Alphabet (Google): A comprehensive analysis of the "king of full-stack AI"

2025.12.16

Alphabet (Google): A comprehensive analysis of the "king of full-stack AI"

Alphabet is currently a "reasonably slightly expensive / mildly premium quality asset," already reflecting the expected second wave of growth in cloud driven by AI, but has not yet entered a severely bubbly zone completely detached from fundamentals.

2025.12.16 - 03:22:08

Navigating Web3 tides with focused insights

Author: Alex Xu, Mint Ventures

1. Research Summary

1. Key Points

Alphabet (GOOGLE), as a cornerstone of the global digital economy, possesses strong cash flow generation capabilities due to its dominant position in search and advertising. As of 2025, core businesses maintain steady growth with operating margins steadily rising into the 30%+ range.
AI-driven cloud services have become an important second growth curve. In Q3 2025, Google Cloud contributed 15% of revenue with a year-on-year growth rate of 34%, returning to high-speed growth trajectory. Profit margins also continue to rise, increasing from 17% last year to 24%, with further room for improvement.
The explosive development of the AI industry and its rapid penetration into end-user markets have complex and profound impacts on Alphabet, presenting both opportunities and challenges:
- In the short term, the rapid advancement of AI has not yet materially impacted Alphabet's core business—search advertising. Instead, Google has enhanced ad conversion rates through AI capabilities. The rollout of AI Overview functionality maintains Alphabet's dominance in search. Based on current ad revenue and management-disclosed ROI data, there is no evidence of declining search conversion rates or per-click ad value. On the contrary, AI capabilities significantly enhance efficiency across various internal product lines.
- In the medium to long term, question-and-answer AI poses a real threat to Alphabet’s business model. User search behavior has begun migrating toward AI products. Although Google's AI Overview temporarily slows user attrition, the competitive multi-player landscape in AI is difficult to alter. It remains challenging for Google to replicate its search monopoly in AI products. Even if it maintains a monopoly in AI search, the high unit costs and limited ad space in AI search would reduce Google's advertising profit margins.
- However, Google's robust product ecosystem provides clear advantages in the AI era. Unlike emerging players like GPT and Claude who must independently attract and retain users, Google can efficiently distribute Gemini and other AI tools to users through its rich product matrix (Search, Chrome browser, YouTube, Gmail, Maps, Android, enterprise products). Amid the upcoming wave of AI Agents, Google will integrate AI into all its products, embedding its AI agents into the daily lives and workflows of individuals and enterprises. This integration will generate massive data feedback, aiding in upgrading and optimizing underlying models, creating a more powerful moat than during the information internet era.
- Alphabet's TPU-based AI accelerator product series partially substitutes NVIDIA's GPU market both internally and externally. Combined with Berkshire Hathaway's recent purchase, the market narrative now suggests "Google owns the most comprehensive AI supply chain" and "Google alone rivals ten others," helping valuations recover rapidly. However, NVIDIA's core business remains solid, AI infrastructure products remain in short supply, and both companies are currently expanding the market together. In the medium term, TPUs may capture part of NVIDIA's market share.
- Warnings about an "AI bubble" focus on: 1) high company valuations and market concentration; 2) excessive capital expenditures that may not be covered by downstream long-term revenues; 3) financial concerns such as overly long depreciation periods and supplier financing. The author believes concerns about point three are overstated with limited actual impact. Point one is far below levels seen during the 2000 bubble. What truly needs attention is point two—the actual demand situation in downstream markets (currently quite robust). Even if an AI bubble bursts, representative companies like Google, due to their stable core businesses contributing the vast majority of revenue and profits, can absorb shocks, making a collapse exceeding 70% as seen in 2000 unlikely.
The breakup risk stemming from the 2024 U.S. federal court antitrust ruling was settled in September this year, ultimately having minimal impact on Alphabet without requiring the separation of Android and Chrome—a result within prior expectations. However, European antitrust lawsuits continue to surge, imposing multibillion-dollar fines and various investigations (the EU launched an antitrust probe into Google AI on December 9).

2. Valuation Assessment

Alphabet is currently a "reasonably expensive / slightly premium quality investment," already reflecting expectations of secondary growth driven by AI in cloud services but not yet entering a severely detached bubble phase. If downstream AI demand is viewed optimistically and Alphabet's long-term profit and free cash flow growth rates are expected to sustain above low double digits (12%), then current valuations are acceptable, though multiples require time to digest. However, if expectations for AI monetization and regulatory environments are conservative, Alphabet should be considered a "high-quality but not currently cheap" long-term holding rather than an obviously undervalued opportunity.

3. Potential Catalysts and Risks

Catalysts: Full commercialization of the Gemini model, cloud business profit margins reaching AWS/Azure levels and continuing to grow, sustained explosion in downstream AI demand, major new orders for TPU cluster services.
Risks: Intense industry competition remains unresolved; widespread open-source AI models pose commoditization risks to AI computing power; tightening global regulation and antitrust scrutiny (especially breakup risks); excessive AI capital expenditure dragging down profits; slower-than-expected or insufficient downstream AI demand; macroeconomic slowdown.

