Alphabet Loses $859M on 'Moonshots' in 2Q 2016
nytimes.comI don't think it's right to equate R&D spending with "losses". Google makes a profit, not a loss, so technically it does not have losses. It has expenses, and among those, investments in future technology.
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.
Especially since they are still working on them. Can't really call them a loss if it turns into billions in the next few years.>I don't think it's right to equate R&D spending with "losses"Better to say "Alphabet spent $859M on...."
Maybe even "Alphabet invested $859M..."
In some contexts, not all Spending is Investment even if it can be defined as investment in layman terms.
I'd consider all R&D spending to be investments. Can you provide an example of one you'd consider to not be?
If it's not capitalized (turned into an asset) then it's not an investment from an accounting perspective. Although R&D may be considered an investment by the layman, as the OP pointed out:
>even if it can be defined as investment in layman terms.
It is an investment from a managerial accounting perspective (how the business really works), no matter what it's called by financial/tax accounting (how the business formally reports its status). Expenses, such as taxes or the electric bill, pay for things you use up. You can't keep them, keep using them, or resell them. But R&D is an attempt by management to produce IP assets, some of which will be used for years and can even be embodied in patents and sold, like land or machinery.
Financial accountants can't deal with the unpredictable outcome and the fact that even success is hard to quantify. They can't put the million-dollar payment in one column and the specific million-dollar asset that was purchased in the matching column, which is required to make the books balance, so they call it an expense.
It's not a case of something that is really an expense but is mistaken for an investment by "laymen". On the contrary, it is really an investment in IP asset creation by management that financial accountants have to treat as an expense, like paying taxes, due to limitations in the accounting "technology" they are required to use.
Can you provide an example? I would not consider reasonable overhead costs to be "investment" dollars, but you may have something else in mind.
Spent: verb, to spend, you could spend money settling a lawsuit but it would be a stretch to call that investment.
Investment: to allocate money in the expectation of future benefit, so that could mean administrative expenses, which would cover and include a lot (but not all) spending.
My vote would be on invested.
It's all about the perspective. A manager might consider test-driven development or security-driven development a matter of "spending" - in that it costs time and money and doesn't provide an immediate tangible benefit compared to making the thing that makes the money - but the engineers see it as an investment.
Both sides are right. If the company is never hacked, then it could both validate the security model as well as give a reason why not to bother in the first place. If the software runs smoothly throughout development (give or take a bug here and there), then all that testing was indeed a waste of time.
The difference between investment and cost is the ability to look into the future and analyze the past.
So there really isn't a straight answer.
EDIT: it also matters to the perspective of those outside of the organization. A bullish analyst might call Alphabet's moonshot projects an investment, while a bear would likely label them a cost.
it could even get more complicated.
in your example, even if the security-driven development generates value by preventing a hack, it could simply be considered Cost of Goods Sold, or maintenance costs...
In accounting standards, Investment turns into an asset.
-> CCTV system = investment -> security guard = cost
they both generate value by increasing security and the dinstinction is not related to their usefullness for the company.
I define 'investment' as 'money spent in the pursuit of future benefit'. In this case, money spent settling a lawsuit to avoid a significant chance of later spending a far greater amount paid as damages (and why else would you settle?) is most definitely investment.
I agree the market has a hard time justifying R&D and that is a problem. That is why small companies/startups can disrupt and innovate faster.
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.
Spending on R&D should be seen as good if it generates useful results and eventually turns into a revenue stream - no matter how indirectly.
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.
Playing devil's advocate here (a little) but imagine they took a few dozen million of that and, say, improved their development tool chains for Android (which are disappointingly flaky). Or another few dozen millions and extended the security updates for Nexus phones by a couple of years. That could grow their market share of both developer mind-share and consumers.
Moonshots maybe should come once you've mastered all your core products?
> Moonshots maybe should come once you've mastered all your core products?
Then they'll never come.
They mastered search. They mastered mapping.
Search has stagnated. Google has gotten scarily good at anticipating what I want to know, but conspicuously bad at answering hard questions. There's tons of room for improvement.
