the end of the day, that's what YouTube is fighting for.
• 24:00
  SPEAKER_01: They they want to show the ads, they want you to use the platform.
• 24:04
  SPEAKER_01: So, yes, I would agree that a YouTube 2.0, a competitor, is not the biggest competitor or risk.
• 24:12
  SPEAKER_01: I would say another entirely different sort of platform, like a TikTok, for example, stealing much more viewer time is more of a risk.
• 24:21
  SPEAKER_01: Yeah.
• 24:21
  SPEAKER_00: And I think what's really mad as well is the the growth rate that YouTube subscribers are seeing.
• 24:26
  SPEAKER_00: That I think it was reported in about February 2024 that YouTube had 100 million subscribers.
• 24:32
  SPEAKER_00: Early 2025 was reported they had about 125.
• 24:36
  SPEAKER_00: It's a 25% growth rate in a single year on quite a already quite a large number of paid subscribers.
• 24:43
  SPEAKER_00: If you if you break that number down as well and you think about the um average revenue per user being about$150, you're looking at about$18 billion in revenue generated and just added on top of all the ads YouTube was already charging for.
• 25:00
  SPEAKER_00: And you know, if you think about that YouTube premium and obviously the subscription model, it could have could have reported anywhere between sort of 10 up to sort of 15 billion towards YouTube's uh sorry um Google's total earnings.
• 25:14
  SPEAKER_00: So it's again, you know, we we already referenced it, but it's one of those things that Nielsen reported that it holds the largest share of US streaming on TV.
• 25:24
  SPEAKER_00: So it it almost is like the undisputed go-to platform already.
• 25:29
  SPEAKER_00: So and and I again I'm not totally convinced that YouTube has tapped into its full potential yet.
• 25:36
  SPEAKER_01: Okay, so um, before I want to switch gears to Android and Google Play, we are kinda biased here.
• 25:44
  SPEAKER_01: We are very, very bullish on YouTube and the company.
• 25:48
  SPEAKER_01: What would need to happen for YouTube to be really like disrupted or go wrong?
• 25:55
  SPEAKER_01: Just to challenge you here.
• 25:57
  SPEAKER_00: Yeah, I think if we consider it, it's definitely some form of sort of the go-to app, TikTok being the perfect example.
• 26:06
  SPEAKER_00: I think there was real pushback and and meta really suffered.
• 26:10
  SPEAKER_00: So if we if you think back to like 2021-2022, that everyone considered TikTok was going to be the Instagram killer.
• 26:18
  SPEAKER_00: You know, whether it's TikTok or another app that comes along, there is something there that basically detracts from users and um their attention.
• 26:29
  SPEAKER_00: We've seen a lot of negative backlash around the likes of Twitter or now X, and there's also sort of pushback to say, you know, I I've not got the numbers in front of me, but I suspect YouTube is pushed by a lot of the younger used by a lot of the younger generation.
• 26:49
  SPEAKER_00: And if YouTube creates these negative spirals that users are spending more and more time on YouTube and effectively being, I don't know, some form of like radicalized.
• 27:02
  SPEAKER_00: Is there an is there a scenario obviously where there's more regulation around YouTube?
• 27:06
  SPEAKER_00: We're gonna come on to it later, but is there a point at which YouTube is sort of or Google are forced to spin YouTube off?
• 27:14
  SPEAKER_00: I don't know.
• 27:16
  SPEAKER_00: Is there any immediate disruption on the horizon?
• 27:21
  SPEAKER_00: I can't see it, but Chat GPT almost for the sort of general public came out of nowhere.
• 27:27
  SPEAKER_00: There might be that other super app that just comes along and and massively disrupts YouTube.
• 27:33
  unknown: Yeah.
• 27:33
  SPEAKER_00: What do you think?
• 27:34
  SPEAKER_00: What's what's your sort of um risks for YouTube?
• 27:37
  SPEAKER_01: Yeah, nothing really to add there.
• 27:38
  SPEAKER_01: I I would agree.
• 27:39
  SPEAKER_01: And um in in the current age of AI and technology, things are moving so fast that I mean just to think when the iPhone was released, nobody could imagine having a phone in your pocket because things move so fast exponentially, and I think that would be one of the reason reasons for YouTube to be disrupted, something entirely new or regulation.
• 28:05
  SPEAKER_01: Spinning off YouTube might also be like value unlocking for shareholders to really see the value of such a company.
• 28:12
  SPEAKER_01: But we're ranting on YouTube here.
• 28:14
  SPEAKER_01: Sonny, take us through Android and uh I'll add to Google Play as well here.
• 28:19
  SPEAKER_01: Before I start, I've got to ask: are you an iPhone user or do you have an Android phone?
• 28:25
  SPEAKER_01: I mean, the listeners will know.
• 28:26
  SPEAKER_01: I I hate Apple.
• 28:28
  SPEAKER_01: I am a Google guy, an Android guy for now and forever.
• 28:35
  SPEAKER_00: So so you maybe chose the wrong guy to run through this because I have to say, apart from I I love all the other parts of Google, as we've talked about, I'm very biased, but I love iPhones, and it's just something that I can you know break out of that.
• 28:50
  SPEAKER_00: So Android, let's say let's come back to that because we're gonna, I'm sure before we wind up this episode, we're gonna talk quite a bit about Apple.
• 28:56
  SPEAKER_00: There's a few bits of crossover there.
• 28:59
  SPEAKER_00: So with Android, it's estimated to be around four to four billion users globally, which is about two-thirds of the global population.
• 29:09
  SPEAKER_00: The um market itself is obviously supported by Google Play, which takes around 15 to 30% commission.
