If all Google could do with their cash flow was pay a dividend, that would be very sad, and it would call for a much lower P/E ratio. This article completely misstates the facts.
Perhaps the way they break out their financial statements is confusing to someone without an accounting degree. Just because "Other Bets" is negative, a growing negative number in this case is a good thing. This is showing Google has more free cash to invest in growth and has good ideas they believe in and want to pursue. I would be worried if instead they were stockpiling cash. You would then have to ask, why can't they put it to work effectively?
Of course, everything they do that is making money is no longer an "Other Bet" by definition.
>I don't think it's right to equate R&D spending with "losses"
Better to say "Alphabet spent $859M on...."
Another way is like Amazon, they just spend all the profit back on R&D and prevent much of this profit/growth talk, it stays focused on competition and future goals. They are in a constant state of R&D by reinvesting profit.
Spending on R&D should be seen as good in a tech world where you must stay ahead, not as losses. If you are a big tech company and not spending on R&D, expect that to be short-lived.
Amazon is great at this kind of R&D, because Bezos seems to spend all of his free cycles asking himself if there's something else Amazon can do to make money. So Amazon R&D is primarily return-led.
No one else works quite like that. Google seems to have thrown a lot of money at R&D, but it's not obvious how much of a return it's going to generate. Apple and MS are in the same boat.
MS does very cool research, but mostly lacks the management to turn the research into viable products. There's a huge disconnect between the products MS could be shipping, and the products MS is shipping.
Apple has been spending more on R&D, but seems to be marketing and image-led - possibly based on the assumption that's how Jobs worked. (He didn't.)
Alphabet R&D seems engineering-led - which is great for engineers, but isn't a famously effective way to find new customers and generate more income.
Moonshots maybe should come once you've mastered all your core products?
Then they'll never come.
Alphabet is trying to learn from the mistakes of their predecessor tech giants, who continued to focus almost exclusively on their current money spinners, only to wind up completely missing the boat on the Next Big Thing (tm).
That being said, it does indeed need a lot of improvement.
The support lib development pace seemed to have really picked up some steam this year.
Of course they could do more, for example :
- a really open support lib repo where you can really easily push contributions on something like github, gitlab, etc..
- start working on a replacement for Java .. Java 10 is better than what we have right now but still way behind kotlin or swift..
- do even more in the support lib. They are dozen of points of the material specs not covered by the platform right now.
- do something about android updates. It looks like a political issue though, so not sure there is a solution.
I don't feel like they are not investing in Android though, all the contrary.
A true moonshot! :) and :( at the same time...
To compete with what, Xcode?
Strategically they're almost better off inspiring others to make better third-party Android dev tools to open up the space
Google Glass seems to have come closest to becoming an actual product, but it eventually crashed and burned as well.
The self-driving car was a great technological success, but I really wonder how Google plans to monetize it. Years ago, when Google was the only major company doing self-driving-cars, there was a lot of buzz and potential. But they didn't seem to capitalize on that in any way. Now that Tesla and every other major car company has achieved near-parity, I really wonder what Google's end-game is for self-driving cars.
In general, a lot of these moonshot projects sound so zany, that I wonder if the division will ever recoup its investment.
Page writes: “Having exceeded even the crazy ambitious goals we dreamed of for Android—and with a really strong leadership team in place—Andy’s decided it’s time to hand over the reins and start a new chapter at Google. Andy, more moonshots please!” [1]
The "more moonshots" implies that Android was itself a moonshot. Whether it was declared one at the time Android Inc was purchased I don't know!
As for financial success, in a recent lawsuit with Oracle it was disclosed Android had a profit of $22 billion [2] if I'm reading into it right (admittedly very quick research, not at all reliable!)
[1] https://techcrunch.com/2013/03/13/andy-rubins-next-moonshot-...
[2] http://www.bloomberg.com/news/articles/2016-01-21/google-s-a...
'Arguably the biggest success, Google Brain, is the one people know the least about. It was an artificial intelligence effort that was spun back into core Google in 2012 and is now embedded in products like voice search and the Google Photos app, in which users can search their albums for images like “dogs” or “mountains.”'
http://www.nytimes.com/2016/07/24/technology/they-promised-u...
but R&D like this is excellent PR. It helps the buzz keep going, attracts smart people, keeps the stock up.
It also intimidates other companies and can be used strategically to mislead them and keep them on their toes.