2. Company History

Before understanding specific industries and business operations, we need to review Google's historical development to extract insights into the company’s foundational culture derived from its founders and overall strategic acumen.

Phase One: Startup and Search Dominance Establishment (1996–2003)

This phase marked the establishment of Google's core technology and business model (advertising), as well as the formation of the "three-legged stool" management structure.

1996: Larry Page and Sergey Brin developed the search engine BackRub at Stanford University, which became the precursor to Google.
September 1998: Google Inc. officially registered. Its first investment came from Sun co-founder Andy Bechtolsheim ($100,000). The office moved into the garage of Susan Wojcicki, later a Google veteran and former CEO of YouTube (now deceased).
1999: Raised $25 million from Sequoia Capital and KPCB. Moved offices to Mountain View, California.
2000: Launched AdWords, the foundation of Google's commercial empire, allowing advertisers to bid on keywords and establishing its search-based revenue model. Also adopted the famous informal motto: "Don't be evil."
August 2001: Realizing the need for experienced management, Eric Schmidt became CEO. This established the decade-long "three-legged stool" management structure.

The so-called "three-legged stool" refers to the internal power triangle under Schmidt’s leadership:

Eric Schmidt — Chairman & CEO, acting as the "parent" and "diplomat," responsible for external affairs (Wall Street, investor relations, government regulation), sales team building, legal litigation, and daily operations.
Larry Page — Co-founder/Product Lead, focused on core products—search engines, advertising, and future grand visions. Page had perfectionism regarding user experience and obsession with speed and efficiency, but early investors believed he wasn’t suited for CEO roles due to poor social skills and attention to managerial details (he eventually succeeded anyway).
Sergey Brin — Co-founder/Technology Lead, responsible for hiring top talent, maintaining the unique engineering culture, and exploring "moonshot projects" beyond the main business (such as Google Brain and AI initiatives).

Under this system, responsibilities were clearly divided, but major decisions required consensus among the three. Schmidt once joked that his job was to decide who was right when Page and Brin argued.

Phase Two: IPO, Acquisitions, and Ecosystem Expansion (2004–2010)

During this period, Google went public for funding and made key acquisitions that laid the foundation for its dominance in the mobile internet era, making several far-sighted strategic decisions that built the moat for future ad traffic.

April 2004: Launched Gmail, shocking the industry with 1 GB of storage space.
August 2004: Listed on NASDAQ using a dual-class share structure where Page, Brin, and Schmidt held Class B shares with absolute voting rights.
2005: Secretly acquired Android (~$50 million), one of Google's highest-return acquisitions, providing critical infrastructure for mobile competition. Became Google's primary platform for mobile advertising, app distribution, and data sourcing, securing a central role in the smartphone supply chain. Also launched Google Maps, a crucial foundational product serving as the geographical backbone for many mobile applications.
October 2006: Acquired YouTube for $1.65 billion, establishing dominance in streaming video.
September 2008: Launched Chrome browser and the first Android phone (T-Mobile G1). Google formally entered the OS and browser markets, forming a tightly integrated core ecosystem that persists today.
January/March 2010: Exited mainland China market.

Phase Three: Mobile-First, Restructuring, and Antitrust Shadows (2011–2018)

Schmidt stepped down, Page returned, followed by Pichai's rise. Corporate structure changed dramatically while facing severe global regulatory scrutiny.

April 2011: Larry Page resumed the CEO role, while Schmidt transitioned to Executive Chairman. Page began streamlining product lines (shutting down Google Reader, etc.), focusing on core businesses.

*Background factors behind Schmidt stepping down: Rapid employee growth led to big-company inefficiencies; Facebook’s rapid rise between 2010–2011 diverted social network users, and Schmidt responded slowly; after over a decade of experience, Page matured personally and always desired full control of Google.

2013: With continuous business expansion, Google began developing TPUs internally to reduce computing costs. The first-generation product (TPU v1) was deployed and used internally by 2015.
2014: Acquired DeepMind. This UK-based AI lab later developed AlphaGo, becoming the core engine for Google’s subsequent AI strategy.
August 2015: Major restructuring forming Alphabet Inc.
- Governance transformation: Google became a wholly-owned subsidiary of Alphabet. Purpose was to separate core internet businesses (Search, YouTube, Android) from "moonshot projects" (Waymo autonomous driving, Verily life sciences, etc.) to improve financial transparency and boost Google’s valuation.
- Personnel changes: Page became CEO of Alphabet Group, Brin became President, and Sundar Pichai (originally a plug-in product manager for ads) was promoted to Google CEO.
- Beyond financial transparency and paving the way for Sundar Pichai's promotion ("making room"), Alphabet's creation also considered innovation protection (separating innovative and mature businesses with independent teams and operations to avoid interference from core business budgets and KPIs) and legal risk isolation (isolating legal and brand risks associated with businesses like Waymo autonomous driving from the main Google brand).
2016: Announced shift from "mobile-first" to "AI First" strategy. Launched Google Assistant and Pixel smartphones. In May, officially disclosed TPU at its developer conference Google I/O, introducing the ASIC chip designed for deep learning. Starting in 2018, Google began offering TPU via its cloud service.
2017: Google Brain published "Attention Is All You Need," the famous Transformer paper.
2017–2019: EU antitrust triple blows. The European Commission fined Google over €8 billion for violations related to Google Shopping, Android bundling, and AdSense advertising monopolies. Since then, antitrust litigation from the EU has been ongoing and persistent.