• 29:18
  SPEAKER_00: It's open source, obviously allows manufacturers like Samsung and developers to customize the software and the user um interface across devices.
• 29:27
  SPEAKER_00: Historically, uh, Google's not charged a direct service fee or licensing fee for most of the world.
• 29:34
  SPEAKER_00: Instead, obviously, this revenue is generated through search advertising, it's generated through the likes of Google Play.
• 29:40
  SPEAKER_00: And I think even part of the research that I conducted, you found that not only was Google not charging, but actually they were paying the manufacturers to install Android.
• 29:52
  SPEAKER_00: So, you know, it may be the case that you know it's not obviously clear, but it's the case that YouTube, sorry, Google is still paying manufacturers.
• 29:59
  SPEAKER_00: I mean, there was certainly a bit of that discussed in the acquired episode.
• 30:04
  SPEAKER_00: So with you know, being being the Android user in this conversation, add to that, but also maybe give me your feelings on Android versus Apple.
• 30:16
  SPEAKER_01: Yeah, we know of course that Google pays a lot to Apple for like the default browser.
• 30:24
  SPEAKER_01: Uh close to a 30 billion annually, I believe.
• 30:27
  SPEAKER_01: I can imagine them paying a Samsung and other device makers to be the default search engine or or having them run Android for uh for example.
• 30:38
  SPEAKER_01: I am not too sure.
• 30:39
  SPEAKER_01: I haven't found the evidence, but I mean that that sounds very reasonable.
• 30:45
  SPEAKER_01: If you think about like I like giving certain businesses like a mode rating, I would say Android and Google Play have like a five out of five star mode rating.
• 30:57
  SPEAKER_01: I think it's it's it's it's a castle protected by two things, which are intangible assets and the network effect.
• 31:06
  SPEAKER_01: And like you said, the first wall, the intangible assets, is kind of built on like clever backroom deals.
• 31:12
  SPEAKER_01: Alphabet Science contracts known as MADAS, M-A-D-A MADAS, with almost every smartphone manufacturer outside of Apple, and it in exchange for the manufacturer being able to preload essential apps like Google Search, YouTube, and Chrome, which is so they are paying for the apps, perhaps also the software, but they are paying for the apps, and the network effect is also formidable because it is so hard for a competitor to emerge here.
• 31:51
  SPEAKER_01: Developers from small startups, even to like big companies like Spotify, will only invest time and money into building apps where the users are, which are the Play Store, the Google Play Store, and the iOS store, the the Apple store.
• 32:08
  SPEAKER_01: It's hard to disrupt this without governments intervening.
• 32:12
  SPEAKER_01: At the end of the day, it comes down to which ecosystem you're locked into, right?
• 32:16
  SPEAKER_01: So if you start on an Apple product, you're locked in.
• 32:19
  SPEAKER_01: If you start on a Google product, you're locked in, and it's very hard to switch.
• 32:23
  SPEAKER_00: Well, even with that, obviously Google is paying Apple probably beyond 20 billion annually to be the default browser.
• 32:33
  SPEAKER_00: So even if you're locked into Android or if separately locked into Apple, you still have exposure to Google and to search through Safari.
• 32:43
  SPEAKER_00: So Apple doesn't have that exposure on Android.
• 32:47
  SPEAKER_00: Google still, you know, is it it creeps in to Apple users.
• 32:52
  SPEAKER_00: I think I'll add to that is if you look at Google hardware, things like the Pixel, I I think that Google really lowers the pricing on these products to bring users into the ecosystem.
• 33:06
  SPEAKER_00: Whereas Apple's devices are probably you know close to a thousand pounds or a thousand dollars on the purchase.
• 33:12
  SPEAKER_00: You know, they're making comfortable profits on that.
• 33:15
  SPEAKER_00: Whereas you Google obviously takes the long-term view with new users, perhaps.
• 33:20
  SPEAKER_00: I would I would guess that the margins are not as good on a Pixel versus a new iPhone.
• 33:27
  SPEAKER_01: Oh, absolutely, absolutely.
• 33:29
  SPEAKER_01: I mean, a Pixel is expensive, don't get me wrong.
• 33:31
  SPEAKER_01: The the prices are not that far apart anymore.
• 33:34
  SPEAKER_01: I think the newest Pixel is about 900 to like 1100 euros as well.
• 33:38
  SPEAKER_01: So the iPhone is still a lot more expensive.
• 33:41
  SPEAKER_01: I think Apple sells hardware as their main revenue source, and I think Google sells these hardware products, probably perhaps even at a loss, just to get you into the ecosystem.
• 33:56
  SPEAKER_01: And once you are in the ecosystem, you're you're not stuck, but their software is so good you get used to it, you it becomes a habit.
• 34:06
  SPEAKER_01: And just like the iOS, the Apple products work together seamlessly together.
• 34:10
  SPEAKER_01: The same goes for all the Google products.
• 34:14
  SPEAKER_01: So I think the goal with the hardware is a bit different for both companies.
• 34:20
  SPEAKER_00: So, with that, shall we sort of just jump on to the next services that Google has that are sort of over a billion users?
• 34:26
  SPEAKER_00: Which is just crazy to think there's there's several services that Google offers.
• 34:30
  SPEAKER_00: So the next one is Chrome.
• 34:32
  SPEAKER_00: Do you want me to cover that?
• 34:34
  SPEAKER_00: Absolutely, yeah.
• 34:34
  SPEAKER_00: Take us through it.
• 34:36
  unknown: Cool.
• 34:36
  SPEAKER_00: So you know, well, these are these are a bit shorter than um maybe the others, but Chrome probably sits around three billion users.