Just shows once again how risky it is to run a startup in SV, putting your eggs in one basket. Lots of otherwise very intelligent people think they can be smarter than Google.
I was baffled by that. Is this just because they called it "Other Bets" instead of plain old boring R&D?
If anything, that would make me want to buy Alphabet stock. We need more companies willing to invest on "moonshots", as the article calls it. We need to get back to the Xerox PARC times.
Catapulting a TRL1-3 concept to product is certainly a moonshot, _but_ they cant afford to take a long comfortable stance to incubate all ideas over an indefinite period of time. The beauty of trying to fund/productize TRL1-3 Moonshots is so many great bits and nuggets fall out of it during the course of maturation that you get to reiterate on.
In my view you are right that they are thinking long term, that they have a positive P/E and still are funding Moonshots along with the safer higher TRL items is encouraging for their investors, that's good long term planning.
[1] https://en.wikipedia.org/wiki/Technology_readiness_level
:edit: Formatting
A vaguely topical example would be Xbox. Microsoft (and the press) reported losses on it for years, years were it would be reasonable to say they were investing in building up the division.
Apple will be in the same position in a few years because they are ramping up R&D.
Given how little Google is known to actually ship I question if they can.
RISK VS REWARD IN THE LONG RUN
Our business environment changes rapidly and needs long term investment. We will not hesitate to place major bets on promising new opportunities.
We will not shy away from high-risk, high-reward projects because of short term earnings pressure. Some of our past bets have gone extraordinarily well, and others have not. Because we recognize the pursuit of such projects as the key to our long term success, we will continue to seek them out. For example, we would fund projects that have a 10% chance of earning a billion dollars over the long term. Do not be surprised if we place smaller bets in areas that seem very speculative or even strange. As the ratio of reward to risk increases, we will accept projects further outside our normal areas, especially when the initial investment is small.
We encourage our employees, in addition to their regular projects, to spend 20% of their time working on what they think will most benefit Google. This empowers them to be more creative and innovative. Many of our significant advances have happened in this manner. For example, AdSense for content and Google News were both prototyped in “20% time.” Most risky projects fizzle, often teaching us something. Others succeed and become attractive businesses.
We may have quarter-to-quarter volatility as we realize losses on some new projects and gains on others. If we accept this, we can all maximize value in the long term. Even though we are excited about risky projects, we expect to devote the vast majority of our resources to our main businesses, especially since most people naturally gravitate toward incremental improvements.
And perhaps "bet" is the wrong word being used here. Usually with a bet in gambling terms, you either win big or you lose it all.
When Alphabet tries a "moonshot", they come away learning a lot about whatever problem it is that they were trying to tackle. They build expertise in-house, and they flex the idea muscle within the company. That isn't zero-value activity. In fact it's very valuable.
$1B a year is a small price to pay for what could eventually spurn a sustainable $10B per year or $40B per year business in the future (self-driving cars, for example).
Now this is just me being optimistic. It could also very well be the case that the X division is horribly mismanaged and the moonshots fail for more nefarious reasons, but I'm willing to give Google the benefit of the doubt.
In a region like silicon valley the opportunity and availability to walk away for a startup is huge this could act as a retention tool also. Better to let a talent disappear for 20% of their time than lose them altogether.
This is like someone betting $1000 on a game, and then calling it a $1000 loss up until the game is actually played (at which point it becomes indeed a true $1000 loss, or possibly a gain). It doesn't make any sense.
This might work for "moonshots" that are closer to their core business, but in other areas there's not going to be any inherent value in building expertise if the "moonshot" itself ends up failing, because at that point they will cease needing any expertise in that area at all.
Likewise, "flexing the idea muscle" would be a benefit if it was regular Google employees that were working on these projects but it's not. It's Alphabet's X lab which is it's own thing, with people working full time on these moonshots.
Internally, they're referred to as 'bets, a pun on the company name Alphabet.
Though I think even $1B for a $100M/year business is a pretty decent deal at this point...
X lab includes self driving car, Goog Glass, Project Tango (editorializing here but Tango is badass!), more crazier bets (1)
Ok, some crazy stuff there - pretty pretty risky.
Wow $1b last quarter for that stuff.
Geez corporate responsibility grumble grumble, stupid silicon valley assholes snark snark.
But wait, spend 30 seconds doing research and in reality the $859m headline is actually referring to Alphabet's line item "Other Bets"
"Other Bets" includes Nest, Google Fiber, Google Ventures, and Verily among others(2)
Nest = iot + Tony Fadell (pre fallout) looked like a damn good way to beat Apple to a new important consumer market. Still holding out hope.
