Editor’s note: In reviewing Google’s latest financial report which delivered record revenue and profits, Technology Business Research analyst Jack Narcotta concludes that Android’s scale in the global device marketplace makes it Google’s “most potent asset.” here’s why.

HAMPTON, N.H. – The scale of Android in the global mobile device marketplace is arguably Google’s, and parent company Alphabet’s, most potent asset, perhaps even more than its search technology or advertising platforms.

Without the billions of mobile devices powered by Google’s open-source mobile operating system, making it easy for users to access Search, YouTube, Gmail, Play, Maps, News and many other applications, any efforts by Google to evolve beyond desktop search would have been significantly hampered, if not impossible, fundamentally changing the course of the now-ubiquitous internet search and advertising juggernaut.

During 3Q16 Alphabet (Nasdaq: GOOG) generated company-record revenue and profits, illustrating Google’s leadership in mobile and video advertising and demonstrating Google’s ability to monetize engagement by Android smartphone users and help traditional advertising outlets make the transition to digital advertising. Revenue, gross profit and operating profit surged 20.2%, 18.2% and 22.5% year-to-year to $22.5 billion, $13.8 billion and $5.8 billion, respectively.

Per Alphabet, revenue and profit growth would have been larger if not for the impact of foreign exchange rates against the U.S. dollar, and currency fluctuations outside the U.S. robbed it of an additional $196 million in revenue. Even as Alphabet’s revenue climbs across all regions, the impact of foreign exchange rates against the U.S. dollar will be a factor, albeit a small one given the rate at which revenue is increasing, as non-U.S. revenue typically generates between 50% and 55% of the company’s total revenue.

TBR believes Google’s mobile-advertising-driven revenue and profit momentum shows it is well-equipped to continue capitalizing not only on users shifting their computing to mobile devices, but also on driving advertisers onto Google’s platform and away from traditional advertising. While emerging technologies in artificial intelligence and machine learning from Alphabet’s Other Bets segments, new hardware such as the Pixel smartphones released in October 2016 and esoteric initiatives in life sciences and medicine detail where Alphabet seeks its next successful business, the company’s top concern will remain squarely in cultivating continued growth of Google’s mobile search and video advertising revenue and profits.

A key digital advertising metric is shrinking, but surging mobile advertising volume is proving an effective remedy for Google

Cost per click (CPC), a metric that calculates the price paid each time a website visitor clicks on a search ad displayed on that site, has been declining steadily for Alphabet’s Google business unit over the last two years, reflecting a shift to the limited space offered on mobile devices compared to PCs. In the past CPC was used as a measure of Google’s success driving traffic to its network. Higher CPC typically indicated Google’s search placement and results algorithms were providing high value to advertisers aiming to get their services or products in front of an eager customer base.

Over the last two years Google set several initiatives into play in efforts to stem the decline in CPC, primarily by crafting ways to increase its ad network traffic by boosting its total paid clicks, especially from mobile devices. Mobile devices, nearly 85% of which are powered by Google’s Android operating system, will support Google’s efforts to tinker with its cross-platform advertising services, particularly those that power Search, YouTube, Gmail and Maps, which are typically among the highest-trafficked sites by mobile devices.

Its efforts have paid off as paid click volumes climbed 29% year-to-year in 1Q16, 29% again in 2Q16 and 33% in 3Q16. The surge in paid click volume is indicative of increased user engagement on mobile devices, highlighting the potential for the prevalence of Android-powered smartphones in the mobile device marketplace to fuel Google’s revenue and profit growth even as CPC continues to decline.

Narrower operating losses in Alphabet’s Other Bets show the company is committed to expense discipline to protect its advertising profits

Alphabet reported in 3Q16 that its Other Bets segment, which is composed largely of niche hardware and services, as well as research initiatives and investments in cutting-edge technology, generated $197 million in revenue, an increase of 39.7% year-to-year from 3Q15’s $141 million. While the three primary revenue generators — Fiber (Google’s very fast internet service), Nest (Google’s smart home hardware portfolio) and Verily (the R&D organization within Google that is researching life science) — and other Other Bets components garner headlines for Google and serve as a showcase for its risk-friendly culture of innovation, they hamper Alphabet’s cash flow and operating income. Cumulative Other Bets operating losses from 1Q16 through 3Q16 have surpassed $2.5 billion; Alphabet reported Other Bets lost $865 million in 3Q16.

However, TBR believes Alphabet has become increasingly aware of the detrimental impact greater operating losses from these moon shots could have on the profits generated by Google’s advertising business. The $865 million operating loss in Other Bets in 3Q16 was an 11.7% improvement from 3Q15’s $980 million loss. CFO Ruth Porat has moved too quickly to rein in or even halt allocating investments into areas deemed as nonessential or underperforming assets, most notably by halting the rollout of capital investment- and operating expense-intense Google Fiber services to eight new U.S. cities, among them major metropolitan areas such as Los Angeles, San Jose, Calif., and Dallas.

TBR believes Other Bets’ narrowing loss indicates that Porat’s initiatives to instill financial discipline into Alphabet’s moon shot segment is a smart, if not necessary, move for the company, as it will protect the remarkable profits generated by Google, allowing Alphabet to invest to drive sustained growth in its core business without burdening its revenue and profit engine with potentially superfluous, frivolous investments into nonrevenue-generating hardware, software or service offerings.

(C) TBR