Narrative: Alphabet Lacks Focus
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Narrative: Alphabet Lacks Focus (Jan 9, 2017)
Written: January 9, 2017
Alphabet (formerly Google) has long shown itself to be willing to invest in many businesses that had tenuous links to the core Google business. Indeed, the very Alphabet structure is a recognition that the ties between some of these businesses are so loose as to resemble a conglomerate more than an integrated business. This lack of focus has been a source of concern for some investors and observers.
It now appears that CFO Ruth Porat was brought on to bring some needed discipline to these various activities, which had flourished under Larry and Sergey’s Montessori-inspired dabbling in whatever has excited them at various times. The Alphabet structure highlighted the heavy losses being made in the Other Bets collectively, and made explicit what many had suspected: only three of the Bets were generating meaningful revenue, and even those were likely still unprofitable.
What we’ve seen since that target was placed on the Other Bets’ back is an increasing financial discipline. Nest has been refocused and its CEO pushed out; General Dynamics was put up for sale; Google Fiber has been pared back and refocused. There has also been evidence of general belt-tightening at other subsidiaries. suggesting that patience with long-term loss making is wearing thin. This has caused discontent among employees of those subsidiaries, who were accustomed to being treated as academic researchers rather than employees of a public company, and the cultural disconnects between the various subsidiaries has also been brought to light.
The increasing financial discipline is resulting in slightly better financials from the Other Bets over time, and may also result in earlier revenue than anticipated, as the companies push more urgently towards monetizing their research. There is more focus than there was, but the fundamental nature of the Alphabet business, with its loosely connected pieces, is still an oddity in the industry.
Google Fiber is rolling out in San Antonio and Louisville, two markets to which the company committed to before halting expansion, but won’t be offering pay TV service in those markets alongside its broadband service. That’s a first, as Google Fiber has always offered broadband and TV (though not always phone service) in its previous markets, in keeping with the most popular pairing of services taken from cable and telecoms operators. The reality is that Google Fiber TV wasn’t nearly as popular as its broadband offering, with just over 80,000 subscribers at the end of 2016, a small fraction of its broadband base, which is thought to be in the high hundreds of thousands at this point. Besides that, the economics associated with pay TV, especially for smaller providers, are not that attractive, with much of the revenue being passed straight through to channel owners and little opportunity for real differentiation. So, with all that as context, it makes perfect sense for Google to drop TV from its bundles and go purely for the broadband market, where its differentiation is far stronger, and where the economics should be quite a bit better. With the launch of YouTube TV in many markets, Google even has its own streaming TV service to offer now too.
, via 9to5Google
Alphabet’s Makani Wind Power Moonshot Unit Struggling (Aug 4, 2017)
Alphabet announced its Q2 2017 earnings this afternoon, and beat analysts’ estimates of revenue and earnings pretty handily, yet its stock still fell 3% in the first couple of hours afterwards, presumably because the stock has been bid up so much in recent weeks and there’s some profit taking going on. The results were pretty strong across the board, with no area of performance looking weak. The core Google business continues to grow rapidly, with the same three drivers – mobile, YouTube, and programmatic – cited once again, suggesting there’s still been no material longer term fallout at Google from the boycott against it earlier this year or the programmatic cutbacks that have followed. It’s clear that Google is investing heavily in its cloud infrastructure and personnel – CFO Ruth Porat said on the call that many of the 1600 new hires this quarter were once again directed at that part of its business. That business is still frustratingly buried in the broader Google “Other” segment along with disparate bits and pieces like Google Play and hardware revenues, so it’s impossible to parse precisely, but it’s likely that the growth of cloud services is a big contributor to overall growth in that segment. But hardware was also called out, though only Google Home and Google WiFi were called out specifically, suggesting Pixel sales are no longer such a big driver. My own recent surveys suggest Google Home in particular is selling well, taking about half the share that Amazon Echo does, with almost no other competitors in the market. The Other Bets continue to shrink their still massive losses, mostly by growing revenue faster, though the company has also reduced its capital expenditures significantly since the Google Fiber retrenchment began in late October last year. Alphabet did account for the EU fine, which it has not yet decided to pay, in its financials, but also provided a version of its profit figures which was more easily comparable with last year’s, and those showed strong growth in both revenues and profits. At this point, it’s hard to see a near-term reason for bearishness about Google or the broader Alphabet business – it now has several separate lines running well and throwing off decent profits, while it’s investing in others that should drive both in future. The one other thing worth noting, though, is that traffic acquisition costs for Google’s own sites continue to rise rapidly, with the rise driven by the payouts Google has to make to mobile vendors who send traffic its way, including Apple, Samsung, and to a lesser extent other Android vendors. That certainly doesn’t seem to be affecting profits yet, but it’s a sign of the increasing share of revenue Google is having to pay out to companies that control much of the traffic that comes its way on mobile.
Google Loses Another Fiber CEO, After Five Months on the Job (Jul 18, 2017)
Alphabet’s Verily Launches Baseline Health Study (Apr 19, 2017)
I did a deep dive on Alphabet’s Verily subsidiary a while back for my Beyond Devices Podcast, and also wrote up some of the key themes for Techpinions subscribers here. What I discovered is that Verily, perhaps more than any other Alphabet subsidiary, has been characterized by hubris in trying to solve the world’s problems with technology. Its two most high-profile early initiatives – a glucose monitoring contact lens and a Star Trek-like “tricorder” to check patients’ vitals – both turned out to be vaporware. But at the same time, Verily is doing enough interesting work that it’s managed to secure partnerships with some big names from the traditional pharmaceutical industry (see this chart from my Techpinions piece), and is working with two big research universities on what it calls its Baseline longitudinal health study. It’s that study that’s now kicking off in earnest (and for which the watch Verily announced last week will be used), as the first 10,000 participants come in for their first set of tests and measurements. The Bloomberg article here does a good job characterizing both the current state of Verily and its return to reality after that early hubris, as well as some of the issues that still dog the tech people who run Verily when it comes to privacy and other related issues. It’s very clear that some of the people in charge have very little common sense when it comes to those issues in the healthcare realm, something that’s been a problem for Google too. And of course the biggest problem with the Baseline project is that – as a longitudinal study – it will literally take years for it to deliver meaningful results. There’s nothing wrong with ambition, especially when it comes to solving the world’s big problems, but it has to be grounded in reality and good practices, especially in the healthcare realm.
Google details Talk transition, SMS removal for Hangouts, other G Suite changes – 9to5Google (Mar 24, 2017)
This has been a heck of a long time coming – Google’s various messaging apps have been a confusing mess for ages now, and it’s good to see some rationalization of the portfolio and a bit more clarity about which bits will survive and what they’ll be used for. SMS-style messaging now belongs in the Messages app, which doesn’t have an equivalent on the desktop, while the ages-old Google Talk will finally be retired in favor of Hangouts, which will carry over some but not all of its functionality, with the rest going away. Some users will no doubt be annoyed at some of the lost functionality, but on the whole this should be a good thing for users. Of course, there is still Google Voice, which combines elements of services also found in Hangouts and Messages, so this doesn’t clear things up completely.