Google Fiber = fast speed is fundamental to Google's biz, heck they could probably look at this as CapEx. Please come to my 'hood!
Google Ventures = bought $258m of Uber stock @ $3.6b valuation. What's that a 20x so far? Pays for entire fund's lifetime by several multiples? Lots of other follow-rounds that make sense (3)
Verily = profitable healthcare division. (4)
So come on NYT spend 5 mins getting the story straight instead of writing a lazy click bait headline.
(1) https://www.solveforx.com/
(2) https://www.engadget.com/2016/02/01/google-alphabet-q4-2015-...
(3) https://techcrunch.com/2013/08/22/google-ventures-puts-258m-...
(4) http://www.recode.net/2016/4/13/11586102/verily-alphabet-pro...
Actually, NYT has syndicated an article originally written by a reporter of the Associated Press. It says so right at the top.
http://hosted2.ap.org/APDEFAULT/495d344a0d10421e9baa8ee77029...
The fact that most of those things aren't huge money losers undercuts your argument though. Nest is making money. Google Ventures is $300 million a year, Fiber invested $100 million in KC in 2013, meanwhile this segment was $3.6 billion in the red last year.
*I haven't looked at their financial statements.
> Google X is mainly about the PR value around its image and recruiting/locking up talent. Google would rather have smart people locked up inside the company working on projects with a high probability of going nowhere rather than having them going to a competitor, or worse, creating the next major competitor.
Is it that inconceivable that Google believes that one or more of these moonshots might actually take off?
IIRC, most of the revenue and cost in "other bets" comes from Google Fibre. It's a signficant up-front investment for a fairly reliable long term revenue stream. treating the whole other bets category as R&D is not really correct. this isn't just google X.
Now Google and Facebook.
(No offense to Google, what they do is really very cool and the scale is mind boggling. But capturing ad revenue doesn't capture the imagination)
At the same time Google has bragged about their car's previously impeccable safety record, they've admitted in reports to the DMV that the only reason they didn't cause 13 accidents in a year was their test drivers... trained humans. The real safety system in the car.
But everyone thinks Google is the leading edge of innovation "because they make self-driving cars and stuff".
This article could just as easily be titled "Alphabet invests $859M on long-term projects".
In fact, that would be a more accurate title since that is precisely Google's intent.
Some projects seem more like the Google-scale equivalent of putting the company name on the shirt of a sports team. Would we expect the Oracle boat to ever turn profitable?
Moonshots are expensive. Doesn't mean they aren't worth it.
[1]: http://news.utexas.edu/2014/07/21/anniversary-shows-us-that-...
Besides, about the author : "..Wallace Fowler is the director of the Texas Space Grant Consortium.".
I think it's wonderful that Google pursues moonshots and that they have the cash flow to keep Wall Street investors from freaking out. I'm confident that one (or more) of their experiments will eventually make a huge impact on people around the world.
"Dear Hen, the process of laying eggs is too expensive and should be eliminated. Furthermore, we're expecting a 5% increase in golden eggs by the end of the year."
If the display ad market collapsed 5 years from now, Google's investment in AI, self-driving cars, AR, robotics, etc. might be the difference between continued dominance and irrelevance. Tech companies rest on their laurels at their own peril.
And I wonder Why not?
[1] http://nvca.org/pressreleases/15-3-billion-venture-capital-d...
Google's R&D budget in 2014 wasn't even in the top 5: http://www.neowin.net/images/uploaded/2014/12/screen_shot_20...
Problem for Google might be that Wall Street may look at a word like "moonshot" and basically associate it with wasting money whereas if you call the same things R&D, it's something companies have been showing as an "investment"(not loss) for decades.
The moonshot program seems to me to be either Google cementing it's position forever in the knowledge economy or a desperate scrabble for another hit.
If the latter is true, then I have hope for the future. It means that the giants - Google (+ Youtube), Amazon, Facebook - can fall. They are not on as strong a footing as it seems.
All it takes is...
- One generation of kids to decide to eschew Facebook (or any product it buys)
- Ad revenue declining or another viable internet business model to rise up and replace it
- More efficient / free marketplaces
Highlighting the research arm's quarterly losses is like setting an FM radio to 10 Mhz* and then declaring there's nothing on air.
* FM Radio bands start around 80 Mhz in the modern world.
