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Taking the Long View: Big Tech’s Earnings and the State of Digital Q2 2024 (Thinks Out Loud Episode 421)

MidJourney-generated image of Google CEO Sundar Pichai talking to an audience to demonstrate the learnings from Big Tech's Q2 2024 earnings calls.

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Just as we do every quarter, it’s time to review Big Tech’s earnings. We do this because you’ll always learn something about the state of digital from what Amazon, Google, Facebook, and Microsoft tell Wall Street. And, despite no significant announcements, that’s just as true this quarter as any other.

So, what did we learn from Big Tech’s earnings calls this quarter? Why is it remarkable that their messages were not so remarkable? What did that tell us about the state of digital right now? And what can we take away from their earnings calls and apply to our business?

That’s what this episode of Thinks Out Loud is all about.

Want to learn more? Here are the show notes for you.

Taking the Long View: Big Tech’s Earnings and the State of Digital Q2 2024 (Thinks Out Loud Episode 421) — Headlines and Show Notes

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You also might also enjoy this webinar I recently participated in with Miles Partnership that looked at "The Power of Generative AI and ChatGPT: What It Means for Tourism & Hospitality" here:

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Running time: 21m 20s

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Transcript: Taking the Long View: Big Tech’s Earnings and the State of Digital Q2 2024

Well, hello again everyone, and welcome back to Think Out Loud, your source for all the digital expertise your business needs. My name is Tim Peter, this is Episode. 421 of the big show, and thank you so much for tuning in, I genuinely appreciate it. You know, one of my long time favorite quotes It comes from Bill Gates, who says we tend to overestimate the change we’ll see in the next two years and underestimate the change in the next ten.

Of course, that’s probably just a restatement of the extremely old adage of the more things change, the more they stay the same. Which brings me to this quarter’s earnings call from Big Tech. Big Tech, as you know. I check out the earnings calls every quarter because you can learn a lot about the state of digital from what big tech tells us, what Apple and Google and Facebook and Amazon and Microsoft say.

Now, this time, I’m focusing primarily on Google, Microsoft, Facebook, and Amazon. I didn’t really look at Apple’s much yet, simply because there’s a lot going on with artificial intelligence, and what they’ve had to say about AI to this point, what they, Apple, have had to say about AI to this point, has been less useful.

More on that in a future episode, but for now, I wanted you to know why they’re not in the mix. And, as always, as a reminder, this isn’t meant to be investment advice. This isn’t about the stocks of these companies. I’m much more interested in what they’re saying about artificial intelligence and the state of digital generally than I am about, you know, which company’s going to have the best quarter or quarters coming up.

So, please don’t take any of this as investment advice. What I found interesting about this quarter’s earnest calls was that no one said anything all that interesting. At least not when you compare it with more recent quarters. You know, they said some good stuff, but there was nothing earth shattering.

Sundar Pichai of Google said they had 300 billion in annual revenue. Of course, search continues to power that, as you see in our Q1 results. But in addition, we expect YouTube overall and cloud to exit 2024 at a combined annual run rate over over $100 billion. So just as a, taking a step back, $46 billion of their 80 and a half billion dollars in quarterly revenue came from search with another $15 billion from advertising on YouTube and Google Network.

In other words, what we’ve seen in the past from them, they’re making their money on advertising. Microsoft’s Satya Nadella talked about, and this is a quote, Microsoft Copilot and Copilot Stack, spanning everyday productivity, business processes, and developer services, to models, data, and infrastructure, are orchestrating a new era of AI transformation, driving better business outcomes across every role and industry.

He then went on to compare the adoption of AI to the early days of personal computers. A reference, a metaphor, he’s made before. We’ve heard this before. Amazon’s Andy Jassy talked about Amazon’s wide array of offerings from logistics and grocery and prime video and stores to healthcare. In other words More of the same, more of what we’ve been hearing from big tech CEOs for the last few quarters.

In my view, that’s a good thing. And hang with me because I want to explain why this is actually a good deal for right now. Anybody who’s listened to the show knows that I have been sharply critical of Google’s lack of vision around how they’re going to make money from AI. And I still think that they have a problem there.

I think they have an overall problem with their vision. At the same time, Sundar Pichai talked about what sets Google apart. For the first time that I really have heard him do, listing the company’s advantages, and here’s what he said. It’s a quote. He said, Let’s look at how well we are positioned for the next wave of AI innovation and the opportunity ahead.

