- Alphabet (GOOG) will now allow Spotify Technology (SPOT) to run its own billing from its customers' Google Play downloads.
- Alphabet and other gatekeepers are already facing rule changes to allow this from the EU Digital Markets Act (DMA).
- The effect on Alphabet’s revenue: As part of “Other” revenue it is likely less than one-half of one percent.
Alphabet said that on March 23 it will allow Spotify to run direct billing of customers who elect to be billed by Spotify. Spotify music and podcast subscriptions will be able to be billed and renewed by Spotify in a new app instead of Google Play.
Normally Google Play takes 30% of revenue take (15% on the first $1 million in revenue). With this new arrangement, it is likely that Spotify will pay Google Play less, although that is not yet clear.
Moreover, on Friday, March 25, the E.U. passed the Digital Markets Act (DMA). The new DMA rules will force Alphabet and other “gatekeeper” tech companies like Meta Platforms (FB) to allow apps like Spotify to do their billing if the customer chooses.
The Wall Street Journal called this the “most sweeping pieces of technology-regulation to go into effect next year.” It covers the app ecosystem, online shopping, and online advertising.
The DMA will also affect Google's search rankings. Google and Amazon (AMZN) won't be able to rank their own products and services ahead of smaller competitors in search results.
Not a Big Deal
This will not have too large an effect on Alphabet’s ongoing and future revenue. The reason is that Google Play is part of the “Google Other” component of Alphabet’s total revenue.
For example, the latest earnings release for fourth-quarter 2021 “Google Other” revenue was $8.16 billion out of a total of $75.325 billion. So “Other” was just 10.8% of the total revenue.
However, page 30 of the 10-K report for 2021 shows that “Other” has 3 components: Devices and Goggle Play Services (like Spotify), YouTube subscriptions, and hardware revenue (non-ad-based sales). Page 34 also says YouTube drives the “Other” revenue growth category, followed by the Google Play app and in-app purchases, then wearables and phones.
In other words, Goggle Play services are a small portion of the Other category. Even if Google Play took up to 40% of the total, its effect on sales is still less than 5% of the total (i.e., 0.40 x 0.10834 = 0.043). I estimate that even if Spotify is 10% of the 4.3% portion of sales, it works to just 0.43% of sales (less than one-half of one percent).
That is so small it can easily be made up with higher revenue growth in "Other" areas.
Where This Leaves Investors in GOOG Stock
Alphabet makes a huge amount of free cash flow (FCF). For example, Alphabet made over $18.55 billion in FCF in Q4 alone. That represented 24.6% of its quarterly $75 billion revenue. So Spotify's 043% of sales will not affect Google's FCF very much.
And even if it does, Alphabet’s growth rate will cover up any detrimental effects. If GOOG stock dips as a result of these points, value investors should take advantage of the bargain price.
