Alphabet (previously Google) recently knocked Apple off their perch as the most valuable company in the world. Behind this rise was their core advertising business which still contributes around 90% of Alphabet’s total revenues of about $75 billion. This figure represents a 14% increase year on year. With figures like these it is easy to understand why Alphabet’s valuation was able to surpass Apple’s. However, a more surprising number was the revelation that Alphabet spent a vast sum of $3.7 billion on their ‘moonshots’ despite the fact that this ‘other bets’ segment of their business only produced $0.4 billion in revenue. Despite these unimpressive returns investors do not appear worried. What then constitutes these ‘other bets’ and why are they worth the investment?
One of the highest profile companies which comes under the ‘other bets’ banner is Nest. It was bought in 2014 for $3.2 billion, which might seem like a high valuation for a company which makes smoke and carbon monoxide detectors. It also appears to be a slightly bizarre acquisition for an internet company like Google. However, the key behind Nest lies in how their appliances learn and interact with their owners. Alphabet’s acquisition of Nest was, therefore, an initiating move into the ‘internet of things’. As more and more products begin to make use of the internet they will all be able to interact with one another and provide their owners with metrics direct to their smartphones making our homes much ‘smarter’. There are obvious benefits to this technology ranging from saving energy through to saving lives, which in itself seems to explain Google’s reason for investing.
Another one of Alphabet’s subsidiaries, Calico, is trying something even more life changing; they want to “increase our understanding of the biology that controls lifespan” and so allow us to “lead longer and healthier lives”. This once again seems like an extremely noble and worthwhile investment. However, it is also about Alphabet positioning itself so as to be at the forefront of this potentially significant piece of science.
For this same reason Google has its very own research and development arm which is constantly trying to make the next big breakthrough. This branch of Alphabet was previously known as ‘Google X’ but now operates under just ‘X’. Their most high profile project was probably Google Glass, which was Google’s attempt to carve out a position in wearable tech. Google Glass was a failure and has been put on hold for a while; Apple have been able to profit from this gap in the market as their watch seems to have taken the lead in the burgeoning sector. Other X projects include driverless cars and ‘Project Loon’, which aims to bring internet to more remote part of the worlds through balloons floating in the stratosphere. Google cars have already been driving around roads in California for some time now and have clocked up more than one million miles whilst Project Loon had a test run in New Zealand back in 2013.
Alphabet keeps on pushing into more and more sectors and whilst it seems slightly odd that a company which started out as a search engine should now be trying to squeeze into the auto industry all of these projects make sense for Alphabet’s long-term strategy. The more exposure consumers have to their products the more likely they are to become locked into their ecosystem. Even Project Loon, despite its philanthropic appearance, has the added benefit of bringing more people online and so more people to click on Google’s ad services.
However, it is not only Alphabet who are trying to expand their ecosystem, all of the other large tech companies are trying to do similar things. Microsoft, Apple, Facebook and Alphabet are all competing with each other in multiple fields including operating software and messaging apps amongst others. It seems likely that in the future they will each compete with one another in even more domains as they carry out similar strategies. We can see this developing as there are continued rumours about an Apple car which would compete directly with Google’s efforts. Furthermore, Microsoft’s recent purchase of Cambridge’s very own Swiftkey indicates a continued effort to make headway in artificial intelligence, where its Cortana system competes with Google Now and Apple’s Siri. Meanwhile, Facebook’s acquisition of the virtual reality company Oculus Rift in 2014 demonstrates their intentions to move away from being just a social network. Therefore, it seems likely that all of these major tech companies will be fighting on multiple fronts as each of them looks to take control of every aspect of consumers’ digital lives.
In the context of these rapidly expanding businesses Alphabet’s willingness to spend so much on ‘moonshots’ suddenly seems extremely sensible. They recognise that if they stick with their search engine and advertisement business they will be left behind by the other major players in the industry. Furthermore, if these bets do come off they will each feed one another as the consumer becomes locked into the Google ecosystem. Given that many of these new developments will monitor various aspects of everyone’s day-to-day existence Alphabet will also have access to more and more data, all of which can then be used to strengthen its original business of targeted advertising. Brin and Page recognise that in order to stay ahead Alphabet must keep innovating and so they are more than happy to fund any technologies which have the slightest chance of keeping them at the top of the pile.