There are six points to make. One, Research Leadership, Two, Infrastructure Leadership, Three, Innovation and Search, Four, Our Global Product Footprint, Five, Velocity and Execution, Six, Monetization Paths. Now think about what he just said there, and think about the order in which he said them. Research leadership, two, infrastructure leadership, three, innovation and search.

I’ve noted before that the greatest strength Google possesses when it comes to winning in artificial intelligence are its research capabilities and its computing infrastructure. When I talk about the research capabilities, they’re literally, Google is literally the folks who wrote the original Generative Pre Trained Transformer paper, which is the GPT in things like GPT 4 and ChatGPT.

They know a lot about Generative Pre Trained Transformers. They know a lot about the best case scenario of how you use AI. I’ve been playing with their Gemini model, for, for a while now, playing with using their Gemini model for a while now. And it works just as well for many use cases as ChatGPT does.

And I think it works better than ChatGPT for some use cases. I also think their computing infrastructure, I don’t think this, it is clear their computing infrastructure is pretty spectacular. So as much as I’ve bashed Google, and don’t worry, I’m going to keep doing that from time to time, including on this episode a little bit.

But for as much as I’ve bashed them, you can count the number of companies who can match their capabilities in research and in computing infrastructure on roughly one hand. And obviously, you can count the number of companies who can match their search capabilities on roughly one finger, right? They’re just as good at it or better at it than anybody and when it comes to search, it’s not even close.

And Sundar Pichai didn’t specifically call out the company’s 108 billion in cash on hand among its advantages. But that undoubtedly goes a long way towards maintaining their leadership in talent research and infrastructure. Again, that’s a really good moat that they have available. On the downside Note the order that Pichai chose to present these strengths.

Monetization paths came last. Put simply, the company does not know how to make money from any product apart from advertising. And the bulk of that from search. Ads make up almost 77 percent of the company’s revenues. With search accounting for about 75 percent of that number, And about 57 percent of all of its revenues.

If you look at their total breakdown of where their profits come from, search and ads account for more than 100 percent of the company’s profits. Everything except for Google Cloud that they do outside of advertising loses money. Sundar Pichai clearly understands that, and as I mentioned last quarter, I still think that Microsoft has a better path to monetization, at least in the near term.

Now, Pichai talked about the growth of Google Cloud, which might help them over the longer term. But in the short term, Google really only has three ways to make more money. One, find ways to monetize consumer behavior. There was a report in the Financial Times that suggested they might do just that by charging users for AI enhanced search.

Two, charge advertisers more for access to customers. Or three, be okay with making less money. Now, how much do you want to bet that it won’t be number three? If it were me, I’d bet a lot that it won’t be number three. I simply can’t picture a universe where Google’s going to say, you know what, we’re just going to make less money and that’s going to be fine, right?

It’s just not a thing that’s going to happen, or at least not for long, because then Sundar Pichai wouldn’t be the CEO anymore. They’d bring in somebody else who said, oh yeah, forget what that guy said. That’s crazy. Now, one of the things that I found particularly interesting in the Google Learnings call specifically, and I know I said there wasn’t much interesting, but this I liked, Pichai noted that 15 products have half a billion users and that the company operates across 100 plus countries.

As he said, quote, This gives us a lot of opportunities to bring helpful Gen AI features and multimodal capabilities to people everywhere and improve their experiences. He then went on to talk about their investment in chips, in large language model development, in the cloud, in multimodal search, in AI enhancements to their ad platforms, and more.

And he wasn’t alone in doing this. Meta talked about their continuing belief in the metaverse and why that’s going to be so beneficial to customers and ultimately their company in the long run. Amazon, as I’d already mentioned, talked about a wide array of products and services that they make available.

Microsoft showed how their Copilot platform operates in the real world with integrations in their Azure Cloud Platform, in Microsoft 365 Productivity Suite, in Teams, in their CRM platforms, in GitHub for developers, in security, and, oh yeah, in Windows. Again, Microsoft might have the most clearly articulated vision at the moment.

At the same time, every single one of those companies is investing for the future and importantly, keeping their options open. And to me, that’s such a key learning. Remember the quotes I started with. We tend to overestimate the change we’ll see in the next two years and underestimate the change we’ll see in the next ten.

And the more things change, the more they stay the same. Big tech, like every public company, is required to let investors know how things are going. Every quarter. Even if they don’t have anything particularly new or interesting to say, I’m very impressed that every member of the big tech that we’ve talked about, all have opted to keep doubling down on a wide array of offerings, while they figure out what’s actually going to change the way people use artificial intelligence in their day to day lives.