• 34:43
  SPEAKER_00: It's one, you know, it's basically sitting at sort of two-thirds or even more of the the uh competitors compine, which is just significant considering that you know maybe maybe you're a little bit young for this, but like Internet Explorer for so long.
• 34:58
  SPEAKER_00: Like that was the go-to go to browser.
• 35:00
  SPEAKER_00: Dude, I know with Chrome, you know.
• 35:02
  SPEAKER_00: I'm not that young, I know Internet Explorer.
• 35:07
  SPEAKER_00: So and yeah, I guess it's used on 65% of desktops.
• 35:11
  SPEAKER_00: So traffic is not it's it's coming from um you know Chrome on on desktop or computers, and then Android is obviously driving search through mobile.
• 35:22
  SPEAKER_00: And again, like I'm I'm a Chrome user, I've got about three tabs open right now, all on Chrome.
• 35:28
  SPEAKER_00: I can't remember the last time I've used I used another desktop.
• 35:32
  SPEAKER_00: So so I'll just quickly run us through the um the other uh products and services that Google has.
• 35:38
  SPEAKER_00: So with Gmail, we've already touched on it, but you're probably looking at about two and a half billion users, and then beyond that, uh there's maps, there's Google Drive, and there's Google Photos.
• 35:49
  SPEAKER_00: So everyone's familiar with those.
• 35:52
  SPEAKER_00: Uh but lastly, I think it's a notable mention is worth shouting out Gemini.
• 35:57
  SPEAKER_00: So Gemini's reported to have around 450 million monthly active users.
• 36:03
  SPEAKER_00: We're going to compare that to ChatGPT later, but I think that this is almost the second half of this podcast is Gemini and AI and how that integrates into the rest of the Google ecosystem.
• 36:16
  SPEAKER_01: Yeah, and you missed two parts of Alphabet, Sonny.
• 36:21
  SPEAKER_01: Perhaps the growth engine of Alphabet.
• 36:24
  SPEAKER_01: Right, you're gonna have to take us through that.
• 36:26
  SPEAKER_01: Google Cloud.
• 36:28
  SPEAKER_01: Google Cloud is now the third largest cloud provider in the world, just behind Azure and AWS.
• 36:36
  SPEAKER_01: And the world is moving to cloud, that's for sure.
• 36:39
  SPEAKER_01: We don't know whether AI will pay off uh economically, but we're moving to the cloud, especially for storage, for Google photos, for storing files, whatever it may be.
• 36:50
  SPEAKER_01: And it's becoming a very, very big business.
• 36:54
  SPEAKER_01: And uh we'll talk about Google Cloud a little more later during this episode, but I think this will be if you're investing in Alphabet at the current price, which I probably wouldn't, this will be one of your growth drivers for the company, I think.
• 37:10
  SPEAKER_00: I think cloud as well, just we're gonna come on to that with the with the sort of AI bet, but lends itself so well to that argument as well.
• 37:22
  SPEAKER_01: So we've kind of touched on the competitive advantages of the different businesses already, but is there anything else you would like to add here before we uh perhaps talk about the financials?
• 37:33
  SPEAKER_00: No, I think uh you know we've we've sort of waxed lyrical about um Google for the last sort of 30 minutes or 45 minutes.
• 37:40
  SPEAKER_00: Uh, do you want to do you want to sort of run us through um the top line?
• 37:45
  SPEAKER_00: Absolutely, yeah.
• 37:46
  SPEAKER_01: Just looking at some of the the basic numbers, the key numbers, Alphabet's growth has been phenomenal.
• 37:54
  SPEAKER_01: Revenue grew 18% kagger over the last 10 years.
• 37:58
  SPEAKER_01: Expenses have grown slightly faster at 19% kagger, mostly due to AI infrastructure, computing, data centers, hardware, etc.
• 38:10
  SPEAKER_01: Operational profits, however, have grown 21% kagger, which shows the operational leverage the company has, faster growth than revenue.
• 38:20
  SPEAKER_01: Search, like you mentioned, about 57% of revenue, still very important for the company.
• 38:27
  SPEAKER_01: Cloud is growing rapidly at about 40% kagger.
• 38:32
  SPEAKER_01: They have$95 billion in cash with a net cash position of$65 billion.
• 38:40
  SPEAKER_01: Nuts.
• 38:40
  SPEAKER_01: The numbers in this company are immense.
• 38:44
  SPEAKER_01: Operating margins around 32%.
• 38:47
  SPEAKER_01: Anything um you would like to add here?
• 38:50
  SPEAKER_00: No, I think um, but one one point is really relevant is the fact that everyone's like search is dying.
• 38:57
  SPEAKER_00: Search still grew over 10% in the last quarter.
• 39:00
  SPEAKER_00: You know, search is certainly not dead, there's still opportunity there.
• 39:03
  SPEAKER_00: Um, and I think with Google, if they can without disrupting themselves, if they can maneuver that effectively, then there's untapped opportunity with the integration of AI and Gemini.
• 39:15
  SPEAKER_01: While talking about opportunities, how about you take us through the risks and opportunities you see for the company, and I'll see if I have anything to add there.
• 39:25
  SPEAKER_00: Okay, so I think there's three big ones.
• 39:28
  SPEAKER_00: Um, the first one is obviously that Apple relationship.
• 39:32
  SPEAKER_00: We've already touched on the fact that Google pays um more than 20 billion to be the default search engine with Apple.
• 39:41
  SPEAKER_00: Now, the company pays Apple about 36% of its uh Safari search revenue.
• 39:48
  SPEAKER_00: So this suggests that you know there's there's total revenue that could be, you know, or the Apple agreement anyway could be worth about 50 billion, even at the sort of high end.
