Searching for Alphabet’s profit? G is still the wiz
percent of its Google Fiber workforce and halted a planned expansion into San Jose, Portland and other cities. But it also bought San Francisco’s Webpass, a provider of wireless Internet access that offered a cheaper way to wire up buildings than the fiberoptic cables which gave the division its name.
Alphabet’s experimental division, known as X, also saw some jobs cut from its effort to deliver consumer items via drone, Business Insider reported last month. And X’s Project Loon — an effort to beam the Internet into rural areas using balloons — moved away from plans to launch its balloons worldwide. Instead, it plans to use 10 to 30 balloons, an effort that would make it more likely to be profitable, according to a Bloomberg report. X said the move to use fewer balloons was due to advances in technology.
Waymo, the self-driving car division, has lost several key executives to other autonomous-vehicle ventures in recent years.
“We’re determining the size and pace of investment appropriate to each Bet given their stage of development and achievements against milestones,” Ruth Porat, Alphabet’s chief financial officer, said on a conference call with investors in April.
For now, investors appear to be willing to let Alphabet spend billions of dollars on these developing enterprises each year, because revenue from Google advertising continues to pour in.
“Right now we can consider all of Alphabet’s (other) businesses as a side business to its main core Google business,” said Clement Thibault, a senior analyst at financial analysis site Investing.com.
But, Thibault added, its Other Bets help distinguish Alphabet from competitors: “It brings a different culture than the established corporate, resting-on-its-laurels kind.” The prospect of moving to an exciting Other Bet after toiling away on Google’s search-andads machine may help Alphabet recruit and retain employees.
Before Alphabet, Google and Google Inc. were all but synonymous, many Other Bets began as Google projects. But in 2015, founders Larry Page and Sergey Brin restructured the business to form the holding company. For Nest, which Google acquired, in 2014, the new corporate form was a concrete assurance of the independence it has promised. For divisions that had been part of Google, Alphabet allowed them to have their own CEOs and budgets as separate companies.
At the time, analysts thought the move would give more transparency to Google’s advertising business and show how the more speculative ideas and concepts being pursued by the other divisions were faring.
“The new structure has helped entrepreneurs build and run companies with the autonomy and speed they need,” Page wrote in a note to investors in April.
Other Bets companies could play a larger role in Alphabet’s future, especially if it makes more acquisitions. For now, though, the revenue juggernaut is Google, which has an estimated third of the worldwide digital advertising market, according to eMarketer.
One challenge facing Google’s digital ad business is that mobile ads are generally less lucrative than desktop ones. As more people start using voice-controlled, Internetconnected home devices, analysts are curious to see how ads will figure into those conversations. As a hedge against ad revenue, Google has expanded into hardware, selling Pixel smartphones and Google Home devices, both of which can respond to voice commands. (Even Google itself, in other words, is spreading its bets.)
One Bet that analysts believe shows a lot of promise is Waymo. Google began research on self-driving cars in 2009, before virtually all of its competitors, and is generally regarded as the farthest along technologically.
Yet Waymo has been slow to commercialize its work and expose it to consumers, a delay that may have contributed to some departures, even though some were well-compensated for meeting technical milestones. Anthony Levandowski, a key Waymo engineer, was paid $120 million shortly before he left to start a self-driving truck company, Otto, according to filings in a lawsuit Waymo is now pursuing against Uber, which purchased Levandowski’s company last year. Court filings suggest that Levandowski was impatient with the pace of progress at Waymo.
Last month, Waymo said it would allow hundreds of people to sign up to for a pilot program of self-driving cars in Phoenix. The company also said it is expanding its fleet to include 600 Chrysler Pacifica Hybrid minivans. Waymo is also exploring ride sharing and trucking.
Another division receiving sizable resources is Verily, which operates out of South San Francisco. In February, Alex Greenwood, director of economic and community development with the city of South San Francisco, estimated that Verily had roughly 300 employees and would get to 1,000 employees this year. Verily declined to discuss the size of its staff.
“They want to develop cures for a variety of diseases around the world,” Greenwood said. “They are being very aggressive in putting together their team.”
The company is working on a variety of projects, including contact lenses that can sense glucose levels; reducing the spread of disease-carrying mosquitoes; and using machine learning to detect eye diseases related to diabetes. It says it could take years to get regulatory approvals for such efforts. So far, the only product that Verily has sold and manufactured on its own is Liftware, a spoon that helps people who have tremors. The company also makes money through business partnerships, like licensing technology to pharmaceutical companies.
When Google purchased Nest for $3.2 billion in 2014, it promised founder and CEO Tony Fadell, known at Apple as the father of the iPod, considerable independence along with the company’s strong financial resources. Since then, though, Nest has stumbled. Its only significant new product was an outdoor security camera, itself the outgrowth of the acquisition of another hardware startup, Dropcam.
The Alphabet reorganization was supposed to give entrepreneurs like Fadell more room to maneuver. But it also brought new scrutiny on budgets and product plans. Fadell left last summer, replaced by Marwan Fawaz, a former Motorola executive.
When Google launched its own Internet-connected Home device to compete with the Amazon Echo, some analysts questioned why it wasn’t a Nest product. Analyst Thibault said the decision could be a sign that Alphabet believes Nest is underperforming. Page recently praised Fawaz’s performance in a letter to investors.
“At some point we would like to see Nest taking the next step to be more familiar with the general public,” said Thibault. “It seems like a project for early adopters and investors.”
While many of its Other Bets have yet to be profitable, Thibault says he believes Alphabet’s management is more than likely making the right decisions. That faith stems from Google’s track record of foreseeing the next wave of technology, such as the growth of video with its YouTube acquisition and the popularity of smartphones with its Android operating system.
As for the gamble that its Other Bets will one day pay off, Thibault said, “That is the risk you take.”
“Right now we can consider all of Alphabet’s (other) businesses as a side business to its main core Google business.” Clement Thibault, Investing.com