Phase Four: Post-Founder Era and AI Arms Race (2019–2024)

Founders fully retreated, leaving Pichai in sole charge. Facing OpenAI's challenge, Pichai issued a "Code Red" alert recalling the founders, declaring war mode on AI, while simultaneously encountering the toughest domestic antitrust lawsuit in history.

December 2019: Page and Brin stepped down as CEO and President of Alphabet, with Sundar Pichai taking on both roles. Founders retained board seats and voting rights controlling the company but no longer participated in daily management. Their retreat stemmed partly from Pichai's excellent performance giving confidence, and partly from fatigue over repeated congressional interrogations and employee protests (Android founder Andy Rubin left due to sexual harassment allegations but received a $90 million severance package; Google's involvement in military projects).
October 2020: DOJ filed antitrust lawsuit alleging Google maintained illegal monopolies in search and search advertising (e.g., paying billions to Apple to be default search engine).
November–December 2022: ChatGPT launched. Pichai issued a "Code Red" alert, believing the core search business faced its biggest existential threat since inception, urgently calling Page and Brin back. Both founders returned multiple times to Mountain View headquarters for strategic meetings reviewing Google's AI product roadmap. Brin decided to return directly to frontline work, stationed at Google's newly built AI headquarters—Charleston East building. According to employee feedback, Brin actively participated in Gemini technical meetings, personally persuaded key AI talent to stay, and even directly submitted code. Subsequent developments showed Google's progress in AI accelerated noticeably, largely thanks to Brin's timely return.
January 2023: Historic mass layoffs. Announced reduction of approximately 12,000 employees (6% of workforce), ending the long-standing myth of high welfare and no layoffs, triggering internal morale turbulence.
January 2023: DOJ filed a second major antitrust lawsuit focusing on Google's digital advertising technology (Ad Tech).
February–December 2023: AI counteroffensive. Hasty launch of Bard (later renamed Gemini) received negative reviews. Merged Google Brain and DeepMind to form Google DeepMind, led by Demis Hassabis (original DeepMind founder, won Nobel Chemistry Prize in 2024) to accelerate AI R&D.
August 2024: Major ruling: A U.S. federal judge determined Google illegally monopolized general search services and text advertising. This was the largest antitrust loss for a tech firm since the Microsoft case, potentially leading to bans on payments to Apple and other manufacturers for pre-installation deals, or even breakup risks.

Phase Five: Regulatory Resolution and Technological Revival (2024–2025)

From being ruled a monopoly by federal courts to receiving "light penalties," from being perceived as a "laggard" in the AI era to regaining reputation, and re-entering the "first tier" of the AI era through the release of Gemini 3.0, Alphabet's past year has been tumultuous.

May 2024: AI Overviews took over search. Despite initial controversy (hallucination issues), Google insisted on placing AI answers above blue links, integrating AI into internal products, transitioning from "retrieval" to "question-answering."

September 2025: U.S. federal court issued final judgment. While imposing numerous unfavorable restrictions on Google:

Prohibited exclusive agreements binding search distribution, such as arrangements with device makers and browsers stipulating only Google Search could be pre-installed and competitors barred;
Ordered Google to share certain ranges of search index data and user interaction data with competitors to lower barriers for new entrants to build viable search services;
For new entry points like Gemini and Google Assistant, the court prohibited Google from locking down distribution channels via exclusive promotional agreements to prevent replicating its traditional search monopoly in the "AI search era."

More critically, the court did not accept the DOJ's request to force Google to split off or sell Chrome or Android, nor restricted Google from paying Apple, Samsung, and other smartphone manufacturers to set Google as the default search engine, preserving Google’s primary source of search traffic. For Google, this was already the best possible outcome.

October 2024: Leadership change in search division. Prabhakar Raghavan, longtime head of core search advertising, stepped down to become CTO. Nick Fox took over. This adjustment was seen as Pichai’s key move to accelerate the integration of "AI + Assistant + Search," aiming to break down departmental silos and fully advance the AI Agent strategy.

November 2025: Gemini 3.0 reclaimed supremacy. After a year of catching up, the release of Gemini 3.0 surpassed rival GPT-5 in complex logical reasoning and native multimodal understanding (directly interpreting video streams). It even earned praise from rival founders Sam Altman and Elon Musk, reaffirming Google's leadership in foundational models and largely dispelling capital market doubts about "Google falling behind in the AI era."

Full-year 2025: Computational advantage based on TPU emerged. Against the backdrop of scarce and expensive NVIDIA GPUs, Google's self-developed TPU v6 (Trillium) became a game-changer, surpassing NVIDIA products in "overall efficiency" and "unit cost." Beyond internal use, core training for giants like Apple Intelligence and Anthropic relied on Google TPU clusters, bringing substantial revenue and endorsement to Google Cloud. Discussions with Meta for a multi-billion dollar TPU procurement are underway.

