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G-O-O-G-L-E Still Rules the Alphabet

February 2, 2016 12:24 AM
19 0

One thing hasn’t changed in Google’s metamorphosis into Alphabet. The company’s science projects tickle the imagination, but the same old Google is making all the money.

These futuristic projects light up the same “Oh, cool!” part of ours brains that Jules Verne novels did. Just for a couple of minutes, though, tune out Jules Verne.

For now, the only thing that matters for Alphabet is Google and the health of its advertising business. And the real Google, we learned Monday, is more profitable than most people expected. (Although no one really knew or knows anything about the company’s finances. More on that in a moment.)

Separated from the financial drain of Alphabet's futuristic experiments, Google -- that is, the search engine, YouTube, Android, etc. -- posted an operating profit margin of 32 percent, before subtracting payments Google makes to its ad partners. That is a level of profitability Google hasn't seen since 2012 under the old financial method that lumped together the money-making and speculative parts of the business.

In the run-up to Alphabet's financial unveiling Monday, it was remarkable how little the world knew about how much the company was splurging on the wannabe businesses like the Nest thermostat, Internet service provider Google Fiber and hot air balloons that ferry Internet service to remote corners of the globe. Wall Street estimates had been all over the map, from operating losses for the "other bets" companies of $500 million to $5 billion. You might as well type “I don't know” into a spreadsheet. It turns out the operating loss last year was $3.6 billion on relatively tiny revenue of $448 million.

The disclosure that the "bets" parts of Google are draining billions of dollar a year is oddly good news. That means the core parts of Google are the same as they ever were, and then some: a ruthlessly effective seller of advertising that would make William Randolph Hearst supremely envious, helped along by perhaps the most advanced computerized systems on the planet.

Proving its ad business was even more impressive than meets the eye was exactly the goal of the new Alphabet structure. The company now looks set to pass Apple on Tuesday as the biggest company in the world by stock market value.

But even for essential parts of the company, we’re still seeing Google through financial Vaseline. What does YouTube’s profit and loss statement look like? Android’s? We didn't know, and we still don't.

Yet the science projects still matter because ambition is the essential fuel of the technology business. Facebook, Apple and Amazon are no slouches in the Jules Verne department, but no other company has the same scope of ambition as Google, which has its fingers in digital media, health care, transportation, Internet connectivity, artificial intelligence, energy and much more.

Companies are obsessed with having a second act, and few can. IBM, Polaroid and Nokia couldn’t be world beaters forever. Google is betting that somewhere in the Alphabet sprawl technologies will emerge that can change the world and sustain Google for the next generations. Some of them are likely to be spectacular flops. Google’s conversion into Alphabet is a real life test of whether a new corporate structure can sustain the audacious imaginations in Mountain View.

Stock investors, of course, may choose to view “audacious” as code for spendthrift and unfocused. As the company’s costs crept up to hire engineers for wannabe businesses, provide employees with free sushi and buy land for computing hubs, Google last year hired a Wall Street number cruncher to keep a closer tab on the budgets -- or at least to create the impression of financial discipline. In a sign of more careful spending, Google's 2015 tab for real estate, computer server farms and other capital expenditures fell nearly 10 percent in 2015, after tripling from 2011 to 2014.

And indeed that is the central question about Google: Will it wisely use its incredible money-generating advertising machine to find its second acts? The answer is out of reach. Google has always been a “trust us" company. Trust us not to do creepy things with all the information we collect with every click. And trust us that the $3.6 billion profit drain from science projects are a smart bet with shareholder money.

It's clear the Jules Verne projects will not pay off until the distant future, if they ever do. But there's enough in the here-and-now Google to keep profitability humming long enough for imagination to catch up.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.


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