Similarly, Google Maps has added features that make it a better map, and it's a great place to find what time a store closes and what their phone number is. But it's been essentially the same service, with iterative improvements, for years. There's a world of possible uses for that data beyond what we imagine when we think of a map.
I suspect Google Search has not actually had quality regressions, but rather that your expectations have gone up over time without you realising it.
Yes, I might have phrased that poorly. Google Search still finds relevant web pages just as well as it did 5 years ago, perhaps better. It certainly has leveraged the data it collects on me to suggest search terms in a way that's almost eerie.
But it's still a tool to find relevant pages, not a tool to find answers. It's made some progress with the semantic web and knowledge graph, but that still provides basic facts about people, places, and things. At its core, it's still a portal. It's still just a much better version of Excite. Search today feels like it did in 1997: a "solved problem" ripe for disruption. Google has the talent, technology, and data to produce something an order of magnitude better.
This. It used to be the first page of results was good enough. Now if it is not in the top 3-4, I refine my query.
I think the biggest issue with google right now is they have so many simple answers available. If I google some even slightly in depth problem, I'm bombarded with quarter explanations from "popular" sites like howtogeek, cnet wikihow, etc, which as far as I remember have never helped me one bit.
They seem to rely too much on site popularity, and not enough about quality of result, and god help you if you try to google a higher-level math problem.
Some of the updates over the last year or so will put Google in a better position to increasingly put quality over popularity. There's still going to be a problem that people seem to trust Wikihow, etc...
Regarding the math problems: do you have an example of a query for which there's a good result on the internet, but Google doesn't return it?
I agree, I think search is ripe for disruption, Google is the old guard in this respect, I think they reached a crossroads where improvements in their search experience did not translate to increased revenue, and they stuck with this 'good enough' solution which made a predictable amount of money. I still show many users the 'filter by date' drop down and it's the first time they have seen it, it still does not offer me any way to restrict my searches to categories, though it certainly seems to have 'knowledge' based data in reach when it shows me adverts. There is surely much more that can be done, most competitors seem to want to match reach rather than innovate on the UI, I'm sure there are lots of startups out there, so if anyone wants to point me in the right direction feel free :)
>Search has stagnated. Google has gotten...
Who downvoted this and why?
> Google has gotten scarily good at anticipating what I want to know, but conspicuously bad at answering hard questions.
Well, 98 percent of the market is not asking hard questions, so by dropping support, they are actually making their search product more tailored towards their market.
Is anything truly "mastered"?
Just yesterday I got a blank result page for a sensible query, seems to have hit some rarely visited bucket combined with a busy machine somewhere or the like, and the background request timed out. Of course a refresh fixed it, but software is never perfect.
It's not "perfect", it's just "mastered"
What's the difference?
Probably "mastered" mean constant quality.
A grandmaster chess player has mastered chess, but he can't play perfectly because he's still a human.
Google is perfectly able to invest a few dozen million in the Android development chain, if they so desire. If they don't, and if you're right that it would be a good investment, then that's simply a bad decision made by Google proper.
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).
I think that they are already investing quite a lot into the Android development toolchain and probably more investment would not make things go faster.
That being said, it does indeed need a lot of improvement.
TBH, it feels like they are already ramping up the Android team.
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.
The Android tool chain has improved A LOT over the years. I used to want to throw my computer every time I was forced to do something in our Android product, now it is only a mild annoyance. Compared to iOS it still has a ways to go though.
Since Other Bets are separate in Alphabet (compared to Google), these aren't technically Google's investments offset by revenues, so would actually be losses for Alphabet as an org, no?
A lot of world class engineers would leave Google to go to their competition. The promise of maybe getting to work on self driving cars is a big recruiting carrot. Improve ad revenue by 0.01%? Will that motivate a top 1% engineer to sign or stick around?
> Improved their development tool chains for Android
A true moonshot! :) and :( at the same time...
> improved their development tool chains for Android (which are disappointingly flaky).
