Alphabet’s experimental investments in the future continue to cost it a fortuneJuly 23, 2018
Google parent company Alphabet posted second quarter earnings for 2018 today, beating Wall Street estimates on revenue and income. Despite the historic $5 billion fine levied against it by the European Union last week, which impacted Google’s operating income, Alphabet stock is actually up around 3.5 percent in after-hours trading. That bolsters the likelihood that the EU fine may be nothing more than a pricey slap on the wrist in the long-run — so long as the fine, which Google is appealing, doesn’t have a substantial impact on Google’s advertising machine.
But one area of Alphabet’s business that only continues to get murkier is its “Other Bets” category, a line item that includes nearly every non-Google division. The category now houses the Waymo self-driving car unit and the experimental tech lab X, which oversees the balloon Wi-Fi initiative Project Loon and drone delivery unit Project Wing. Other Bets also includes the connectivity-focused Access (formerly Google Fiber), healthcare and life extension units Verily and Calico, and other smaller units centered on venture capital investments.
According to its earnings report, the Other Bets units generated $145 million in revenue in the second quarter, up 33 percent year over year. Yet the category collectively cost Alphabet $732 million in operating losses. Stock-based compensation for the category this quarter totaled $127 million, equaling nearly the entire category’s quarterly sales. (It could be that heated competition in the autonomous car space is driving up hiring costs at Waymo.)
Following a restructuring in February, Nest is now part of Google, whereas it used to be part of the Other Bets category. The smart home device maker was one of the few divisions in Other Bets that actually made money, and losing the company to Google proper could negatively impact these figures going forward.
So clearly, the company is spending a lot of money on its more experimental projects, and that’s nothing new. Alphabet leadership has laid out in the past how it views these efforts as a way to scope out the future and find the next billion-dollar business. Occasionally, that’s involved costly investments in spaces that turned out not to be worth the time, effort, and resources, like fiber internet.
For instance, following layoffs and numerous leadership changes, Google Fiber is now looking into wireless transmission for its internet business in partnership with its Webpass subsidiary. With divisions like CapitalG and Google Ventures, Alphabet is investing in growing businesses, with an eventual payout that may not occur for years.
Still, it seems like the costs of the Other Bets category are on the rise, and Alphabet may soon find itself losing $1 billion every three months just to keep all the divisions running. If Waymo ends up providing the brains to the entire auto industry’s self-driving future, much like how Android became the de facto smartphone OS, that could be a huge win for Alphabet and result in massive licensing revenues. And there’s no telling what advancements Verily or Calico could bring to the healthcare industry, where disease prevention and life extension solutions could reap unprecedented benefits.
But for now, Alphabet continues to put chips down, and it looks like it will have to wait quite a while to see which bets will pay off.