• 40:00
  SPEAKER_00: It seems to be the case that every year there's a report of 20, 20 plus billion that Google is paying to Apple, but in fact it seems to be a lot higher than that.
• 40:09
  SPEAKER_00: Um, and I suspect that's that's only increasing.
• 40:13
  SPEAKER_00: I can't see it.
• 40:14
  SPEAKER_00: I can't see Apple creating their their own search engine, and it they've not got the history that Google has in this market.
• 40:21
  SPEAKER_00: We've seen stranger things, and that obviously would disrupt all of the Apple users, you know, take them off or taken off the search users, or sorry, far users, sorry, off search.
• 40:33
  SPEAKER_00: Do you think it's feasible, or do you think it in the next five years we could see Apple ditching Google, or is that just a sort of paranoid risk?
• 40:43
  SPEAKER_01: I don't think so.
• 40:44
  SPEAKER_01: I think if Apple wanted to get rid of Google Chrome, they they already should have.
• 40:52
  SPEAKER_01: They have immense amounts of money to invest in RD.
• 40:57
  SPEAKER_01: They have not been able to get rid of Google Chrome or disrupt Google Chrome.
• 41:02
  SPEAKER_01: Besides, look at the innovation Apple has shown over the last few years.
• 41:08
  SPEAKER_01: It's very mediocre for such a company if you compare it to a Microsoft, an Alphabet, or a Meta even.
• 41:17
  SPEAKER_01: Besides, I think Google Chrome has the user habit, the brand loyalty.
• 41:21
  SPEAKER_01: I don't think this is gonna happen, not by Apple.
• 41:26
  SPEAKER_01: Apple could in theory, I guess, negotiate higher revenue, because I do think Alphabet will probably pay it because it's so lucrative.
• 41:36
  SPEAKER_01: But if it still gives them a good return on investment, I mean why not?
• 41:43
  SPEAKER_00: So probably something that is more, you know, take to be taken more seriously is the fact that Google has there's several cases outstanding.
• 41:52
  SPEAKER_00: And I actually did a did a piece on this sort of back in 2022 or late 2022 about the DOJ.
• 41:58
  SPEAKER_00: And it was only recently announced, actually, that was it was considered that Google might have been forced to spin off probably Chrome or Android.
• 42:07
  SPEAKER_00: Now, that was recently announced that wasn't going to be the case, so I think shares jumped by about five to seven percent on that day, but that was you know that was only one case, and there's still several outstanding.
• 42:20
  SPEAKER_00: So, you know, I think there's a DOJ, they're taking on Google's ad tech monopoly.
• 42:25
  SPEAKER_00: There's several cases with the EU.
• 42:28
  SPEAKER_00: And is the scenario okay?
• 42:29
  SPEAKER_00: You know, Google has so much money and cash on hand that they get a slap on the wrist and find a few billion dollars.
• 42:36
  SPEAKER_00: For most companies in the world, that would put them out of business, but Google sort of just accepts it and moves on.
• 42:42
  SPEAKER_00: You know, if we if we reflect back historically, sometimes it's the case that companies seem to be focused on we've seen that with with um Meta about five years ago.
• 42:54
  SPEAKER_00: Then if we go back to sort of early 2000s, obviously there was quite a large case brought against Microsoft.
• 43:00
  SPEAKER_00: Google seems to be the company that is in the fire and light right now.
• 43:04
  SPEAKER_00: And as a shareholder, I was concerned that Google would be forced to spin something else off.
• 43:10
  SPEAKER_00: And and actually it wasn't even spin it off, it was sell Chrome to a competitor or sell Android to a competitor.
• 43:16
  SPEAKER_00: Now, they've obviously they've dodged a bullet in this first case, but you know, what's to say that that this or something along these lines can't happen again?
• 43:27
  SPEAKER_00: What's your what's your thoughts on that, Steam, with obviously the regulation and the sort of monopoly breakup?
• 43:32
  SPEAKER_00: How much of a risk is this for Google and for shareholders?
• 43:36
  SPEAKER_01: I think selling Chrome is such a crazy, such a crazy turn of events.
• 43:43
  SPEAKER_01: That would be that would be nuts.
• 43:44
  SPEAKER_01: I think selling Chrome would actually be a risk.
• 43:47
  SPEAKER_01: Imagine Apple or Open AI being able to buy Chrome.
• 43:51
  SPEAKER_01: First of all, it makes no sense because you're sort of giving the monopoly to someone else.
• 43:58
  SPEAKER_01: I mean, the problem is Chrome.
• 44:00
  SPEAKER_01: It doesn't matter who who has it, right?
• 44:02
  SPEAKER_01: So I think selling Chrome would be a risk, yeah, for sure.
• 44:06
  SPEAKER_01: Um if I'm being completely honest, I think the biggest known threat isn't a competitor, I think it's the courtroom.
• 44:14
  SPEAKER_01: Yeah.
• 44:16
  SPEAKER_00: So with that, um think there's the next risk probably deserves its own section entirely.
• 44:22
  SPEAKER_00: Probably big question.
• 44:23
  SPEAKER_00: Um, and let's come back to this at the end and try and answer it.
• 44:26
  SPEAKER_00: Is ChatGPT the Google killer?
• 44:30
  SPEAKER_00: You want my answer?
• 44:33
  SPEAKER_00: No, we're not gonna we're we're gonna have to run through this first.
• 44:35
  SPEAKER_00: Okay, okay.
• 44:38
  SPEAKER_00: So AI, you know, the opportunities and the threats.
• 44:41
  SPEAKER_00: Now, same, I'll be quite honest with you.
• 44:44
  SPEAKER_00: As a as a Google shareholder, before we sort of did this deep dive, I was a bit concerned about the likes of ChatGPT.