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
Genuine question: Has Google ever achieved financial success with a moonshot project?
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.
I believe Android was (technically at least) a moonshot
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...
I think the term "moonshot" is reserved for exploring new technical frontiers. Android is "just" another OS.
Easy to say that now. They started developing it before the iPhone came out, right?
This is what it looked like before the iPhone: http://www.technobuffalo.com/wp-content/uploads/2011/10/Scre... So, yes, it was "just another OS" in the grand scheme of things. A blackberry and symbian competitor. A footnote. An explorer of new frontiers it was not.
http://appleinsider.com/articles/14/04/14/exclusive-android-...
" The change log of the planning document conveys the rapid change that occured in April, when suddenly there was a "major update." Among the changes were section 3.11.2 Touchscreen, which now read, "a touch screen for finger-based navigation—including multitouch capabilities—is required. Stylus-based navigation is not supported."
The iPhone had the android team sweat bullets. They were working all this time on a Blackberry clone, and had to re-purpose their UI to become 100% multitouch friendly before releasing it.
Android might have been released earlier than it did if the iPhone hadn't been a thing. It had to be remade to not become a laughing stock. It still was a laughing stock at release though.
" When it was released, Android still lacked support for touchscreen typing by finger. And while the phone shipped with hardware support for multitouch, its software was patched to remove support for the feature. In late 2009, Google released Android 2.0, adding software support for multitouch. "
Yeah, but Andy Rubin and Android were a separate company that Google bought. They sort of acquired someone else's moonshot.
Also, there was Symbian OS, and probably a bunch of others. So not even someone else's moonshot.
Imho, Android was more about exploring a new business strategy for Google.
OK, but c'mon. If the definition of "moonshot" means you built something without benefit significant previous work in the field, then sending a spaceship to the moon doesn't qualify either.
From a different nytimes Article this week:
'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...
In terms of internal projects gmail, and local maps comes to mind. If your going to call everything that did not work a moonshot then by definition no. However, it's only a failure when they give up so self driving cars are rather undecided at this point, and theses projects help recruiting which has non obvious benefit.
By moonshots, I'm referring specifically to projects that came out of the "Other Bets" division. That division specifically invests in projects that are "out there." From what I hear, realistic products like gmail and maps came out of the 20% time and other product-divisions, not the "Other Bets" division.
Considering that the Other Bets division (and Alphabet itself) was created one year ago, maybe it's too early to evaluate what has it produced.
The important question is whether something was designated a "moonshot" before it succeeded or failed, thus giving us an unbiased sample.
I think moonshot, by definition, means 15+ year timeframe to full realization. Google is a very young company, they just haven't had piles of cash to invest in moonshots for long enough for us to have seen the results. X was founded just 6 years ago, Alphabet was founded just last year!
To be asking 6 years in where are all the moonshot successes already? I think this demonstrates exactly how problematic and pervasive short-term thinking is.
The question to ask is in 50 years, how many different $10B+ revenue streams will Alphabet have?
If we really think this R&D isn't going to pay off, at the scale Alphabet operates, that's almost like losing faith in humanity.
I didn't say moonshots were a bad thing. I just stated the basic standard for collecting a sample of something in a halfway unbiased way.
would be careful to say "near-parity", google is still ahead of everyone in level 4 autonomous cars at the moment, not only that the gap may be larger then the other car companies lead you to believe.
This.
I mean, Apple is investing into cars, changing the original goal from "car" to "self-driving car"... and we are seriously questioning whether google's effort was a good idea? WTF, people?
I don't know about your personal definition of success...
but R&D like this is excellent PR. It helps the buzz keep going, attracts smart people, keeps the stock up.
It also intimidates other companies and can be used strategically to mislead them and keep them on their toes.
> Genuine question: Has Google ever achieved financial success with a moonshot project?
Just shows once again how risky it is to run a startup in SV, putting your eggs in one basket. Lots of otherwise very intelligent people think they can be smarter than Google.
> I don't think it's right to equate R&D spending with "losses".
