Google’s main business could use 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 CEO Sundar Pichai mentioned just two of the “Other Bets” — Waymo and Calico, the biotech research and development company. Calico and its partner, AbbVie, announced 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 commercialise, 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.

—Bloomberg