Summary

Looking back at Google’s 30-year entrepreneurial journey, the two founders established a spirit centered on innovation and doing no evil, once representing the pinnacle of Silicon Valley engineering culture. During the first 15 years of development, they made a series of crucial strategic decisions that built wide moats for the enterprise. However, as the company grew larger and founders gradually withdrew, issues such as reduced product sensitivity, decreased corporate efficiency, cultural divergence, poor translation of fundamental research into engineering/products, and sharply increased antitrust risks began to surface. Google’s midlife crisis has only just begun. Although its AI products regained some reputation over the past year, increasing AI penetration among users also poses direct threats to its core search advertising business, which will be discussed in detail in subsequent sections.

3. Comprehensive Business and Industry Analysis

Alphabet operates across digital advertising, cloud computing, online video, consumer electronics, autonomous driving, and attempts to drive acceleration in each business through artificial intelligence.

This section will analyze business data and industrial development for each line, especially artificial intelligence. Although AI isn't separately categorized as a business segment by Alphabet, it serves as an "accelerator" across all divisions and directly offers AI compute services embedded in Google Cloud centered around TPU, representing Google’s future core value. Therefore, the author will dedicate a separate section to analyze it.

Note that the following business classifications have some overlap. For example, "Digital Advertising and Search Business" includes YouTube display ad revenue, but given YouTube's importance, it is analyzed separately. Similarly, YouTube subscription revenue is also statistically included in the broader category of "Subscriptions, Platforms, Consumer Hardware."

3.1 Digital Advertising and Search Business

3.1.1 Industry Overview and Competitive Landscape

The global advertising market exceeded $1 trillion for the first time in 2024, with digital advertising's share continuously rising, expected to account for 82% of total ad spending in 2025. Alphabet ranks first globally in digital ad revenue through Google and YouTube.

Recent shifts include:

Google's market share is being eroded by giants like Meta and Amazon.
In search advertising, Google still holds about 90% of global search engine user share. However, according to eMarketer data projections, Google's share of U.S. overall search ad revenue may fall below 50% for the first time in 2025 (due to diversified search behaviors and rising ad shares from vertical e-commerce, social platforms, and short videos).
In the overall digital advertising market, Google's share declined by approximately 7.6 percentage points from 2021 to 2025, dropping below 50%. Meanwhile, Meta and Amazon increased their shares by about 3 and 4 percentage points respectively.

Main reasons include:

1) Rise of social advertising: Meta’s social ads on Instagram and Facebook grow rapidly, attracting more brand marketing budgets;

2) Emergence of e-commerce advertising: Amazon leverages its e-commerce platform traffic to expand search and display ads, rapidly growing its advertising business;

3) Rise of short-video platforms: TikTok and other short-video platforms under ByteDance compete for new traffic.

Despite intensifying competition, Alphabet retains advantages in digital advertising:

Search advertising delivers clear results and high ROI, making Google Ads a primary online promotion channel for most small and medium-sized enterprises;
The digital advertising market continues to grow—global digital ad spending rose ~15% YoY in 2024, projected to reach $723 billion by 2026, with annual growth of ~9%.

3.1.2 Business Positioning and Structural Role

Alphabet's search and advertising business primarily includes:

Google Search & other: Search + ads on other owned traffic
YouTube ads (video ads, detailed in next section)
Google Network: AdSense, Ad Manager, and other third-party website/app alliance ads

Together these form the Google Ads ecosystem, serving as Alphabet’s definitive "cash cow":

In 2024, ad revenue accounted for approximately 78% of group revenue
In Q3 2025, advertising still accounted for over 70% of quarterly revenue

3.1.3 Latest Quarter (2025 Q3) Core Data and Profit Contribution

Revenue Structure (single quarter):

Group total revenue: $102.3 billion, +16% YoY, breaking $100 billion for the first time
Google Services (mainly ads + subscriptions + hardware): Revenue of $87.1 billion, +14% YoY. Advertising breakdown:
- Google Search & other: $56.6 billion, +15% YoY, the single largest contributor to growth
- YouTube ads: $10.3 billion, ~+15% YoY
- Google Network: $7.4 billion, -2.6% YoY, continuing slight decline

Total Google ad revenue approximately $74.18 billion, +12.6% YoY, accounting for about 72% of group revenue.

Profit Contribution:

Q3 Google Services operating income ~$33.5 billion, operating margin 38.5%
Adjusted operating profit ~$37 billion (after excluding $3.5 billion EU antitrust fine), margin 42.5%, up ~2.2% from last year
Alphabet consolidated operating margin was only 30.5% (33.9% excluding fine)

Clearly, high-margin search and advertising still contribute the majority of operating profits; Cloud and Other Bets turned profitable/reduced losses, but profit scale remains far smaller than advertising.

Short-term trends:

Search and YouTube advertising have achieved consecutive quarters of double-digit growth (Search +12% in Q2, +14–15% in Q3). Growth remains strong despite rapid AI development, increasing user penetration, and intense competition among multiple giants;
The only declining segment is network advertising, mainly due to management gradually de-emphasizing it and guiding ad placements toward owned traffic and higher-quality inventory.