I was baffled by that. Is this just because they called it "Other Bets" instead of plain old boring R&D?
If anything, that would make me want to buy Alphabet stock. We need more companies willing to invest on "moonshots", as the article calls it. We need to get back to the Xerox PARC times.
That story was written by someone at AP covering the tech industry. He has consistently showed terrible analytical acumen and reporting of major and minor events. http://bigstory.ap.org/content/michael-liedtke
yes, absolutely. they do have 75B$ in cash and another 60B$ in short-term investments. So they have 135B$ to spend. judged by that number Google is too conservative.
That's incorrect. They have $75 billion in total 'cash.' $15 billion is listed as cash and $60 billion is listed as short-term investments (as of Q1 2016).
right, thanks. 90B$ in current assets and 150B$ in total book value.
I agree with where you're going. If you're not familiar with the DoD/Govt Lab TRL Model [1], that is how I mental model this type of "Other Bets" and similar group work.
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
There's a long history of using terms like loss to describe such segmented financial results. It's also typical to talk about them on an operating basis.
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.
Capital can still be poorly allocated even if it goes to R&D. If investors think that that capital would be better allocated by being returned to them through dividends then it should be. This may or may not be the case, but just saying that it's R&D so more spending is good is the wrong way to look at it.
It's an accounting loss. Their revenue is less than their costs. Nobody gauges the state of a company by just looking at one line on an income statement though.
Google's core business (search-powered ads) is at this point a cash cow that does not require R&D investment at a $1B/pa level, so it's not fair to label these as investments either. That was the whole reason behind the creation of Alphabet - now investors can see that Google is acting as a VC that's being powered by its ad earnings, and they can judge how successful Google is as a VC. (So far, not very successful.)
Company X invests billions into the "future". This continues for 5-10 years without results turning into profitable products or direct improvements. Shareholders begin to question the value of those investments. "Is the R&D being well spent?" Google hasn't turned any moonshot into a profitable product yet, right? They're going to need a winner or two to convince investors.
Apple will be in the same position in a few years because they are ramping up R&D.
Doesn't matter too much what Google/Alphabet shareholders think. The controlling majority is with the founders, and the company is not going to the markets anytime soon to ask for more capital.
"any time soon" What exactly does that mean? The next two years? If people start dumping your stock, I'm sure there will be repercussions.
What kind of repercussions? Please elaborate.
The only result of a lower stock price that I can see is that Google employees might demand cash instead of stock for compensation. (But Google still does make enough in cash.)
And by 'demand' I mean: get unhappy, be more likely to leave, and for new hires, be more likely to take up alternative offers instead.
Well, to be fair, people probably won't be dumping their stock over this news.
To be really fair, I didn't say they would. I was addressing the long-term impact of spending large sums of money without any clear benefit.
People are usually content while a company is growing fast enough.
On the other hand, if research for a particular moonshot ends up creating something that the other products can use (and become more profitable/successful as a result) - such as Google Brain - the moonshot itself doesn't need to succeed for the project to be considered worthwhile.
Yes, that would fall under direct improvements, right? You can link the research to a profit use.
The question is can these moonshots pay off their expenses in the long run.
Given how little Google is known to actually ship I question if they can.
Moonshots are called that way because they bear both immense risk of failure as well as a potential to bring in billions. So individual moonshots are almost always failures; the ones that are successful pay the other ones. Google is doing the right thing to remain alive in the future without enforcing lock down on their users (like other companies not producing moonshots do).
> Moonshots are called that way because they bear both immense risk of failure as well as a potential to bring in billions.
Which is kind of funny because the original moonshot was a rather predictable thing (build bigger rockets until one is big enough) and success only meant that you could stop spending billions.
Well, predictable in the sense that they would either reach the Moon and come back, or reach the Moon and die trying to come back, or reach the Moon and die there, or die along the way to the Moon, or explode in the air, or explode on the ground.
They're only good investments if they tap that well someday.
If you sit around moonshotting all day and never shipping they're worth $0.
