Alphabet (NASDAQ: GOOGL), the company formerly known as Google, might not be omnipotent after all. A variety of news sources are reporting that Alphabet (NASDAQ: GOOG) is planning to shut down its insurance, mortgage and credit card market place, Google Compare, on March 23.
“Beginning on February 23, 2016, we will start ramping down the Google Compare product, which is currently live in both the US and UK,” an email from the Google Compare Team obtained by our friends at Search Engine Land states. “We plan to terminate the service as of March 23, 2016.”
The email’s authenticity has been verified by Search Engine Land and The Wall Street Journal. It looks as if Google is taking the unprecedented step of abandoning a market.
Why Did Alphabet Abandon Google Compare?
Alphabet has not revealed any reasons for abandoning Google Compare, which allowed users to compare credit card, mortgage and insurance prices. However, we can guess the major motivation for this action: Compare simply was not making money.
More importantly, Google does not need Compare to make more money. Judging by its fourth quarter financial numbers, Alphabet’s current business model is a money-making machine that is showing no signs of slowing down.
Its revenue grew by $8.99 billion in 2015 without Compare, rising from $66 billion in December 2014 to $74.99 billion in December 2015. More importantly, Alphabet’s income grew by $2.2 billion in 2015, increasing from $14.22 billion in December 2014 to $16.42 billion in December 2015.
Alphabet’s cash from operations grew $3.64 billion in 2015, rising from $22.38 billion in December 2014 to $26.02 billion a year later. The amount of money Alphabet has in the bank also hit an astronomical number: $73.07 billion in December 2015. The amount of Alphabet’s cash and short-term investments increased by $8.68 billion, rising from $64.39 billion in December 2014 to $73.07 billion a year later.
These figures clearly show us that Alphabet simply does not need the insurance, mortgage or credit card markets, so why bother with them and all the regulatory headaches associated with them? Advertising is generating all the cash Sergey Brin and Larry Page could ever want or need.
A Victory for Regulators and Politicians, Not Insurance Agents
The demise of Google Compare is also a major victory for regulators, bureaucrats, lawyers and politicians. Bureaucracy, red tape and regulation were three of the major reasons why Alphabet pulled the plug.
The major factor affecting car insurance rates in the United States is state laws, not accident rates or driving records. Michigan has America’s highest auto insurance prices because of its bizarre insurance regulations, not the driving habits of its residents. Louisiana has very high insurance rates because it is very easy to sue insurance companies and win in that state, where lawyers effectively control the legislature and the court system.
Since there are 50 states in the U.S., each with a different set of regulations on insurance, mortgages and credit card products, you can get the picture here. It was simply impossible for Google Compare to offer a competitive pricing model. In the United Kingdom, Google Compare came under the scrutiny of the Financial Conduct Authority, Her Majesty’s financial industry watchdog. Obviously, the Authority, like any government agency, is motivated by politics.
The Limitations of the Free Market
This, of course, raises serious questions about big data and the free market. Alphabet’s data-driven business model only seems to work in a market that is largely free of regulation and outside interference, such as advertising. When other illogical factors, such as politics, come into play, it can quickly fall short.
Once again the so-called efficient market theory has been proven to be a fantasy. There is no such thing as an efficient market because inefficient and illogical actors, namely, human beings, are heavily involved in all markets. That means mathematical-based efforts to predict market behavior, such as Google Compare, will usually fail.
This means Alphabet will have to go back to the drawing board and completely revise its technology and business model if it wants to enter new markets. That might be the real reason why the company has become so interested in artificial intelligence—it needs to figure out how to deal with irrational and often emotionally-motivated actors to expand its reach.
Despite its retreat from research, Alphabet is still a very good investment. It is a great company that is making an incredible amount of money. Investors that shell out the big bucks for Alphabet stock will not be disappointed, because Compare did not add any value to Google.