3.1.4 Medium-Term Growth Trends and Drivers

High ad share but structural adjustments:

In 2024, ad revenue accounted for nearly 80% of total group revenue, transitioning from single-digit growth during macro pressures in 2022 to low double-digit growth in 2023–2025, with search and YouTube consistently outpacing overall growth;
Structurally, owned traffic (Search + YouTube) share increases while Network share declines, improving overall quality and pricing power.

AI-enhanced search and advertising:

As of 2025, AIOverviews cover over 1.5 billion monthly users, AIMode rolled out comprehensively in markets like the U.S.;
Management repeatedly emphasized: Monetization rates for search results with AIOverviews are roughly equivalent to traditional search;
After full AI rollout in Q1/Q2, Search revenue maintained 10–12% YoY growth, reaching +14–15% in Q3. Google’s search ad revenue appears completely unaffected by the growing adoption of AI search.
AIMax in Search, launched globally in September 2025, became Google’s fastest-growing AI search ad product, "unlocking tens of billions of new search queries" in a single quarter, adopted by hundreds of thousands of advertisers. The core logic is:
- Using large models to understand long-tail, complex requests
- Mining previously unmet demands and matching them with ads
- Expanding the potential market for search advertising

Enhanced profitability:

With ad growth returning to double digits, adjusted Google Services profit margin has reached ~42–43%;
Q3 management disclosed: Paid click volume and average CPC (cost per click) both achieved mid-single-digit YoY growth, indicating advertisers' willingness to pay for Google traffic continues to rise.

Unrealized: Long-term impact of AI development on intent advertising market

So, has the concern that "Google’s search advertising business might be disrupted by AI" been disproven, eliminating worries?

In the author's view, not necessarily.

We first need to examine why the rising penetration of AI products (including general-purpose models like GPT, AI search products like Perplexity, and Google’s own products like AIoverview and gemini) might disrupt Google’s advertising business.

We begin by dissecting Google’s search advertising business. Google’s search advertising is also known as the "commercial intent advertising market." "Intent" refers to the true purpose behind a user action (search, click, purchase, query).

User search intents generally fall into four categories: informational, navigational, commercial, and transactional.

Informational: Seeking knowledge, e.g., "Does milk cause cancer?" or "How to write OKRs."
Navigational: Finding websites, e.g., "Taobao" or "China Merchants Credit Card Center."
Commercial: Researching products, e.g., "Best laptops for remote work."
Transactional: Preparing to buy, e.g., "macbook air m3 JD.com."

High ROI primarily comes from commercial and transactional intents, with some contribution from navigational. Informational queries create user value but rarely generate ad revenue for Google.

Therefore, Google Search's operating profit stems from a simple equation:

Advertising profit = Search volume × Convertible intent ratio × Number of ads per page × CPC (user click cost) × Click-through rate – (Search cost + Traffic cost)

Existing AI products’ penetration and maturation have varying degrees of impact on multiple aspects of this equation, with the most direct impacts likely on search volume, ad space, and search cost.

Declining search volume: Many users no longer use Google Search, turning instead to other AI platforms for queries, causing the top layer of Google’s search revenue funnel—the total search volume—to decrease. Ask yourself: After experiencing questioning on GPT, Perplexity, DeepSeek, or DouBao, how long has it been since you searched information on Baidu or Google?
Reduced ad space: Unlike search pages filled with numerous links and ad slots, AI Q&A provides precise, concise answers based on accurate intent detection, leaving limited room for ad insertions. Additionally, GPT-type AI products differ from search engines—they resemble intelligent assistants with strong credibility. Users expect AI to take responsibility for its answers. If AI-generated answers are driven by ad placements, users perceive a loss of neutrality, quickly undermining trust and damaging the product’s image among users. This contrasts sharply with search engines, which provide abundant information, leaving users primarily responsible for filtering and evaluating it.
Significantly increased search costs: An AI search costs 5–10 times more than a traditional search. Fully enabling AI Overviews could result in annual incremental costs of tens or hundreds of billions of dollars, consuming substantial profits.

Then why, despite clearly increased AI penetration, hasn't Google's search advertising revenue and profit declined, but instead continued growing, with net margins not decreasing due to higher search costs? The author believes possible reasons include:

Competitor markets immature: The advertising market for AI (including general-purpose products like GPT and specialized AI search products like perplexity) hasn't introduced viable, scalable products. Without mature bidding systems, attribution systems, and settlement capabilities, advertisers haven't completed large-scale ad placement experiments or obtained stable ROI reference data. Until these fundamentals are realized, Google Search advertising remains advertisers' preferred choice, and ad budget diversification hasn't formally begun. However, companies represented by OpenAI have started exploring ad and shopping guidance features through gray-scale testing.

GPT's smart shopping tab has appeared in some search box functions

In other GPT interaction pages, floating windows occasionally appear prompting the use of shopping assistant

The current stage remains "AI enhancing search rather than replacing search": Currently, AI supports traditional search more than it replaces it. For instance, Google's overview feature improves user search experience, increasing willingness to search and retaining users. Features like AIMax in Search increase advertiser deployment scale, matching ads to more potential demands.
Delayed margin impact: Increased unit computing costs from AIoverviews don't immediately show as increased operating costs in current financial reports. Instead, the impact follows this path: increased AI computing demand → building more data centers (accounted for as capital expenditure, not operating cost) → increased fixed assets → rising depreciation expenses in subsequent years. Thus, the initial impact hits Google's free cash flow (already evident in current financial reports), then gradually erodes profits through annual depreciation. Additionally, Google conducted large-scale layoffs and efficiency improvements in 2023–2024, implementing better cost discipline, which significantly helped maintain profit margins.