So far, no moonshot by a big corp has paid off. Maybe it's too early, or more likely Google is hoarding tech and filing patents like a rational engineer running a business using machine learning would do, and while that's good for Google it's bad for Society to have so much cool tech locked away in a damp basement when it could be changing lives and being iterated on.
No moonshot by a big corp has paid off?
I used to work at Google. I remember the term "moonshot" being thrown around, it started with Larry and Sergey. If there's a definition for what this means, in the Google context, it's in their heads and nowhere else. But the way I interpreted it was "really really ambitious project".
One thing I do remember is that several projects that were described at the time as moonshots did pay off. The one that comes to my mind immediately was Street View. The idea of driving a car with a spherical camera down every road in the world seemed completely insane at the time it was first proposed, the idea it might make money even moreso. But Street View worked, and whenever we switched on SV in a new country usage of Maps in that country permanently increased. It really increased the value of the product, and in turn I guess it also raised ad revenues (or it'd be odd if increased usage didn't correlate with increased ad revenue at all).
There were others I remember. Rewriting the web search indexing system more or less from scratch was a big one. You don't hear much about that, but it was a big risky effort to rewrite the core of your product from scratch.
I think people tend to take past successes of radically ambitious projects for granted. Android was a moonshot at the time. We don't think anything of it now, but it wasn't clear at all it'd be so successful.
Self-driving cars look poised to pay off in a big way in the next 5-10 years.
Except Google is exclusively focused on full Level 4 autonomy which is likely to be a number of decades out.
Maybe in the Southern US. Here in Canada they're a lot longer from solving the snow and ice problem.
> So far, no moonshot by a big corp has paid off.
What about that mobile phone apple launched in 2007?
I wouldn't call the iPhone a moonshot, more an extreme iteration.
This was around before the iPhone: https://en.wikipedia.org/wiki/IPAQ (HP IPAQ)
Combine that with a phone and update the software and make it designed and you have an iphone.
The iPhone went without keyboard and put all real estate towards the touch screen. That was a big change back then.
There were other no-keyboard all touchscreen devices though. The Nokia N770 (2005-2006), the PalmPilot and later iterations (starting 1997), various HTC smartphones and Pocket PCs before 2007, and so on.
The HP IPAQ didn't have a keyboard on standard models. Touchscreen only for text entry, with a little stylus to tap it out with. Around 5-10 hardware buttons around the case for things like back, volume controls, power etc. POCKET PC had excel, word, played and recorded audio files but was difficult to use and sluggish on the lower end models.
The top wiki picture with keyboard is one of the later models aimed at the Blackberry corporate users.
Iphone wasn't that innovative, just did things simply and really did "just work", which was a big deal at the time.
> no moonshot by a big corp has paid off
Does SpaceX count as a moonshot?
I'd say yes, quite literally.
If the article was titled, 'Will Google's moonshots pay off'? With a list of the top projects and cumulative spending on each one. Some analysis on each of the markets and what their potential size could be in 2020. Who are the biggest competitors in the space? Now that would have been interesting to read!
Google's S-1 April 24, 2004 https://www.sec.gov/Archives/edgar/data/1288776/000119312504...:
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.
I don't see anything wrong with this approach, especially since the company can actually sustainably afford to keep placing these bets.
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.
And there are so many side benefits. Obviously Google employees are likely to be capable and smart individuals. So I wonder how much value is in having these type of employees take ideas to the company rather than planing to branch off for most companies that would scoff at letting you do a side project for a while.
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.
In addition, it's not like these bets have been pronounced dead. They're all still in play. It will be years before we know whether any were successful or not.
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.
Absolutely, it's as if the article's author only looked at these moonshots in the silo of a single financial quarter when it's clear that the moonshots are intended to be decade long investments...
You could argue that Google Glass is dead.
Though to be honest, it was never intended as a consumer product. (But their marketing was conflicted.)
Wave is probably an even bigger disappointment: it would have done great as an enterprise product.
> 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.
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.
> 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.
Internally, they're referred to as 'bets, a pun on the company name Alphabet.
Aww, isn't that cute.
