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Google bets billions on future beyond advertising

In 2015, he formed parent company Alphabet that would separate the money-spinning Google – which includes its search engine, Android operating system and Gmail – from its “moonshot” ideas. Some of these riskier businesses were acquired, in the case of its smart thermostat maker Nest, or incubated in Google’s secretive lab “X” before graduating to become individual companies.

Alphabet defines these eight companies as “other bets”. They include Waymo, its driverless car division, an ambitious health project known as Verily and its own venture capital arm, GV.

“Some of those bets might fail,” writes Gennaro Cuofano, an independent financial analyst. “Yet some others might not only grow exponentially in the next years, they might also transform Google’s business model.”

On Alphabet’s balance sheet they are indistinguishable from each other, making it harder for ventures that are burning cash to be dumped. Employees within these are happy to work the long hours expected of a fledgling start-up, with stock incentives that they hope will one day prove as profitable as Google itself.

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Four years since the move, and none of the “other bets” have exactly taken off. Combined sales last year was $US595 million, up 25 per cent from 2017 but less than half of 1 per cent of the main Google business.

Richard Holway, chairman of TechMarketView, said: “So, for all the talk of driverless cars, Alphabet will be dependent on its advertising core for some time yet.”

Revenue is mostly generated from research and development licences, broadband, TV and phone services through its Access division, formerly known as Google Fiber, and the Verily health unit. While several of the divisions are nascent, others have been dealt setbacks. Verily, for example, canned an ambitious project to develop a smart contact lens last year. The lens detects glucose levels, but the team could not overcome watery eyes. Human tears thwarted the data collection and skewed the results and the project was paused.

The unit suffered further difficulties with plans for clinical smart watches for the elderly. The interface proved ineffective in trials because patients struggled with touch screens. Another spin-out, Access, once promised to disrupt major telecommunications companies when it was known as Google Fiber. However, it has cut back on expansion as it struggles to figure out a way to make money. In 2016, under pressure to produce returns, it reduced staff and it is estimated to have fewer than half a million customers, hardly the fearsome challenger that broadband providers once feared. Some of Alphabet’s non-Google businesses are spending more than they make. Operating losses at the “other bets” rose from $US2.7 billion to $US3.4 billion last year.

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Alphabet is taking private funding to prop up its research and development. Verily was recently handed $US1 billion from Silver Lake, an investment company that has backed Alibaba Group, Tesla and gene testing kit company Ancestry. It is not clear how much of a stake the venture capital giant will take but its managing director, Egon Durban, has been handed a board seat.

Verily received $US800 million from Singapore’s Temasek in 2017, a sign that investors clearly see some potential. Calico, a separate health division that has been tasked with the small matter of “curing death”, has had its own setbacks.

But the bet that analysts believe makes the biggest loss might just be the next jewel in Alphabet’s crown. Waymo, the company’s driverless car division, is confident that it is on the cusp of a revolution.

Autonomous vehicles could create a $US7 trillion-a-year industry by 2050, according to estimates from Intel.

The company predicts a new “passenger economy” will create new opportunities for businesses, some of which sound almost hard to believe such as on-board beauty salons, mobile health clinics and even a “platoon” of driverless cars that form pod hotels and take passengers from A to B while asleep.

Waymo cars can already be seen weaving through San Francisco. In December, the division started to earn revenue, as residents of Phoenix, Arizona, were able to order driverless car rides. On a recent call with analysts, Alphabet’s finance chief, Ruth Porat, was asked whether it was correct to assume that Waymo was generating the biggest loss. She expressed few concerns about its heavy spending.

For all the talk of driverless cars, Alphabet will be dependent on its advertising core for some time yet.

“We are intently focused on safety first and ensuring a great user experience and that is why we are expanding methodologically.”

It is likely Waymo will be a case of going slow and steady, the antithesis of Google’s chaotic and fast-moving roots. Porat hinted that other cities were interested in putting Waymo cars on their streets and that it was “continuing to explore” supplying driverless systems for logistics and delivery. The company is also in talks with the Renault-Nissan alliance that could see its driverless systems put in millions of cars.

GV, Alphabet’s venture capital arm, has been a relative success, backing Uber, scooter unicorn Lime, blogging website Medium and popular American coffee retailer Blue Bottle. CapitalG, another financial arm, makes investments in mature companies with proven business models. But it is difficult to imagine some reaching a profit, including internet balloon company, Loon. Others are unknowns, such as Sidewalk Labs, a smart cities initiative in Toronto.

Yet, the company is pressing on. Alphabet states in its annual report: “People thought we were crazy when we acquired YouTube and Android and when we launched Chrome, but those efforts have matured into major platforms for digital video and mobile devices and a safer, popular browser. We continue to look towards the future and continue to invest for the long term. We will not shy away from high-risk, high-reward projects that we believe in because they are the key to our long-term success.”

Google turned 20 last year and maybe we will have to wait another two decades to find out whether any of its more nascent businesses will be as successful.

Analysts say it doesn’t really matter. The main Google business continues to increase profits every year, taking home $US31 billion in 2018, despite a number of publicity issues surrounding cyber security, privacy and its treatment of workers. Its experiments have plenty of time to stay in the lab.

The Sunday Telegraph, London

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