• 44:52
  SPEAKER_00: And you know, I've seen so many people, um, the narrative around, especially around sort of um X and on Substack, seems to be there's gonna be like a magic button that OpenAI or ChatGPT will flick, they'll flick a switch and suddenly they'll have advertising and that's search.
• 45:08
  SPEAKER_00: You know, that's all of Google's uh search revenue gone.
• 45:12
  SPEAKER_00: But I don't think we're gonna find that.
• 45:14
  SPEAKER_00: So let's let's jump into this because I think it's difficult to mention Google without discussing AI.
• 45:19
  SPEAKER_00: It's been basically, you know, these guys essentially invented modern-day LLMs.
• 45:25
  SPEAKER_00: You know, that the transformer uh architecture, the the T in ChatGPT is a foundational technology for that.
• 45:32
  SPEAKER_00: So let's talk about this and talk about how 2017, you know, Google almost had this perfect opportunity to completely dominate this market.
• 45:43
  SPEAKER_00: How have they let it slip?
• 45:45
  SPEAKER_00: Um, and with ChatGPT, you know, what are we looking at here?
• 45:49
  SPEAKER_00: Or should we be concerned as Google shareholders?
• 45:52
  SPEAKER_01: I think you really wanted to record this episode just uh to put your your mind at ease on uh on AI, right?
• 46:01
  SPEAKER_01: Now I would say, of course, take this with a grain of salt.
• 46:08
  SPEAKER_01: Like all things, I think AI is a double-edged sword.
• 46:13
  SPEAKER_01: I can definitely see it being a risk.
• 46:16
  SPEAKER_01: If the user user behavior changes too fast for Google to change, there's a lot of uncertainty, it's expensive.
• 46:25
  SPEAKER_01: There is a lot of risk with AI.
• 46:27
  SPEAKER_01: I don't think a lot of companies will get any return on invested capital with all the build-outs and all everything they are spending on AI.
• 46:36
  SPEAKER_01: I think future profitability is going to be very difficult to forecast.
• 46:40
  SPEAKER_01: Do I think it is more of an opportunity for alphabet?
• 46:45
  SPEAKER_01: Yes.
• 46:46
  SPEAKER_01: Let me explain why.
• 46:48
  SPEAKER_01: I think the cloud and AI go hand in hand.
• 46:52
  SPEAKER_01: It is about being the essential pick and shuffle provider during this AI rush or gold rush, whatever you want to call it.
• 47:02
  SPEAKER_01: They are kind of laying the foundation for AI.
• 47:05
  SPEAKER_01: So even if AI doesn't really play out for them, they are still the cloud provider that AI needs to run on.
• 47:13
  SPEAKER_01: So they'll get paid anyway.
• 47:15
  SPEAKER_01: That's my first point.
• 47:16
  SPEAKER_01: They they have their own chips, which makes them more efficient and blah blah blah.
• 47:21
  SPEAKER_01: A lot of good things to like there.
• 47:24
  SPEAKER_01: Cloud is growing rapidly, they can embed AI into all their products, which is a lot more useful than just a single piece of software, software as a service, an AI app, whatever it may be.
• 47:37
  SPEAKER_01: Because when you are incorporating it into your own ecosystem, people actually find it useful and use it, and the product becomes even better, it increases the user experience, and eventually they should be able to get a higher ARPU for each of the users they're charging.
• 48:01
  SPEAKER_01: Now I found this very interesting infographic where it's about you can find it in our uh in our deep dive on uh the Dutch investors, it's about the hyperscalers that used to go to AWS, but now most AI startups are going to Google Cloud because they can incorporate it into the ecosystem that AWS doesn't really have.
• 48:29
  SPEAKER_01: They are just a cloud provider with uh some foundational models, so I think it's uh it's a lot more of an opportunity, and besides, I am no AI expert, but from the looks of it, AI is causing more people to search for things, the overall queries are increasing, so people are searching more, whether in AI mode, Chat GBT, and apparently the AI links are a little more profitable because there's less of them.
• 49:06
  SPEAKER_01: So I don't know, it's a double-edged sword, but I do think it's more of an opportunity than a risk.
• 49:11
  SPEAKER_00: I would also ask the question: are OpenAI going to have to outspend Google to beat them?
• 49:19
  SPEAKER_00: Is that the scenario?
• 49:20
  SPEAKER_00: So we've got yes, so we've got the obviously a scenario, OpenAI closed a sort of 40 billion funding round, led by Softbank, by Massa, valued OpenAI about 300 billion.
• 49:33
  SPEAKER_00: Now, it just seems that OpenAI is one of these companies that has continually raised round after round.
• 49:39
  SPEAKER_00: But Google, because of its sort of massive revenue, is it's self-funded.
• 49:44
  SPEAKER_00: And being one of the largest companies in the world, it's almost impossible unless you're Microsoft or or Amazon.
• 49:51
  SPEAKER_00: You can't compete with Google on how much you can invest.
• 49:54
  SPEAKER_00: And I certainly think OpenAI are going to encounter that.
• 49:57
  SPEAKER_00: So with that same, do you want to cover ChatGPT and run us through that?
• 50:03
  SPEAKER_00: And then we can maybe come on to Gemini.
• 50:06
  SPEAKER_01: Are you more of a ChatGPT or Gemini user yourself?
• 50:10
  SPEAKER_00: Again, you know, I'm I'm gonna have to um hold my hands up here.
• 50:13
  SPEAKER_00: Uh first of all, I admitted I used Apple, now I have to admit that I I use ChatGPT.
• 50:18
  SPEAKER_00: However, I've made an active effort to use Gemini in preparation for this podcast in my deep dive, and I would say there's not a noticeable difference between the two of them.