Only partially. The name 'Alphabet' in itself is a pun on 'Alpha' (in finance terms) and 'bet'.
What is this, punception?
"I have not failed. I've just found 10,000 ways that won't work."
I agree with the sentiment, but I don't think you're going to spend just $1B to get to $10B/year. Does Google get to that number with anything apart from Search and Youtube?
Though I think even $1B for a $100M/year business is a pretty decent deal at this point...
I think that it would be reasonable to assume that many of these moonshots are generating patents that could have significant long term value.
This article makes it sound like Google frittered away $1b on the "X" lab last quarter.
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...
> So come on NYT spend 5 mins getting the story straight instead of writing a lazy click bait headline.
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...
> "Other Bets" includes Nest, Google Fiber, Google Ventures, and Verily among others(2)
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.
Yes, but they could* be taking write-downs on their investments in e.g. Nest.
*I haven't looked at their financial statements.
For anyone else not familiar with it, Tango looks to be phone-based AR that requires specific hardware: https://get.google.com/tango/
There was an HN discussion earlier this week on Google X[0]. One important point made there, by snarf:
> 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.
That entire thread is filled with snark/speculation and lacks any actual facts.
Is it that inconceivable that Google believes that one or more of these moonshots might actually take off?
The "other bets" category accounts for $185mm in total revenue. By most normal reckoning, that has taken off. It looks small by google standards and compared the the spending on other bets, but that's a lot of money.
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.
Well I'm sure the people working on it think one might take off. But if you're taking the pessimistic view it doesn't matter if they never succeed as long as the smart people are kept busy working for them.
It's a clever argument that might convince certain purse-holders, who are optimistic or pessimistic about the success, that it's in the company's best interest either way. I don't think Google's under full control of the sociopaths yet that this sort of "locked up" argument is needed, or is felt internally by very many upper level managers. It's also just not a great strategy if you're worried about potential future competitors given that employees are free citizens, not slaves, and California has no non-compete laws. Industry (let alone tech industry, let alone Californian tech industry) is littered with successful offshoots started by individuals and teams who used to work together at one company, and quit or were fired en masse to start working on something else in the same domain, taking their experience with them and owing their former company nothing. Facebook's strategy of "buy any threat" is a lot more sound, even if it too is vulnerable when the threat refuses to be bought.
There's a number of projects as part of Google X that have little to do with any of Google's core businesses. They don't really need engineers specializing in fluid mechanics outside of Google X. I interviewed for a mechanical engineering Google X position a few years back. I note that the project I interviewed for still hasn't come out of their lab yet.
I've strongly suspected this of corporate R&D for decades. AT&T, IBM, Xerox, Microsoft.
Now Google and Facebook.
Yes, I think this is all about the mystique of Google as an exciting and innovative place to work. I mean, it is essentially an ad company.
(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)
I've long held that self-driving cars are a marketing ploy by Google. Their lead, Chris Urmson, frequently speaks as if it's only a couple years away. One of his famous phrases was that his daughter, 14, should never have to get a driver's license, if he met his goal. He's spoken in front of Congress, acting like the laws are the only thing holding them back, which is false. I'd absolutely call him out on the things he said to Congress being outright lies.
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".
Yeah but Google _does_ make self-driving cars. You can see them all over Mountain View. They drive themselves. It's amazing.
Subtly dishonest journalism in my opinion.
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.
Or maybe "Alphabet invests $859M on brand maintenance"?
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?
There's nothing dishonest about it. It's a loss because these are explicit investments which haven't produced any earnings. When they produce any sort of revenue then their financial statements (and media reports of the financial statements) will say "Other bets showed an operating profit of $Xm". It's just a media report on a fact.
There's some intentional provocation going on with the title. Sure, it's factually correct, but choice of words really pulls the truth one way or another.
There's nothing subtle, and everything dishonest, about this.
> The cost for the Mercury, Gemini and Apollo programs was more than $25 billion at the time more like $110 billion in today's world.[1]
Moonshots are expensive. Doesn't mean they aren't worth it.
