Google parent Alphabet Inc. warned that its business may be damaged by changing data privacy practices, new digital advertising polices and software bugs that leak user information.
Alphabet generates a significant portion of its revenues from advertising, and generated over 85% of total revenues from advertising in 2018. Many of our advertisers, companies that distribute Google's products and services may not continue to do business with Google if does not not create more value (such as increased numbers of users or customers, new sales leads, increased brand awareness, or more effective monetization) than their available alternatives.
The company filed its annual report on Tuesday, saying that "..changes to our data privacy practices, as well as changes to third-party advertising policies or practices may affect the type of ads and/or manner of advertising that we are able to provide which could have an adverse effect on our business. If we do not provide superior value or deliver advertisements efficiently and competitively, our reputation could be affected, we could see a decrease in revenue from advertisers and/or experience other adverse effects to our business."
Consumers and politicians re-evaluate the data-collecting business models of companies like Google and Facebook Inc. To date, Google has mostly faced fines in Europe that it has been able to pay with its massive cash hoard, but some privacy advocates and those concerned with the company’s sheer size are pushing for harsher policies.
Alphabet’s latest filing also includes warnings about software errors. "Bugs or defects in our products and services have occurred and may occur in the future, or our security measures could be breached, resulting in the improper use and/or disclosure of user data," the company wrote.
Last year, Google found a software glitch in its Google Plus social network that could have exposed the personal data of as many as half a million people. The company decided to shut the service soon after.
Alphabet also updated its warning about an expansion into non-advertising businesses like cloud services and consumer hardware.
"Due to these factors and the evolving nature of our business, our historical revenue growth rate and historical operating margin may not be indicative of our future performance," it wrote.
Alphabet reported thinner fourth-quarter profit margins late Monday as the internet giant spend heavily to expand its cloud and YouTube businesses.
"Our revenue growth rate could decline over time, and we anticipate downward pressure on our operating margin in the future.
Our revenue growth rate could decline and/or vary over time as a result of a number of factors, including increasing competition and the continued expansion of our business into a variety of new fields. We may also experience a decline in our revenue growth rate as our revenues increase to higher levels or if there is a decrease in the rate of adoption of our products, services, and technologies, among other factors," Google wrote in the filling.
In addition to a decline in its revenue growth rate, Alphabet said it might also experience downward pressure on its operating margin resulting from a variety of factors, such as the continued expansion of its business into a variety of new fields, including through products and services such as Google Cloud, Google Play, and hardware products where margins have generally been lower than those Alphabet generated from advertising.
Besides the emphasis on data and privacy, Alphabet also added a new warning about the United Kingdom’s plan to separate from the European Union, known as Brexit, under the Risks section of its disclosure.
"Brexit may adversely affect global economic and market conditions and could contribute to volatility in the foreign exchange markets, which we may be unable to effectively manage through our foreign exchange risk management program," the company wrote. "Brexit may also adversely affect our revenues and could subject us to new regulatory costs and challenges, in addition to other adverse effects that we are unable to effectively anticipate."