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Google s parent company is riding high
Feb 6th 2016 | SAN FRANCISCO
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.
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.