A year of Al­pha­bet: Great for Google, less so for moon­shots

Daily Local News (West Chester, PA) - - BUSINESS - By Michael Liedtke

SAN FRAN­CISCO >> Re­or­ga­niz­ing it­self un­der the um­brella com­pany Al­pha­bet has done won­ders for Google — but less so for a grab bag of eclec­tic projects rang­ing from ro­botic cars to in­ter­net-beam­ing bal­loons, which are suf­fer­ing costly grow­ing pains.

A year af­ter Al­pha­bet took shape, Google’s rev­enue growth has ac­cel­er­ated — an un­usual de­vel­op­ment for a com­pany of its size. That suc­cess, how­ever, also un­der­scores Al­pha­bet’s de­pen­dence on the fickle busi­ness of plac­ing dig­i­tal ads in core Google prod­ucts like search, Gmail and YouTube video. As a result, it re­mains vul­ner­a­ble to swings in mar­ket­ing bud­gets and stiff­en­ing com­pe­ti­tion from an­other equally am­bi­tious ri­val, Face­book.

Al­pha­bet was sup­posed to speed the process of turn­ing off­shoot busi­nesses into new tech­no­log­i­cal jackpots. CEO Larry Page pre­dicted that sep­a­rat­ing these smaller “moon­shots” from the mas­sive search-and-ad­ver­tis­ing busi­ness would spur in­no­va­tion by fos­ter­ing a more en­tre­pre­neur­ial at­mos­phere.

That hasn’t hap­pened dur­ing Al­pha­bet’s first year.

Mak­ing the shift

Un­til Page and fel­low Google co-founder Sergey Brin cre­ated Al­pha­bet (which turns 1 on Sun­day), in­vestors com­plained that Google was spend­ing too much on high-risk ef­forts. New Chief Fi­nan­cial Of­fi­cer Ruth Po­rat, who joined Google in mid-2015, re­sponded by rein­ing in ex­penses to keep them more in line with rev­enue growth.

A few months later, Page an­nounced the plan to draw a di­vid­ing line be­tween Google and the far-flung for­ays Al­pha­bet now refers to as “Other Bets.” The mish­mash in­cludes smart-ther­mo­stat maker Nest; the Fiber project, a high-speed in­ter­net ser­vice; and X lab, where the com­pany is build­ing ro­botic cars and de­sign­ing the strato­spheric bal­loons de­signed to beam in­ter­net ser­vice to re­mote ar­eas.

Other “Other Bets” in­clude the biotech firm Ver­ily and med­i­cal-re­search firm Cal­ico, which has been study­ing ways to stop ag­ing. Al­pha­bet also runs funds in­vest­ing in star­tups and mid­sized com­pa­nies.

Page ar­gued that fenc­ing off Other Bets would make Google “even bet­ter through greater fo­cus.”

Core successes

That part of Page’s vi­sion ap­pears to be pan­ning out. Af­ter sub­tract­ing ad com­mis­sions, Al­pha­bet’s sec­ondquar­ter rev­enue jumped 22 per­cent from the pre­vi­ous year to $17.5 bil­lion. It was the best per­for­mance in four years, ad­justed for changes in cur­rency ex­change rates, says RBC an­a­lyst Mark Ma­haney. Al­pha­bet shares rose 25 per­cent over the past year, eas­ily out­pac­ing ma­jor mar­ket in­dexes.

“Folks will be hard pressed to say that Al­pha­bet hasn’t been a suc­cess,” S&P Global Mar­ket In­tel­li­gence an­a­lyst Scott Kessler says.

Al­pha­bet Inc. de­clined to com­ment on its first-year per­for­mance. But Sun­dar Pichai, who be­came Google’s CEO in the re­struc­tur­ing, told in­vestors in July, “There is an amaz­ing en­ergy right now.”

Among other things, Google has been mak­ing strides in the still-nascent field of ar­ti­fi­cial in­tel­li­gence, hop­ing to cre­ate more con­ve­nient ser­vices that at­tract even more eye­balls for its ad­ver­tis­ers.

Stalled bets

But the de­mand for fi­nan­cial dis­ci­pline and ac­count­abil­ity ap­pears to have taken a toll on Other Bets, which lose bil­lions of dol­lars a year. Key lead­ers have de­fected from Al­pha­bet’s high-pro­file self-driv­ing car project and its Nest line of in­ter­net­con­nected de­vices. Al­pha­bet also has scaled back plans to ex­pand its Fiber ser­vice to dozens of U.S. cities.

Cre­at­ing a hold­ing com­pany also was sup­posed to make it eas­ier to di­ver­sify through ma­jor ac­qui­si­tions. But Al­pha­bet’s big­gest deal so far has been the $625 mil­lion pur­chase of a busi­ness soft­ware maker, Apigee Corp., which had an­nual rev­enue of just $92 mil­lion.

Al­pha­bet could make a much big­ger splash if buys Twit­ter, as re­cent re­ports say it is con­sid­er­ing. Twit­ter would give Al­pha­bet a pop­u­lar pub­lish­ing out­let to mon­i­tor trends, mine data and sell even more ads. Al­pha­bet de­clined to dis­cuss whether it’s mulling a bid, which would be ex­pen­sive; Twit­ter might fetch be­tween $20 and $30 bil­lion, de­spite its prob­lems with user growth and on­line ha­rass­ment.

Look­ing be­yond

Google is do­ing so well that in­vestors aren’t fix­at­ing on the losses with Other Bets, Kessler says.

Only three Bets — Nest, Fiber and Ver­ily — are gen­er­at­ing even a smidgen of rev­enue. In nine months, the Other Bets com­pa­nies have lost a com­bined $2.6 bil­lion on rev­enue of $410 mil­lion. An­other big loss is ex­pected in the July-Septem­ber quar­ter; the com­pany re­ports re­sults on Oct. 27.

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