Therefore, the impact of increasing AI penetration on Google's search advertising may not have truly manifested yet.

3.2 YouTube: Online Video and Media Entertainment Advertising

3.2.1 Industry Overview and Competitive Landscape

The online video platform industry, where YouTube resides, has grown rapidly, continuously capturing user time from traditional TV and streaming services:

As of 2025, YouTube has over 2.7 billion monthly active users, second only to Facebook, covering about 52% of global internet users;
Daily viewing time exceeds 1 billion hours cumulatively, causing online video ad market size to rise accordingly. YouTube holds significant shares in digital video advertising, especially in UGC short videos and mid-to-long videos.

Challenges are also increasing:

TikTok's global monthly active users have reached about 1.59 billion and continue to climb, with short-video advertising remaining an emerging high-growth sector;
Streaming giants like Netflix and Disney+ introduce ad-supported packages, competing with YouTube for brand advertising budgets;
YouTube itself promotes paid subscription models (YouTube Premium, YouTube Music, etc.), with over 125 million subscribers, needing dynamic balance between "ads vs. subscriptions."

Overall trend:

User viewing habits continue shifting toward online video, with online video advertising expected to maintain double-digit growth;
Evolving content formats and increased competition require YouTube to constantly innovate product forms (like Shorts) to maintain user stickiness and advertiser appeal.

3.2.2 Business Positioning and Structural Role

YouTube is the core carrier of Alphabet's online video and social platform business, including:

YouTube Ads: Ads in long videos, Shorts, live streams, and TV-end (Living Room);
Subscriptions and premium: YouTube Premium/Music, channel memberships, tips, etc. (accounted for in "Google subscriptions, platforms and devices").

From a group perspective:

In 2024, YouTube ad revenue was $36.1 billion, +14.6% YoY, accounting for about 10% of Alphabet's total revenue;
On the user side, monthly active users were around 2.7 billion in mid-2025, second globally only to Facebook.

Thus, YouTube serves as Alphabet's second growth engine in video/social/"quasi-TV" advertising and subscriptions, acting as an important branch of ad cash flow and a key lever for expanding into TV screens and entertainment sectors.

3.2.3 Latest Quarter (2025 Q3) Core Data and Profit Contribution

Revenue and Growth:

Q3 2025 Alphabet total revenue $102.3 billion, +16% YoY;
Among this, YouTube ad revenue $10.3 billion, +15% YoY, breaking $10 billion in a single quarter for the first time. Previously, YouTube ads achieved +15% growth in both Q2 and Q3, driven by Shorts + Living Room (TV-end) + brand advertising recovery.

Subscription Side:

Although no specific disclosure of YouTube's standalone subscription revenue, Q3 management emphasized that Google subscriptions (including YouTube Premium, Google One, etc.) grew 21% YoY overall, one of the fastest-growing segments within Services.

Profit Contribution:

YouTube ads belong to the high-margin business within Google Services, with main costs being revenue sharing with creators/copyright holders;
While individual profit isn't disclosed, the market widely believes its operating margin is slightly lower than search but higher than most traditional media;
Based on revenue scale estimates, YouTube (ads + subscriptions) currently contributes close to 12–15% of Alphabet's total revenue, with its profit contribution to Google Services rapidly increasing, gradually evolving from a "marginal increment" to a key pillar of group profitability.

Trends:

YouTube ad revenue recovered from single-digit or even negative growth during macroeconomic pressure in 2022 to mid-double-digit growth in 2024–mid-2025, ranking second only to cloud business in terms of revenue contribution within Alphabet;
Indicating it has passed the advertising cycle trough, re-entering a virtuous phase of "dual-driver growth from ads and subscriptions."

3.2.4 Medium-Term Growth Drivers and Competitive Dynamics

1) Content Formats: Dual Engine of Shorts and TV-End

Shorts (short videos): In the U.S. market, hourly ad revenue from Shorts has surpassed that from long videos, serving as a significant contributor to the 15% ad growth in Q3;
Living Room (TV-end): Viewing time on living room large screens continues to rise, with interactive direct-response ad annualized revenue exceeding $1 billion. YouTube effectively competes with linear TV and streaming services for brand and performance advertising budgets.

2) Subscriptions and ARPU Increase:

After surpassing 125 million Premium/Music users, introduced lower-priced plans like Premium Lite to continue raising overall ARPU;

3) AI Recommendation and Monetization Efficiency:

The 15% growth in YouTube ads significantly benefited from increased viewing on Shorts and Living Room (home-connected TVs), as well as improved content discovery efficiency via recommendation systems and the Gemini model;
AI primarily enhances recommendation accuracy, CTR (click-through rate), retention, and creator productivity, amplifying viewing duration and ad eCPM (earnings per thousand impressions).