[1]: http://news.utexas.edu/2014/07/21/anniversary-shows-us-that-...
Author of that article is like an apologist for excessive government spending. To me, if government did not spend that amount of money on space exploration, probably private sector would have achieved even better things faster with lower cost.
Besides, about the author : "..Wallace Fowler is the director of the Texas Space Grant Consortium.".
This is simply how moonshots work. You lose $50m 99 times in a row, then make $50b on the 100th time. (This is also very similar to how venture capital economics work.)
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.
"NASA loses $25.4B on 'Moonshots'" - New York Times headline from July 29 1973
> The money that Google spent on areas that have little to do with internet search and advertising used to frustrate investors who wanted to see bigger profits.
"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."
Wall Street is short sighted and regularly see things by the quarter. Its long term outlook tends to be a year give or take. Alphabet needs more forward thinking investors who can see a payout that may not happen for a decade or more. While it has cool projects, the problem with X is that it doesn't seem to have a clear mission / message like SpaceX and Tesla where you are investing for more than just a profit. I could be wrong but they have a marketing / PR problem (in addition their other pre-exisiting ones).
Stock is up 4% after hours. I'm not sure which "wall street" strawman you are attacking, but it doesn't appear to be the one that actually trades stock.
ok, my criticism is directed towards Wall St analysts. I could be wrong but it feels like the vast majority of them see X as a money pit that's hampering Alphabet as whole. I've been hearing this for about a year now. If ad revenue wasn't up, the chorus would be louder.
I also don't know if that's entirely true either. After the earnings came out, it looks like quite a few Wall St analysts changed their recommendation to outperform, with a target price of 900+, and in general, it seems like many analysts all have pretty high target prices assigned to Alphabet.
Just because they like Alphabet as a whole doesn't mean that they like X. Am I wrong?
Google seems to be actively attempting to avoid the trap that Apple, Microsoft, Facebook, etc have fallen into. When you completely dominate a market, it can be tempting to optimize and be the best at serving that market. But the nature of tech is such that markets have a short lifespan. New innovations are constantly overturning old monopolies--just ask Microsoft. By investing heavily in high-risk, high-reward prospects, Google is insulating itself against future disruption.
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.
Interesting take on it, I would probably write the headline "Alphabet spends nearly $1B trying to find new businesses". Using the New York times logic nearly $15.3B was lost last quarter by startups[1] :-) But setting aside that Google's spending as much as 6% of the existing startup ecosystem, they are still not spending a material amount of their free cash flow of nearly $7B last quarter.
And I wonder Why not?
[1] http://nvca.org/pressreleases/15-3-billion-venture-capital-d...
"Moonshot" is the Google term for R&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.
I don't think this is true for Google. The "Moonshots" mentioned here are pretty far from Google. It is in some sense R&D of course, but it is not R&D that will benefit Google as a company.
How do you reach the conclusion that it is not R&D that will benefit Alphabet? They make it pretty clear it is a high risk high reward R&D, meaning if they hit pay dirt, it can be massively profitable for Alphabet.
Notice that GP said Google while you said Alphabet.
If they pay off, it benefits Alphabet. Maybe Google (the search engine monetized through advertising) but possibly not.
I assumed GP meant Alphabet since public entity is Alphabet, not Google.
The moonshots are in alphabet, but pretty far from Googles core with Search, ads and Android. For example robotics, health care and self driving cars.
(I work for Google and have worked in another alphabet company)
Google as far as I can tell understands itself not as an ad broker, but as an AI company. Robotics, health care, self driving cars and stuff like that are pretty much the future applications for AI.
I am encouraged by this advertising companies attempts at designing cars.
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
How is Amazon being mentioned in the same line as Google and Facebook? They don't rely as much on the ad revenue as the other two.
Each line of those bulletpoints was for a different company facebook, google then amazon
This article highlights the myopia of public investment. Other comments have mentioned the self driving car. That's a work still in progress, and likely has been a net loss quarter over quarter.
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.
