A GOOGLY is a ball bowled in cricket with unexpected spin. For years, Google was similarly hard to read, sharing only basic figures about its business. Alphabet, Google’s newly formed parent company, is bowling a bit straighter. When it reported earnings on February 1st, Alphabet disclosed for the first time how much it was spending on its “moonshot” projects, including self-driving cars, fibre internet and space exploration. In 2015 Alphabet lost around $3.6 billion on these ambitious initiatives—a large sum, but less than some had feared. Meanwhile Google, its core business, saw revenues and profits rise.
As a result, Alphabet’s shares surged this week, helping it, albeit briefly, overtake Apple to become the world’s largest listed company by market value (see article). Today Alphabet is a giant advertising company with the potential to become a giant in other sectors as well—although exactly which ones, no one is yet sure. Almost all of the $75 billion in revenue it made last year came from advertising, most of it search advertising, where Google places ads relevant to what someone is looking for online. The firm has around 70% of the global search market.
Google has profited handsomely from foreseeing two important trends: the rise of mobile phones and online video. It now has seven products that claim a billion or more users each, including search, maps, Gmail, YouTube, the Google Play store, the Android operating system and the Chrome browser. That is more than any other internet company. As users spend more time with Google’s services, the company learns more about them and sells more ads. Other firms have struggled to profit as much from users’ engagement. On February 2nd Yahoo, a struggling rival, announced it was cutting 15% of its workforce and suggested it would consider selling its core internet business, which could put its boss, Marissa Mayer, out of a job.
Alphabet fans argue that it is set to go from strength to strength. The firm has started to look like a conglomerate, with interests in areas such as cars, health care, finance and space, as it tries to find the next big thing. Although most of its projects outside its advertising business do not make any money, some are showing tentative signs of promise.
A timeline of Alphabet, the world’s latest largest listed company
Last year its moonshots claimed some $450m in revenue. Although Alphabet did not spell out the source, it probably comes from Google Fibre, a high-speed internet business in several American cities, and Nest, a maker of smart household devices that Google bought in 2014 for $3.2 billion. But most of Alphabet’s investments are likely to take years to pay for themselves, and some almost certainly never will. Like the high-altitude balloons that Alphabet is using to blanket the world with internet access as part of an initiative called Project Loon, its startup projects will either fly high or crash.
For the time being, Alphabet can do as it pleases. Investors and analysts do not seem overly concerned about how much the firm is spending. Last year Alphabet set aside a whopping $5.2 billion for stock-based compensation, and expanded its headcount to nearly 62,000, an increase of more than 15% on the year before. Mark Mahaney, an analyst at RBC Capital, an investment bank, thinks that many internet companies, such as AOL and Yahoo, faltered in the past by skimping on investments to shore up their businesses while they were still thriving, and therefore does not mind seeing Alphabet invest with its future in mind. Such tolerance is common during winning streaks, but it can quickly disappear.
This article appeared in the Business section of the print edition under the headline "Of profits and prophesies"
