Google’s ‘Other Bets’ Should Focus On Its Main Business

Desy Papper

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 […]

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

When you have a market monopoly, the sales and marketing people end up running the company. The product people get run out of the company. Then the companies forget what it means to make great products. The [researchers] at Xerox PARC used to call the people who ran Xerox ‘toner heads.’ They just had no clue about a computer or what it could do.

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.

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