• 50:31
  SPEAKER_00: However, I've used ChatGPT for the last several months, and obviously it has all this sort of backlog data on me, and there's that element that I need to make sure that comes over to Gemini.
• 50:43
  SPEAKER_01: Yeah.
• 50:44
  SPEAKER_01: Yeah, I do think Gemini still has lots of um many needed improvements, it still lags behind user experience in uh when comparing it to ChatGPT.
• 50:55
  SPEAKER_01: But the output might even be just as good, perhaps a little better.
• 51:01
  SPEAKER_01: But I find myself using ChatGPT as well a little more.
• 51:05
  SPEAKER_01: I don't know.
• 51:06
  SPEAKER_01: That's an interesting question to think about for myself, why I use ChatGPT more.
• 51:12
  SPEAKER_01: I wouldn't mind switching over to Gemini, but um I don't know.
• 51:16
  SPEAKER_01: It's apparently there is something about ChatGPT that is better.
• 51:20
  SPEAKER_01: The users are deviating from search, it has been shown by statistics and uh and research.
• 51:26
  SPEAKER_01: People are using more LLMs.
• 51:29
  SPEAKER_01: It is a threat to the search monopoly for sure.
• 51:33
  SPEAKER_01: Like I said, I find myself using ChatGPT, it might be because of the first mover advantage.
• 51:38
  SPEAKER_01: I am used to it.
• 51:39
  SPEAKER_01: It has a kind of a brand, I would say.
• 51:42
  SPEAKER_01: 800 million active users is not bad.
• 51:45
  SPEAKER_01: They can probably monetize a lot of it, whether through advertising or through subscriptions.
• 51:52
  SPEAKER_01: I do think just 13 billion in revenue is so little for a company that is valued over 300 billion, and they have this inflated bubble of deals.
• 52:04
  SPEAKER_01: Over 500 billion dollars worth of deals.
• 52:08
  SPEAKER_01: They lose billions of dollars every single week.
• 52:12
  SPEAKER_01: So I don't know if I mean if the funding ever stops, they are gone.
• 52:17
  SPEAKER_01: They are backed by a lot of big companies, Nvidia, Microsoft, Oracle, stuff like that.
• 52:23
  SPEAKER_01: Yeah.
• 52:24
  SPEAKER_00: Do you have anything to add on ChatGPT, perhaps?
• 52:27
  SPEAKER_00: No, I think it's just investment.
• 52:29
  SPEAKER_00: You know, let's look at the total capex.
• 52:32
  SPEAKER_00: So ChatGPT is estimated to be around 50 billion on an annual basis of CapEx and investment.
• 52:40
  SPEAKER_00: About 35 billion of that's going to NVIDIA hardware.
• 52:44
  SPEAKER_00: Google's obviously this is for the entire company, but our Alphabet's CapEx was estimated to be around 85 billion for 2025.
• 52:53
  SPEAKER_00: Now, that does drag down margins, um, but unlike OpenAI, there's a scenario that OpenAI has to lease compute from Microsoft, whereas Google is effectively, yeah, but it's it's investing, but it's massively investing in its own infrastructure.
• 53:12
  SPEAKER_00: And we'll come onto this in a second, but it is a scenario that OpenAI is paying um you know predominantly NVIDIA, but Google has its own TPUs.
• 53:23
  SPEAKER_00: You know, Chat GPT is relying on NVIDIA's GPUs.
• 53:27
  SPEAKER_00: We'll come into that in a minute, but yeah, I think it's the case that actually there is this cycle that Google, yeah, as long as it's done properly, investment-wise, it's it's gonna be it's gonna look to go the outcomes are gonna look quite different from um OpenAI's investment.
• 53:43
  SPEAKER_01: I think the only real winner is NVIDIA here.
• 53:46
  SPEAKER_01: I I I don't see how OpenAI is ever going to get their money back on all these crazy investments.
• 53:54
  SPEAKER_01: Something about OpenAI really bothers me.
• 53:57
  SPEAKER_01: Everybody's so excited about it.
• 53:58
  SPEAKER_01: Can they ever make this much money from subscriptions?
• 54:02
  SPEAKER_01: They have to do so much more than that.
• 54:04
  SPEAKER_01: They would need to have advertisements.
• 54:07
  SPEAKER_01: Uh they just launched a browser and Google stock dropped about 160 billion, and then people started using the browser and they just realized it is exactly a Google Chrome with AI functions and good and alphabet's stock increased 200 billion.
• 54:24
  SPEAKER_00: So But yeah, I would agree.
• 54:26
  SPEAKER_00: There's not there's no obvious switch to just turn on and suddenly the revenue just is is generated, you know, into the hundreds of billions.
• 54:35
  SPEAKER_00: Chat GPT is great, and there's been a lot of experiences that I've had in the past or we've seen that you you look at something like Facebook and Meta, and you know, it wasn't it wasn't this magical ad uh advertising engine from day one, but it had the users.
• 54:51
  SPEAKER_00: And if ChatGPT has the users, there might be that scenario where there is other revenue generation, most likely from advertising, but we're moving into almost this sort of strange new world.
• 55:03
  SPEAKER_00: Yeah.
• 55:04
  SPEAKER_00: Is ChatGPT here to say is to stay?
• 55:06
  SPEAKER_00: I I do think so.
• 55:08
  SPEAKER_00: I think we'll still have Chat GPT five, 10 years down the line.
• 55:11
  SPEAKER_00: In what format is that?
• 55:12
  SPEAKER_00: Is that Microsoft have acquired it or another large player?
• 55:17
  SPEAKER_00: Maybe.
• 55:17
  SPEAKER_00: Yeah, degree with that one.
