Image of Google headquarters showing privacy practices as a risk in Alphabet annual report
Privacy Practices Cited as New Source of Risk in Alphabet Annual Report

Privacy Practices Cited as New Source of Risk in Alphabet Annual Report

For the past 12 months, Silicon Valley tech giants like Facebook and Google have been coming under increasing scrutiny from regulators, investors and consumers for their controversial privacy practices. Finally, it looks like those concerns are starting to be taken seriously by Google. In the Alphabet annual report for 2018, Google’s parent company provided additional guidance on how their privacy practices could impact the company’s overall business model, and hence, its ability to churn out billions of dollars of revenue each quarter.

Of course, previous 10K filings from Alphabet have cited privacy concerns as potential risk factors. But that was primarily legal boilerplate added to the Alphabet annual report – the type of vaguely worded statements designed to protect Alphabet from potential lawsuits from investors. So the additional insertion of detailed new language about privacy practices into the Alphabet annual report is worth paying attention to – it signals, at the very least, that Alphabet’s top executives are finally starting to wake up to the prospect of advertisers and consumers walking away from the company, or the U.S. government imposing fines or additional regulation upon the company.

Privacy practices and advertising in Alphabet annual report

Most importantly, Alphabet signaled that less-than-stellar privacy practices at Google might eventually hit its core digital advertising business. Right now, a whopping 83 percent of all Alphabet revenue comes from selling digital ads, so any pullback in Google’s ability to sell ads would come as a huge blow to the company.

In the Alphabet annual report, the company warns that new digital advertising policies might impact the “types” and “manner” of ads being shown to users. Thus, for example, if Google is no longer able to use personal data gleaned from Google search results, that might impact the overall relevancy of the ads being shown to users. If ads are no longer seen as impactful by advertisers, that fact could lead them to walking away from Google in search of other advertising platforms.

Privacy practices and reputation risk in Alphabet annual report

Another core risk cited in the Alphabet annual report is the potential reputation risk that might result from “bugs” or “defects” in its products. This is a direct reference to the recent string of events that have befallen Google over the past 12 months, the most notable of which was the software bug impacting 52 million users of its Google Plus social network. While Google said that this software bug was never exploited by hackers and never posed a risk to users, it nonetheless took the dramatic step of announcing that it was closing down the Google Plus social network forever. (Of course, it didn’t help matters much that the much-hyped Google Plus social network never gained the traction it was supposed to, with the network often referred to as a “ghost town” by tech analysts.)

Privacy practices and regulatory risk in Alphabet annual report

A third risk factor cited in the Alphabet annual report was the potential regulatory overhang facing Google as the result of some of its privacy practices, several of which have been labeled as “deceptive” by privacy advocacy groups. In Europe, for example, Google is now facing tens of millions of dollars in potential regulatory fines from the EU, as a result of the implementation of the General Data Protection Regulation (GDPR), which went into effect in May 2018.

One concern, as suggested in the Alphabet annual report, is that U.S. regulators might also start to impose fines on Google. Of particular interest to regulators is Google’s use of location-tracking data from user mobile phones. According to one study, even when users had specifically turned off “location tracking,” Google was still recording user data and whereabouts, leading to concerns that no matter what consumers did, Google would still be able to track them.

As a result, momentum is growing for upcoming privacy regulation, such as the upcoming Consumer Privacy Act, set to go into effect in California in January 2020. As suggested by the new wording in the Alphabet annual report, it could be the case that Google is finally starting to see the writing on the wall, and is just now starting to prepare investors for what might happen if the U.S. government decides to enact sweeping federal privacy legislation.

What changed in 2018?

Until 2018, Google managed to weather the regulatory storm over its privacy practices. For years, consumers have expressed concerns that Google search results seemed to know just a little too much about them, such as past behaviors and their physical location. Also, tech analysts have suggested that Google might have gained too much power as a monopoly-like player in the tech space, thanks primarily to its growing suite of products – everything from Google Search to Gmail to Google Drive – and how they are all interconnected and stitched together. But until now, Google has managed any type of formal regulatory oversight. So what changed in 2018?

One important answer to that question is the European GDPR, which for the first time, made it possible for regulators to assess substantial fines against any company for sub-standard privacy practices. According to the GDPR, regulators can fine companies like Google as much as 4 percent of their annual revenue for non-compliance. In the case of Google, that fine might be in excess of $1 billion.

With numbers like that, it is no wonder Google executives are suddenly paying much greater attention to privacy practices. It’s why wording about privacy practices made their way into the latest Alphabet annual report, and why the same wording is likely to continue appearing in Alphabet annual reports over the coming years.

Google adjusts to changing consumer attitudes about privacy practices

In 2019, then, the lesson for Google is clear: start paying attention to consumer privacy practices, or face the consequences. The stakes are rising for Google. It is not just the prospect of regulatory oversight that should be concerning,  but also the prospect that consumers, advertisers and investors might jump ship entirely if Google does not start taking user privacy seriously.