Alphabet owns the largest search engine, video sharing platform, mobile operating system, and mapping service in the world, enabling it to capture an estimated 31% share of the global digital advertising market as of 2019.1 Excluding China, where Alphabet’s properties are essentially banned, Alphabet has a 41% global market share. As opposed to an absolute good where prices are driven down through innovation and competition, advertising is a relative good where businesses seek to outspend their competitors to maintain mind share. As such, the advertising industry is one of the few industries that has maintained its share of GDP over time. As a result of Alphabet’s virtually unrivaled network of users, publishers, and advertisers, we believe the company is in a great position to benefit from both growth in the global advertising market and the secular trend toward digital advertising, which currently only accounts for 50% of total spend. Moreover, because a) network value rises exponentially as new participants join a network and b) the company continues to invest heavily in emerging media platforms such as Waymo, we believe Alphabet is likely to maintain or even increase its pricing power over time.
To read a more detailed description on GOOG as discussed in a prior investment letter, click here.
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