• 55:19
  SPEAKER_01: Uh I think luck plays a role here as well.
• 55:22
  SPEAKER_01: If something bad were to happen to like the to the global financial system or to like the semiconductor industry, of people realizing AI is more of a hype than actually useful, then all these large players will perhaps fund them a lot less, or even back out.
• 55:46
  SPEAKER_01: And this is a request to all our listeners.
• 55:49
  SPEAKER_01: I would love to talk some to someone that is like an AI expert, whether on foundational models, hardware providers, development platforms, working for cloud providers.
• 56:00
  SPEAKER_01: I would love to interview somebody that is deep into the world of AI and just ask all the questions that come to mind.
• 56:09
  SPEAKER_01: I would love to learn more about it.
• 56:10
  SPEAKER_01: So uh email us if you uh know anybody.
• 56:15
  SPEAKER_01: Let's uh switch over to Gemini.
• 56:18
  SPEAKER_00: Yeah, let's do it.
• 56:19
  SPEAKER_00: Um so we already talked about search at length, and everyone's saying, you know, ChatGPT is the search killer.
• 56:27
  SPEAKER_00: Now, I don't necessarily think that search is by any means dead.
• 56:31
  SPEAKER_00: I think that Google are just making a quiet shift to integrate an AI into search.
• 56:37
  SPEAKER_00: We've seen search become more conversational, you get generative AI suggestions.
• 56:43
  SPEAKER_00: Obviously, the threat is that the LLMs or ChatGPT eliminates the sort of the window to the internet or the middle man status that Google holds.
• 56:52
  SPEAKER_00: But it's funny because obviously, as soon as ChatGPT came out, there was almost like this recognition from Google and the management that actually this could seriously disrupt the business.
• 57:04
  SPEAKER_00: With AI and with Gemini in particular, Google has reported um that it has about 2 billion monthly users, you know, obviously, plugged into search that are you know benefiting from AI.
• 57:17
  SPEAKER_00: The search, the you know, the scale itself as well for search and and all Google software is unprecedented.
• 57:24
  SPEAKER_00: So there is the scenario that actually Google doesn't cannibalize its search business, but it enhances it with the integration of AI and Gemini.
• 57:35
  SPEAKER_00: If we consider Gemini, you know, Gemini is obviously accessible through the Gemini app and then in the desktop, which is where I was using it for research for this podcast.
• 57:44
  SPEAKER_00: However, it is the case that it's been integrated into Chrome.
• 57:47
  SPEAKER_00: I can't speak for Android because obviously I'm not an Android user, but it's the scenario that Google are starting to integrate AI and sort of Gemini as a spearhead of that across its platforms.
• 57:59
  SPEAKER_00: I mean, Google possesses fundamental structural advantages that this was probably I'm gonna run you through this, but this for me was the peace of mind that I needed as a Google shareholder that I was a bit concerned about before we jumped into this, but now recognize that Google sits in this really, really unique position because it has an entire AI stack.
• 58:24
  SPEAKER_00: So we've already talked about Google's chips, which are its TPUs.
• 58:29
  SPEAKER_00: These are custom designed and they're only available if you're using Google Cloud.
• 58:34
  SPEAKER_00: Coming onto that, it's got the infrastructure, you know, it's got that the hyperscaler advantage.
• 58:39
  SPEAKER_00: Uh, you know, I think it's now, well, as you've already touched on, I think it's about 13% of um cloud marketplace.
• 58:47
  SPEAKER_00: We've then got the the model, it's got Gemini, uh, which is its LLM.
• 58:52
  SPEAKER_00: And lastly, it's got its applications that plugs these this this model into.
• 58:57
  SPEAKER_00: There's not another company out there that has all four of these.
• 59:01
  SPEAKER_00: Microsoft doesn't have that, Amazon doesn't have that, Apple certainly doesn't have that, and neither is OpenAI.
• 59:07
  SPEAKER_00: Google ticks all four boxes, and for me, not only gives me confidence in Google, but it makes me quite bullish on the company going forward.
• 59:17
  SPEAKER_00: Obviously, price right now, perhaps I wouldn't I wouldn't invest, but it does make me quite bullish for what the next decade looks like within Google.
• 59:24
  SPEAKER_00: So, with that, do you want to maybe add to that?
• 59:27
  SPEAKER_00: I mean, I don't think we're quite finished in this section yet, but I just I hadn't really fully taken that in until I conducted the research for this podcast.
• 59:35
  SPEAKER_01: I don't really have much to add here because there is so much uncertainty around all of it.
• 59:43
  SPEAKER_01: I what I do know is that AI has a very unique positioning within AI.
• 59:51
  SPEAKER_01: It has a foundational model, which is OpenAI or Meta or Antropic.
• 59:58
  SPEAKER_01: Google has its own.
• 1:00:00
  SPEAKER_01: Google also has its own hardware providers, and it has its own development platform, which is very unique.
• 1:00:10
  SPEAKER_01: I just I really believe Alphabet will be one of the long-term winners, whether it's in AI or just in digital, like they navigated the mobile revolution, it will survive, if not thrive, in the AI revolution.
• 1:00:26
  SPEAKER_01: If AI is as big as people say it is, then the current investments are more than reasonable.
• 1:00:32
  SPEAKER_01: You can't miss out on it.
• 1:00:34
  SPEAKER_01: It's funded by their own cash flow.
• 1:00:37
  SPEAKER_01: If AI is overhyped, then it is a loss of capital, but they'll still be fine because they still generate a ton of cash through search and uh the other segments.
• 1:00:48
  SPEAKER_01: They're one of the few companies that invest heavily in RD.
• 1:00:52
  SPEAKER_01: Um, they have this other bad segment that can contain like this hidden potential.