Sometimes, the original intent of a research program doesn't come to fruition, but there are a lot of downstream benefits and innovations that can be traced to the so-called "failed" research program. I believe that's exactly what's going to happen with some of these so-called "failures."
Even today, what Elon Musk has already done, is considered impossible for his companies to have done. (The car, and the backwards landing rocket.)
Here's to more moonshots from Google and Facebook! Salute!
-------------------
And here's Nassim Taleb on "inverse Turkeys" (i.e., positive Black Swans), from AntiFragile:
> Harvard Business School professor, Gary Pisano, writing about the potential of biotech, made the elementary inverse-turkey mistake, not realizing that in a business with limited losses and unlimited potential (the exact opposite of banking), what you don’t see can be both significant and hidden from the past. He writes: “Despite the commercial success of several companies and the stunning growth in revenues for the industry as a whole, most biotechnology firms earn no profit.” This may be correct, but the inference from it is wrong, possibly backward, on two counts, and it helps to repeat the logic owing to the gravity of the consequences. First, “most companies” in Extremistan make no profit—the rare event dominates, and a small number of companies generate all the shekels. And whatever point he may have, in the presence of the kind of asymmetry and optionality we see in Figure 7, it is inconclusive, so it is better to write about another subject, something less harmful that may interest Harvard students, like how to make a convincing PowerPoint presentation or the difference in managerial cultures between the Japanese and the French. Again, he may be right about the pitiful potential of biotech investments, but not on the basis of the data he showed.
I am not saying ad-networks aren't complicated and involved and require highly intelligent people, but I don't believe them to be comparable to what Musk is delivering.
So, right, there is a methodology. Get very far from that methodology and tend to get failed projects.
Sure, on some par 3 hole, there are a lot of hole in one shots, and only a small fraction are made by expert golfers with the rest from luck. Still, if picking someone to make a hole in one, pick an expert!
Sure, with luck, might get another successful mobile, social, local, sharing app, but luck is not very reliable!
It only takes one of these moon shots to be successful to bring in extraordinary revenues, and Google has always been crystal clear that following such path was in their DNA.
Thiel criticizes Google/Alphabet for hoarding any cash at all. A true technology company re-invests all its excess profit.
This "loss" corresponds to less than 7% of Google's gross profits in the same quarter.
But idiotic jabs on the fact that long-run investments in R&D haven't paid off immediately are pathetically stupid.
Do I contradict myself? Very well. No I don't!
moon shot, n.2 One might think, “1961, moon shot;” this word relates to the space program as this is the year that President Kennedy set out the great challenge to go to moon by the decade’s end, but it doesn’t, at least not directly. The space term dates to 1949. This moon shot is baseball jargon for a ball hit to a great height. But it’s still 1961, so the baseball usage could be a figurative use of the space term, but the type of hit was made famous by L. A. Dodger Wally Moon. Undoubtedly the coinage is something of a double entendre, combining Moon’s name with the astronautic term, but it shows that in etymology the obvious answer isn’t always the right one.
[1] http://www.wordorigins.org/index.php/site/comments/1961_word...
It's not research that spends that kind of money. It's attempts to buy market share by selling at a loss that do. Or existing businesses with a high burn rate that aren't profitable. That number includes Nest and Google Fiber, both of which are in production but perhaps not doing too well. Does it include Android? Google's various attempts to build and sell phones? Motorola?
"I have not failed. I've just found 10,000 ways that won't work."
They _still_ need to have some source of income, however, generally through donations, though other sources may exist (foundations, grants, some operate revenue-generating services, direct government aid, etc.).
The reason for the balance of inflow and outflow is based on how our economic system works: there are demand bidding rights which are handed out every so often (dollars, pounds, euros, yen, yuan), whose creation is limited to specific entities (national mints, central banks, and banks generally, via loans).
Being able to freely create those demand rights without limite doesn't work on a few counts.
The general principle is that the bids you take in have to match, over time, the ones you hand out (when you're bidding on goods or services). There are exceptions: bids can be borrowed, those debts can be dismissed, and a bunch of other stuff. But it's complicated.
A company is essentially a flow box which accepts and issues those bids. And over time, the bids in have to match the ones out (or you get to the complicated situations listed above).
In the case of Alphabet, it can continue to operate money-losing companies, but only by diverting bids (at the rate of about $900 million/year) from its other companies. Since one of those (Google) essentially mints cash, that's not a large concern.
TL;DR: We don't live in a moneyless society yet.