Why am I impressed by that? Because of another quote you’ve probably heard, it’s known as Goodhart’s Law. When a measure becomes a target, it ceases to be a good measure. Many, many, many companies get caught up in the short term when they have to do their quarterly earnings, making mistakes that preference their next quarter’s earnings.

Over their long term best interest, companies can get hung up on boosting earnings per share or revenue growth or profit margins at the expense of their long term health and innovation. They might cut costs in ways that hurt quality or delay investing in new products, and while those can drive short term results, They’re not sustainable in the long run.

What impressed me is that big tech doesn’t seem to be doing that. They’re taking the long view. Which, generally speaking, is what they always do. Exactly four years ago, at the depths of the pandemic, I released an episode called Amazon, Google, Facebook, Apple, and Microsoft have a secret plan right now.

Here’s why you should care. That was episode 286. When everything was going to hell, big tech was investing to improve how they took care of customers, how they provided great customer service. And yes, in a few places, they got ahead of long term demand, which is why they’ve been laying folks off lately.

Keep in mind, though, despite those layoffs, they’re all larger than they were on the eve of the pandemic. Google is 52 percent bigger in terms of headcount than they were in Q4 of 2019. Amazon is 91 percent larger. Yes, layoffs suck for the people affected, but it’s not like these companies are shrinking compared to where they were before.

Back when the pandemic started, they keep getting bigger, they keep investing, they keep growing, and they keep reaping the long term rewards. They keep winning because when everybody else tightens their belts, these folks say, no, no, we’re going to invest, we make money. Change where we invest. We may shift our focus to invest in a specific area over another.

Or, like they’re doing right now, placing a lot of investments in a lot of different places. You know, planting a thousand seeds to find the flowers that will bloom. If I can butcher a phrase, but they’re literally looking at all of the possible options and then watch, just watch when things start to settle down and they figure out where customers really are going to go, watch them throw a lot of resources into those specific areas.

These companies are saying, you know what, there isn’t a lot to report on right now, there isn’t a lot that’s changed. We’re going to keep investing, we’re going to keep our options open, and that is the current state of digital. We’re on a little bit of a plateau at the moment. Not much has changed in the last quarter, really.

There’s still a lot of hype around AI and some cool product introductions. At the same time, most adoption is happening more around the enterprise, around large enterprises, big business, than around consumers. At least at the moment, big tech is looking at that environment, though, and they’re not standing still.

They’re continuing to invest. They’re testing new ideas, new concepts, and new products. Yeah, they’ll kill off the ones that don’t seem to work or aren’t gaining traction, but they’re moving towards where they expect to be, where they expect customers to be. To be, and not waiting for it simply to fall into their laps.

That’s the lesson I’m taking away from Big Tech’s earnings this quarter. The status quo could change, maybe as soon as tomorrow. Big Tech remains focused on being the ones to make that happen. It’s okay if you don’t get too hung up on the change we’re going to see in the next two years. They’re thinking about the change we’re going to see in the next ten.

What do you think, though? Is there something that I’ve missed? Is there something that they announced or introduced that blew your mind or at least made you sit up and take notice? I’d love to hear from you. Until then, though, I’m going to operate under the assumption that the right game plan, the right state of digital, is to test and invest where the tests pay off.

Not to double down too much on anything until we see how customer behaviors change over the longer term. Get ready to move. Put the right pieces in place. And also, be cool with the status quo while it’s the status quo. And for me, that’s the state of digital where we are in Q2 of 2024.

Show Wrap-Up and Credits

Now, looking at the clock on the wall, we are out of time for this week.

And I want to remind you again that you can find the show notes for this episode. As well as an archive of all past episodes by going to timpeter.com/podcast. Again, that’s timpeter.com/podcast. Just look for episode 421.

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Show Outro

Finally, and I know I say this a lot, I want you to know how thrilled I am that you keep listening to what we do here. It means so much to me. You are the reason we do this show.

You’re the reason that Thinks Out Loud happens every single week. So please, keep your messages coming on LinkedIn. Keep hitting me up on Twitter, sending things via email. I love getting a chance to talk with you, to hear what’s going on in your world, and to learn how we can do a better job building on the types of content and community and information and insights that work for you and work for your business.

So with all that said, I hope you have a fantastic rest of your day, I hope you have a wonderful week ahead, and I will look forward to speaking with you here on Thinks Out Loud next time. Until then, please be well, be safe, and as always, take care, everybody.

Tim Peter is the founder and president of Tim Peter & Associates. You can learn more about our company's strategy and digital marketing consulting services here or about Tim here.

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