• 1:00:58
  SPEAKER_01: There's just so much to like about the company the holding company alphabet, and can things still go wrong?
• 1:01:05
  SPEAKER_01: Absolutely.
• 1:01:06
  SPEAKER_01: I'm I'm not convinced AI is going to kill the company.
• 1:01:10
  SPEAKER_00: Yeah, I would agree.
• 1:01:11
  SPEAKER_00: I think we're almost in a very expensive arms race, and global share prices are basically at all-time highs.
• 1:01:19
  SPEAKER_00: We're seeing a lot of investment.
• 1:01:21
  SPEAKER_00: Obviously, Massa likes to go big or go home, and he's done that with OpenAI.
• 1:01:28
  SPEAKER_00: And I just I think we did see it uh last year with Deep Seek coming in, and there was a huge drop-off, obviously, in Nvidia's share price because of the fact that there was maybe this assumption that there wouldn't be the need for as many GPUs.
• 1:01:46
  SPEAKER_00: Perhaps this is the case, perhaps there's a sort of something that's unforeseen that there's a workaround to make um LLMs a lot cheaper.
• 1:01:54
  SPEAKER_00: But in this current scenario and the trajectory we're heading down, I can't see OpenAI being able to continually outspend Google without creating an effective revenue generation.
• 1:02:11
  SPEAKER_00: It almost reminds me a little bit of like, you know, during the pandemic, everybody was using Zoom, and Zoom was just this, I think it was quite different from obviously from ChatGPT.
• 1:02:22
  SPEAKER_00: But suddenly, like the next day, Microsoft just brought Teams in, and it felt to me like Zoom just died a death.
• 1:02:30
  SPEAKER_00: And I don't know if that's maybe the same scenario, maybe that's a poor analogy, but that's that's where I sort of feel we're at with Chat GPT a little bit.
• 1:02:40
  SPEAKER_01: Yeah, the problem with these large companies have just so much capital and they have so much power that if a new startup arises that becomes that has this massive potential, they'll either one power it by their cloud or two acquire it, or three, if neither of those two things happen, and I mean just look at uh ChatGPT, Google just funds the hell out of Gemini and starts their own AI LLM.
• 1:03:13
  SPEAKER_01: They just have so much capital to to to just fight any anyone that threatens their business model, and lots of investors have doubted all these companies, um especially during times that um that a new bubble or a new hype comes along.
• 1:03:34
  SPEAKER_01: Everybody starts questioning whether they can transition, and they have just proven time and time again that they can.
• 1:03:40
  SPEAKER_01: It's a bet I'm willing to take for uh for now.
• 1:03:42
  SPEAKER_01: Yeah, but what would make you second guess yourself or sell alphabet altogether?
• 1:03:50
  SPEAKER_00: I think probably the most obvious thing has to be real disruption to search and either a slowdown or a sort of decrease in search revenue.
• 1:04:00
  SPEAKER_00: Again, you know, we we talked about this at length, but Google search is still growing at double digits.
• 1:04:05
  SPEAKER_00: Like that's that doesn't say to me that that's a business that's been massively affected by Chat GPT or or any other LLMs.
• 1:04:13
  SPEAKER_00: This is a business that's still growing and can still integrate more.
• 1:04:17
  SPEAKER_00: Now, if that slows down, stagnates, decreases, that's a that's a real watch route for me.
• 1:04:25
  SPEAKER_00: I think we're in this position where you know it feels like the narrative is overblown.
• 1:04:33
  SPEAKER_00: And if the market wasn't at all-time highs as it is today, I think Google probably would be a lot cheaper.
• 1:04:40
  SPEAKER_00: And I think it is cheaper than than all the sort of other um mag 7 companies.
• 1:04:47
  SPEAKER_00: It's only at the price it is today, probably because of the fact that just the market is you know is is so high.
• 1:04:53
  SPEAKER_00: So yeah, I think for me, what would cause a big cause for concern is the obviously the breakup of the company if if there was some sort of regulatory pressure, or if we saw that decrease in search revenue, and neither look like they're coming to fruition just now.
• 1:05:10
  SPEAKER_00: So yeah, I'm I'm I'm a pretty happy alphabet Google shareholder.
• 1:05:17
  SPEAKER_00: I wouldn't invest in these at these levels, but I still think it's a scenario that we're in a pretty good place for the decade ahead.
• 1:05:25
  SPEAKER_01: Yeah, and the funny thing is once you find out that search is declining, alphabet will alphabet stock will pummel and you're gonna be too late.
• 1:05:36
  SPEAKER_01: So I that is a difficult thing.
• 1:05:39
  SPEAKER_01: I mean, if if you find out tomorrow that search is going to perhaps 1% revenue growth or declining, investors will panic and and it will drop significant significantly on the news.
• 1:05:56
  SPEAKER_01: So definitely something to keep in mind.
• 1:05:58
  SPEAKER_01: You know, people are just wary, uncertain, and that's why it's the cheapest of the Mac 7.
• 1:06:05
  SPEAKER_01: Risks and uncertainty causes opportunities.
• 1:06:08
  SPEAKER_00: Cool.
• 1:06:08
  SPEAKER_00: So I think with that, same, we're already over an hour and 20 minutes.
• 1:06:11
  SPEAKER_00: So let's wrap up here, and listeners can tune in to the next episode where we're going to cover the other bets, and we'll also come into valuation and make a conclusion on Google.
• 1:06:22
  SPEAKER_00: Does that work?
• 1:06:23
  SPEAKER_00: Absolutely.
• 1:06:24
  SPEAKER_01: I'm very excited about the next part of this episode because there's lots to like, lots to talk about, and we'll see you in the next episode.