In the second quarter of 2017, Alphabet reported substantial increases in traffic acquisition costs (TAC), i.e. the portion of advertising revenue that the search giant shares with its distribution and content creation partners. Those partners include websites that direct traffic to Google services, publishers and content creators that subscribe to the search giant's advertising solutions, smartphone manufacturers, and mobile carriers. In Q2 2017, Google shared 71.6 percent of its advertising revenue with websites that utilize the company's advertising networks and individuals that publish video content on its streaming service YouTube. This is the highest percentage of advertising revenue allocated by the search giant to content creators since 2009. On the other hand, Google shared nine percent of its advertising revenue with smartphone manufacturers and mobile carriers. Compared to the same period in the previous year, this figure represents a 52 percent growth in payments made to partner manufacturers.
The increase in the amount of money paid to its partners reflects the change in Google's business model. In the previous years, most of the company's revenue came from advertisements shown on desktops. However, analysts point out that as people's Internet browsing habits are moving to smartphones, Google has to pay more of its ad revenue to partners. If this trend continues, this may result in a decrease in Google's net revenue. The news alarmed some investors, resulting in the search giant's stock prices decreasing by around three percent in after-hours trading.
Alphabet's CFO Ruth Porat admitted that the company may see increased traffic acquisition costs within the next few years as more people access websites and the search engine through their mobile devices. Porat, however, tried to calm investors by stating that the increase in payments to its partners also means that there are more people accessing the company's services. As more consumers utilize Google's solutions, the tech giant is still improving its bottom line, regardless of the fact that its overall profit margins in this segment are decreasing. Hence, spending more on its partners should secure the company's future in an evolving content consumption landscape. Google's stock will likely soon recoup the value it lost in the last 24 hours.