ECONOMY

Google’s Main Business Could Use Some Moonshots

When Google renamed itself Alphabet Inc. in 2015, co-founder Larry Page revealed that one of the new name’s meanings was a pun: alpha-bet, as in “a bet on investment returns above a benchmark.” This implied that the so-called “Other Bets” in Google’s financial reports — subsidiaries that work on projects ranging from self-driving cars to cancer cures — aren’t just moonshot bids to make the world better, but potential businesses with better-than-average returns.

It may be early days for the reckoning on the “Other Bets,” which have absorbed some $3.2 billion in capital expenditure and reported operating losses of about $24.3 billion since the renaming. After all, when Mark Shmulik, a Sanford C. Bernstein & Co. analyst, recently attempted to value Alphabet’s parts separately to see if the sum of these valuations would be greater than the current whole, he suggested that “Other Bets” could be worth $75 per share, or more than $50 billion. That’s 2.9% of his full sum-of-the-parts valuation — not bad for businesses that provide between 0.3% and 0.5% of Alphabet’s revenue quarter after quarter. 

More than half of that “Other Bets” valuation, though, would come from Waymo LLC, the self-driving taxi company whose chief executive officer John Krafcik stepped down last month after it became clear the promise of self-driving wouldn’t be fulfilled as soon as many tech optimists expected a few years ago. Time was when some investors valued Waymo above $100 billion; that number has reportedly melted to about $30 billion. How the business can make money in the near future is still unclear.

Other Alphabet moonshots are developing even more slowly. On the most recent Alphabet earnings call, its chief executive officer Sundar Pichai mentioned just two of the “Other Bets” — Waymo and Calico, the biotech research and development company. Calico and its partner, AbbVie Inc., announced earlier this year that two of their molecules were entering Phase I clinical trials, but the announcement came with a warning from Calico founder Arthur Levinson that the companies’ approach requires “patience” and “perseverance.”

Alphabet’s “Other Bets” — even X, the “moonshot factory” that takes on the most fantastic projects like the (now discontinued) effort to capture wind energy with kites — appear to be insured against the fate of Xerox PARC, the highly innovative lab whose many inventions from the 1970s the copier company failed to commercialize, including the graphical user interface or a near-commercial version of the mouse. Apple co-founder Steve Jobs summed up the reasons for that failure in a famous 1995 interview

Google is part of an internet advertising duopoly, and it’s as close as it gets to a search monopoly, so Google executives — ad heads, one might call them — might be tempted to wave away ideas unrelated to the lucrative main business. Cancer drugs? Driverless taxis? Electric kites, for God’s sake? At Alphabet, however, the moonshots are treated as potential businesses from the start; there’s pressure on project founders to find monetization opportunities and develop business models, even though there’s a relatively high tolerance for trial and error. One can see “Other Bets” looking for ways to make money and veering into new areas in the process; Alphabet health care subsidiary Verily’s move into insurance last year is a good example. 

But Alphabet is still a big corporation, with the inevitable bureaucracy on the one hand and an overabundance of resources on the other. Inefficiencies are endemic to its sprawl and its secure main revenue stream. It’s not obvious that Google’s patronage confers any decisive advantages on research and development projects — that they couldn’t, in other words, have done as well or better with traditional venture funding (which some Google projects also attract) or even at a high-profile academic institution.

To take just one example, DeepMind Technologies Ltd., the U.K.-based artificial intelligence company that is one of the “Other Bets,” has made important advances in using artificial intelligence to model the 3D shapes of proteins — but could the resources Alphabet has sunk into it have been better used? The endowment of Carnegie Mellon University, the global leader in artificial intelligence research if measured by published papers, reached slightly more than $2 billion last year. DeepMind lost about $1.2 billion in 2018 and 2019, according to the latest report it has filed with the U.K. Companies House — and besides, in 2019 Google’s Irish subsidiary wrote off $1.5 billion of DeepMind’s debt, incurred most likely as it used the parent company’s cloud computing resources to train its models. Google also provided DeepMind with most of its revenue.

If Alphabet’s goal is eventually to corner some new, now still nonexistent markets the way it once cornered the search one, then treating moonshot projects as potential businesses and having them think simultaneously about products and business models is probably the right approach. Even if just a couple of them become dominant in their industries, Google might eventually stop deriving 92.5% of revenue from the main business, 81% of that from advertising. But since most of the Alphabet projects are in crowded areas such as self-driving, AI or biotech, even the successful projects are less likely to grow into monopolies; Google’s cloud business — no moonshot but a sideline, too — is strong, but it’s not globally dominant.

If, on the other hand, Alphabet’s ultimate goal is to make the world a better place and perpetuate its own place in it, the company might do better to focus on innovation in areas it knows best and dominates. Instead of spending tens of millions of dollars on lobbying to prevent regulators from clamping down on its high-handed data collection practices, it could invest in researching alternative ways to target ads, such as paying people a percentage of ad revenue if they agreed to provide more of their data for precise targeting. Instead of fighting off content creators that want to be paid for the material surfaced by Google services and only loosening purse strings under pressure from nation-states, it could look into happier, more symbiotic arrangements with media companies. Instead of paying out huge fines in Europe in one antitrust case after another, it could review all the accusations of monopoly abuse against it and search for ingenious compromises. Like the other member of the ad duopoly, Facebook Inc., Google could benefit from purposeful investment in building a less predatory image in the markets where it has already succeeded way beyond its founders’ early dreams.

Not being seen as evil is not just a public relations task — it’s one for engineers and project managers, too. A small competitor, Brave Software Inc., has created a way for people to get rewarded for viewing ads, but only a giant like Google could implement such a program at a grand scale and turn it into the new industry standard. Helping rebuild local media on a new basis is another suitable challenge for an ad, search and map leader of Google’s stature. It may not be as glamorous as finding a cure for cancer — but, with all due respect to Google, others might be better positioned for the cancer breakthrough; when it comes to internet content and ads, that’s not the case.

Alphabet, in other words, could be underinvesting in the sustainability of its prosperous main business while overinvesting in adventurous sidelines unlikely ever to become as important to the company, even if they do eventually make money, get spun off at high valuations or both. Here’s to moonshots that would challenge Google’s “ad heads” on their own turf.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is a member of the Bloomberg News Automation team based in Berlin. He was previously Bloomberg Opinion’s Europe columnist. He recently authored a Russian translation of George Orwell’s “1984.”

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