Why Google needs to focus on connected cities for its Alphabet strategy to pay off
Editor's Note: This piece was written by Michael Provenzano, CEO and founder of Vistar Media, a geospatial technology company. The opinions represented in this piece are independent of Smart Cities Dive's views.
In many ways, we live in Google’s world. The company’s parent, Alphabet Inc., reported more than $90 billion in 2016 revenue, up 20% from 2015. Most of that almost unimaginable pile of cash — a whopping $79.4 billion — came from its advertising business. But there’s a catch: though the number of ads Google sells is spiking, the amount of money it earns per ad, or cost per click, has been declining for years. Connected cities could change that — and bolster the company’s bottom line as well as its breakthrough initiatives.
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The company blames the decrease of its advertising business on the rapid expansion of YouTube advertising, which is cheaper since results are less customized and not tied to user searches. Prices also decline as competition heats up with Facebook’s mobile display ads.
If Google counters this decline in price with increase in ad sales, it’s fine. But if the volume begins to stagnate, both Google and Alphabet are in real trouble, and will need to turn to additional sources of revenue. That's because the search giant’s geyser of advertising dollars directly subsidizes Alphabet’s so-called moonshots: self-driving cars, virtual reality and life extension projects that may revolutionize society someday but are losing a lot of money currently. Google’s founders have been clear that they expect many moonshots to fail. Indeed, one of the projects, its ambitious super-fast fiber optic internet network, has already been curbed.
So if Alphabet wants to be the dominant driver of 22nd century life and fuel breakthroughs in a vast array of industries from artificial intelligence to medicine, it needs to accept large costs as it nurtures more risky experiments.
To make sure those moonshots have the runway they need to grow and Alphabet’s overall strategy can succeed, Google must continue to innovate its advertising business. And as cheap prices, ad blocking software and savvy consumers drive its online ad business down, they must look out the window to the outside, physical world — where it’s impossible for us to ignore messages, and where traditional media is rapidly evolving thanks to new technology and connected devices.
Alphabet, in other words, needs to double down on its urban innovation business, Sidewalk Labs.
Funding the future
Out-of-home ads are richly tied to consumer location and intention, and are of an advertising sector that is set to explode: As connected cities grow and internet access in public spaces becomes the norm, digital out-of-home advertising will drive overall OOH revenue to a projected $42.7 billion by 2020, according to a recent PwC report.
Google executives know this, which is why they’ve signed on to one of the most exciting connected city initiatives in the country. Last year, Sidewalk Labs, an urban innovation organization that works with cities to build products addressing urban problems, got involved with LinkNYC to offer free public Wi-Fi across the city. LinkNYC is spearheaded by the City of New York and CityBridge, of which Sidewalk Labs is involved through its investment at Intersection.
Some 7,500 kiosks are now in the process of being built to replace old payphones and will deliver the high-speed access that modern consumers now consider a birthright, while also displaying 55-inch ads to pedestrians. The set-up is a win-win-win: attractive for pedestrians, highly targeted for advertisers, lucrative for Alphabet.
As President Donald Trump’s administration begins to funnel a planned $1 trillion-plus into infrastructure improvements, programs like LinkNYC will likely become de rigueur across big cities and small towns alike. Connected cities are moving mainstream, and the upshot extends far beyond traditional advertising models.
"Indeed, connected cities can become self-funded hubs of ambitious innovation."
CEO, Vistar Media
As any business person worth their salt will say, steady investment and buoyant revenues can breed the best innovations. Indeed, connected cities can become self-funded hubs of ambitious innovation. Alphabet’s already making advancements with its balloon-based internet project and has hinted at everything from super fast Wi-Fi to autonomous driving vehicles that will soon be embedded into Sidewalk Labs. Around the globe, ahead-of-the-curve cities are already embracing futuristic features, including everything from large-scale, real-time energy and water monitoring to traffic-management algorithms and taxis outfitted with GPS-based touch payments.
Connected cities will require a massive tech upgrade to support the quantity of data streaming from every autonomous train, power line, water tank, taxicab and light pole. But research shows that the benefits — in energy use, public safety and quality of life — will far outweigh those upfront investments.
To help fund that future, revenue from out-of-home advertising can provide the seed capital needed to subsidize the initial cost of building the connected cities infrastructure.
Location-based data will allow advertisers to reach their audiences better than ever, which means the value of each ad will increase. That means Alphabet will be able to say goodbye to declining costs per click — and hello to a future in which brilliant innovation is funded by smart advertising that gives people what they want, when and where they want it.