4) Competitive Landscape:

Against long-form video/streaming (Netflix, Disney+, etc.): YouTube has become the U.S.'s longest-viewed video streaming platform, adopting a light-asset model with UGC + ads as primary and subscriptions supplementary, resulting in superior content cost structure compared to pure content platforms;
Against short-video platforms (TikTok): Competitors have respective strengths. TikTok has extremely strong Z-generation stickiness, while YouTube counters with Shorts, primarily leveraging its existing creator ecosystem and monetization system, achieving faster ad revenue growth;
Against social platforms and TV advertising: Meta Reels and Facebook Watch divert some budgets, but YouTube's comprehensive layout across "long + short + TV-end" positions it very close to a "quasi-oligopoly" status in the video advertising sub-sector;
Content and compliance risks: Faces content moderation, copyright, children's privacy, and regulatory pressures from EU DMA/DSA, though not currently a primary battlefield for antitrust litigation.

3.3 Cloud Computing: Google Cloud and Global Public Cloud Industry

3.3.1 Industry Overview and Competitive Landscape

Cloud infrastructure services represent one of the fastest-growing tech markets in recent years:

In 2024, global enterprise cloud services (IaaS, PaaS, managed private clouds) spending was approximately $327–330 billion, with annual YoY growth rebounding to 20–23%;
In Q3 2025, global enterprise cloud service spending reached $107 billion, surging $7.1 billion from the previous quarter, +27.7% YoY, marking the largest quarterly increase on record.

The market is highly concentrated among three major players:

According to Synergy Research Group's tracking of the global cloud services market, AWS, Microsoft Azure, and Google Cloud currently hold about 62% combined market share, with AWS around 29%, showing slight decline in recent years;
Azure, leveraging Microsoft's enterprise customer base, holds nearly 20% share and continues to grow;
Google Cloud has recently increased its share to about 13%, roughly unchanged from a year ago;
Alibaba Cloud ranks fourth globally with 4% market share.

The industry competition resembles an oligopoly:

AWS has the largest scale and most mature product lineup;
Azure leverages Office/Windows/enterprise account advantages to dominate in large enterprises and government markets;
Google Cloud uses AI and big data technology advantages to catch up, enhancing competitiveness through generative AI services like large model APIs and TPUs.

Future cloud market prospects are broad:

Expected to maintain over 20% annual growth in 2025, fueled by soaring computational demands from AI application deployment (GPU-as-a-service revenue in the industry has already grown over 200% annually);
But competition intensifies, with "new cloud forces" (CoreWeave, Oracle, Databricks, Chinese vendors, etc.) accelerating market share gains in niche scenarios.

3.3.2 Business Positioning and Structural Role

Google Cloud mainly consists of two parts:

Google Cloud Platform (GCP): IaaS/PaaS (computing, storage, databases, networking), data analytics (BigQuery), AI infrastructure (TPU/GPU clusters), generative AI platforms (Vertex AI, Gemini models and APIs), etc.;
SaaS: Google Workspace: Collaborative office subscriptions such as Gmail, Docs, Meet, etc.

At the group level:

In Q3 2025, Google Cloud revenue reached $15.2 billion, growing 34% YoY, accounting for about 15% of Alphabet's total revenue (around 12–13% last year), widely viewed as "the next major growth engine after search advertising."

Strategically, Cloud is both the main battlefield for commercializing Alphabet's AI capabilities and a key segment for hedging advertising regulatory risks and improving revenue structure quality.

3.3.3 Latest Quarter Core Data and Profitability

Revenue and Growth Rate:

Q3 2025: Cloud revenue $15.2 billion, +34% YoY, the fastest-growing among the three segments. In Q3 2024, revenue was $11.4 billion, +35% YoY in 2023. Maintained over 30% high growth this year despite an already high base;
2025 Full-Year Trend:
- Q1: $12.3 billion, +28% YoY;
- Q2: $13.6 billion, +32% YoY;
- Q3: $15.2 billion, +34% YoY.

Consecutive quarterly growth rates have sequentially increased, showing a clear "re-acceleration" trend.

Profitability:

In Q3 2025, Google Cloud operating profit was $3.59 billion, a massive 85% increase YoY (compared to $1.94 billion in the same period last year), with profit growth far outpacing revenue growth, pushing operating margins up to 23%. Last year's Q3 2024 margin was about 17%, increasing approximately 6% within a year;
Profit margins rose significantly even amid substantially increased AI/data center capital expenditures, demonstrating strong operational leverage.

Contribution to Group Profits:

Alphabet's consolidated operating profit in Q3 2025 was $31.2 billion, with Cloud contributing $3.6 billion, nearly 12%. A year ago, it was still in single digits;
Compared to AWS's operating profit of $11.4 billion and Microsoft Intelligent Cloud's $13.4 billion in the same period, Google Cloud's absolute profit scale still lags, but its profit growth rate (+85%) significantly leads AWS (+10%) and Microsoft (+27%).

Cloud has transformed from an early "long-term loss-making" segment into a mature business with high revenue growth and high-profit elasticity, rapidly increasing its weight in Alphabet's profit structure.