All of humanity is going to benefit from these moonshots.
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.
The thing is, the car and reusable rocket stages exist and are far more difficult to pull off than creating and running an ad-network.
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.
For the project for real, actual moonshots, we knew in quite good terms right at the beginning that the project was doable. Same for the Manhattan project. Same for GPS. Same for the SR-71.
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's R&D expense. Nothing new here.
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.
I don't see it that way exactly. R&D is an investment. Hell, I'd consider calling it a pure capital investment, if not simply enhancing goodwill. If even one of those moonshots become successful those "sunk costs" will likely start streaming back.
I fear if such a view is prevalent, eventually focus might shift from 'solving problems that matter on scale' to 'how much money can I make out of this'. Hope research and innovation do not succumb to desire/pressure to grow revenue. I don't believe such projects cannot have any (indirect) monetary accountability. However, Investors should have a softer take on the outcome of these projects.
Can't help but notice the bias in the title on HN. Sure, the company spent .8 billion on R&D. The revenue went up by 3.5 billion this quarter too, yoy.
That is almost 20% investment on R&D - twice as good as other good companies. That is why I would love to work for Google!
A lot of times I feel like the instinctive reaction to the word losses is an image of Google stacking up a millions of dollars and burning it. That's not what happened - it went to people who used it to build things that would not have been built otherwise, in the hope that some of them might shape the future. Not really a loss to humanity.
That's an interesting headline from the same company that posted a 21%/28% YoY 21.5B Revenue / 6B profit quarter.
The people complaining about this better not be the same Thiel worshippers who constitute most of the Google hate here.
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.
I can criticise the headline (if that's what you're referring to) while hating on many things that Google do (advertising, crapification of the Web, TPP support, absolutely atrocious user support, a pathetic Android environemnt, from OS to apps to hardware/vendor dynamics.
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!
I had to look up [1] the etymology of "moonshot" and thought it was interesting.
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...
This is why nobody plays the long game, because of crap like this spread around. Articles like this force people to play the 'quarterly' short game and we don't get as much long term research as we need as a species.
Google operating costs are more than $5 billion a quarter. $859M is not that big.
For that kind of money, you could build a new moon. I don't see anything positive about this kind of loss. If anything, it sounds like questionable accounting to reduce the cost of other profits.
It's not a loss though, they just invested some profits in R+D...
I wish they'd do something a long the lines of using all of their traffic data to design better lighting systems for cities. Gotta be able to do better than what is currently happening.
We need more detail in financial statements. "Operating loss of $859 million in Other Bets" is not enough disclosure for a public company.
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?
Or it's just the cost of 3,000 engineers doing R&D work in this day and age...
Good. Isnt that the idea? That's what Moonshots are. Plus its hard to see returns on a moonshot in a year. This is a long term investment.
Is there a way to incentivize smaller companies to take these risks (relative to the scale of the company and assuming you have the manpower)?
would it be legal to announce R&D as losses then buy back your own shares at a reduced cost?
Quoting Edison here:
"I have not failed. I've just found 10,000 ways that won't work."
Better to have `Moonshots losses` than some CEO/Board rip off stock buyback scheme.
Alphabet INVESTS $859M on 'Moonshots' in 2Q 2016
That's pretty much Amazon's profits in 2Q 2016.
How much did Microsoft spend on their R&D?
Has Peter Norvig retired?
s/loses/invests
AFAIK thinking out-of-the-box is prohibited in Corporations :)
People are still starving in the USA on a daily basis, it's a mad world
Why should any organization have net profits at all? "Loses" here is being used to mean "spent". You can't just keep stacking up cash forever. That would be pointless and stupid.
There are incorporated entities which don't, in terms of actual economic activity -- they're not-for-profit charities, generally.
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.
Net profits are how you pay shareholders dividends, which are often demanded, and the futurr promise of which are the root basis of how the company can attract money through IPO
That's a sort of quaint belief about the market but it's degenerated into straight up gambling. Let me put the question a different way: why should any company have positive retained earnings?
Because they're holding it offshore.