3.3.4 Medium-Term Growth Drivers and Competitive Landscape

1) AI as Main Driver:

Management explicitly stated that Q3 cloud revenue growth was primarily driven by AI infrastructure and generative AI solutions, particularly model APIs based on Gemini, Vertex AI, and AI-optimized computing;
Third-party reports indicate that AI-related revenue reached "tens of billions of dollars" in a single quarter, rapidly increasing its proportion within Cloud revenue;
Q3 Cloud backlog reached $155 billion, rising significantly quarter-on-quarter, with about half expected to convert into revenue within the next two years—providing strong revenue certainty without considering new customers.

2) Continuous Improvement in Profit Quality:

Cloud margins rose from 17% to 23–24%, and against the backdrop of Alphabet raising its capital expenditure guidance to $91–93 billion (primarily for AI/cloud infrastructure), demonstrated significantly improved unit computing/storage gross margins supported by high-value AI workloads;
Fixed-cost amortization effects are gradually releasing.

3) Customer Structure Upgrade:

Customers are shifting from "long-tail SaaS + traditional enterprise trials" to "large enterprises + AI labs + industry-leading clients";
Parallel presence of AI labs and traditional large enterprises significantly improves order quality and stickiness.

5) Competitive Landscape:

Within the three-player oligopoly, Google Cloud ranks third in scale but first in growth rate, steadily gaining share from "other cloud providers";
Compared to AWS and Azure:
- Disadvantages lie in traditional enterprise ERP/industry clouds and channel depth;
- Advantages lie in data analytics (BigQuery), AI/ML (Vertex AI, Gemini), Kubernetes, and high-performance computing (TPU).
"New cloud forces" such as CoreWeave, Oracle, Databricks, and regional players pose localized challenges to the three giants in AI/data/local compliance scenarios.

3.4 Subscriptions, Platforms, and Consumer Hardware

3.4.1 Industry and Ecosystem Background (Operating Systems and Hardware)

Alphabet's layout in hardware and operating systems includes:

Android mobile ecosystem, Pixel smartphones, WearOS smartwatches, Chromebooks, Nest smart home devices, etc.

Industry landscape:

Android dominates the global mobile OS market with approximately 71% share (iOS ~28%), maintaining absolute leadership. Although the Android system does not directly generate revenue for the group, most phone manufacturers using Android are required to pre-install Google's ecosystem apps and set Google as the default search engine, making it Google's primary traffic source and product distribution entry point in the mobile market;
However, Alphabet's influence in branded hardware remains relatively limited:
- Global annual smartphone shipments are around 1.2–1.3 billion units, with Pixel phones accounting for less than 2% of sales, holding modest market share only in select regions like North America and Japan;
- The smartphone market is led by Samsung and Apple (combined share over 50%), with other Android manufacturers like Xiaomi, OPPO, and vivo dividing the rest.
The smart hardware industry faces fierce competition and low profit margins but holds unique strategic significance:
- Google completes the "cloud-device" ecosystem loop through hardware, exploring a vertically integrated model similar to Apple;
- Ensures the Android platform doesn't become overly dependent on third-party manufacturers.

In terms of revenue structure:

In 2024, revenue from the "subscriptions, platforms, and devices" (SPD) category was $40.34 billion, approximately 11.5% of company revenue, encompassing Play Store commissions, hardware sales, and subscriptions from YouTube/cloud services.

3.4.2 Business Positioning and Structural Role (SPD)

Hardware and other platform businesses consist of three components:

Consumer Subscriptions: YouTube TV, YouTube Music & Premium, NFL Sunday Ticket, Google One, etc.;
Platforms: Google Play app and in-app purchase commission revenue;
Devices: Pixel series devices (phones, tablets), Pixel Watch, Pixel Buds, Nest/Chromecast smart home and media devices.

Within Google Services, SPD is the second-largest non-ad revenue source, primarily fulfilling:

Providing sticky, predictable subscription revenue to improve overall revenue stability;
Monetizing mobile traffic and developer ecosystems through Play and the Android ecosystem;
Utilizing hardware like Pixel/Nest as "AI endpoints and reference devices" to showcase Gemini's capabilities on-device and strengthen user binding to the Google ecosystem.

3.4.3 Recent Quarterly Performance and Profit Contribution

Revenue and Growth:

Q3 2025 Alphabet total revenue $102.35 billion, +16% YoY;
SPD revenue $12.87 billion, +20.8% YoY compared to $10.66 billion in Q3 2024;

Roughly:

SPD accounts for about 12–13% of Alphabet's total revenue;
Represents about 15% of Google Services revenue.

Profit Contribution (Qualitative):

Alphabet does not disclose SPD profit margins separately, but:
- Subscriptions (YouTube Premium/TV, Google One) and Play commissions are high-margin digital services, while hardware has lower margins, sometimes approaching breakeven;
Considering the 10-K statement that "SPD growth is primarily driven by subscription revenue, especially YouTube services and Google One," it is reasonable to conclude:
- SPD's overall margin within Google Services is "moderately high," slightly below pure advertising businesses;
- True profit contributors are subscriptions and platforms, while hardware plays a more strategic and branding role.