Alphabet’s bets beyond search are starting to pay off



Google reported mixed earnings for its fourth quarter today — but we’re starting to see some flashes of improvement in its “other bets” category, which is where it stuffs pretty much everything that lives outside of Google proper.

In the fourth quarter, Alphabet’s other bets recorded $262 million in revenue, a healthy jump from $150 million in the fourth quarter a year ago. But more importantly, the company’s losses in the division shrank from the previous year, from $1.2 billion in Q4 2015 to around $1.1 billion in the fourth quarter this year. Google’s other bets consists of products like Nest, and while this represents a tiny fraction of Google’s overall business, it’s important because it represents a lot of the market Google envisions itself occupying in the years to come — and it’s equally important to see strong performance in that category.

CFO Ruth Porat dove into further into the other bets category for the full year, where other bets generated $809 million in 2016, up 82% vs 2015 — which was primarily generated by Nest, Fiber and Verily. The operating loss for the division was $2.9B for the first year 2016, a slight decline from 2015 (Porat didn’t specify there). So even if it’s a slight decline, it looks like things aren’t getting quite out of hand and losses are accelerating as Alphabet enters 2017. Alphabet will “continue to calibrate the magnitude and pace” of its investments in other bets, and “exercise careful stewardship over the amounts and pace of investments,” Porat said.

Alphabet’s other bets in 2016 in particular faced scrutiny. The company sought to trim down a lot of the underperforming segments of Alphabet in order and focus its resources on the operations that were working. Alphabet has for a long time (with Google X) been known as a bit of a playground for new ideas — like balloons and fiber internet — but the company is showing signs that it needs to push forward into areas that it knows best and where it can dominate. That’s included making some aggressive moves like spinning out its self-driving car unit into a new company called Waymo, among others.

If you wanted some perspective on how tiny this component is, here you go (but remember this is a significant area of importance for the company):

We’ve also seen Google expand into newer areas like trying to expand its Google Cloud, with moves like the hiring of Diane Green. It became clear that this could be a hugely lucrative business in 2016 by just looking at the performance of Amazon’s AWS business over the past year. That business has quickly become one of Amazon’s most efficient operations and contributing segments to its profitability, something which has surely not gone unnoticed with Google. Microsoft is also working to aggressively snap up as much of this space as it can, so there is plenty of competition.

Here’s a point of performance for Google’s areas that include Play, Cloud and Hardware: Google’s “other revenues” which encompass that was up 62% to $3.4 billion in the fourth quarter, up from $2.1 billion in the same quarter a year earlier. There weren’t specific break-outs for those individual divisions, but it looks like either all are growing in a healthy clip or at there is some outsized performance in one or more.

Analysts were looking for earnings of $9.67 per share on $25.22 billion in revenue. The company reported earnings of $9.36 per share on revenue of $26.06 billion. Given the mixed results, the stock was largely unchanged, but we’re starting to see some interesting developments for Google beyond search.

Alphabet’s shares in extended trading fell around 2.5% — which, for a massive company for Google, is quite a bit — meaning there may be some uncertainty among Wall Street that Google is steering in the right direction as that ad value continues to fall. That it didn’t generate the earnings that Wall Street was expecting probably represents some concern that it’ll continue to be a cash machine while it figures out what happens throughout the next few years.

Last year was essentially a transition year for Alphabet, which over the course of 2016 showed flashes of its transition beyond simply a search engine advertising business. While search has always been Google’s core competency — and decades of that have helped it build a powerful AI ecosystem — it’s not like it can continue monetizing with desktop search ads forever.

The biggest result of this major shift away from desktop search is Google’s perpetually declining advertising value. The play for mobile has largely been to either figure out new advertising formats, or figure out how to generate more value from the much larger amount of impressions mobile devices generate. As a result, Google is able to offset its declining value per ad (the cost-per-click) with more impressions and still generate impressive results that keep Wall Street happy for now.

Not surprisingly, we’re still seeing that in decline. Google’s cost-per-click once again fell, this time down 15% in the fourth quarter from the same quarter a year earlier. Its paid clicks, as expected, continued to rise and were up 36% in the fourth quarter from the same quarter a year earlier. So, on the advertising front, more or less the same story as the past previous quarters.

We’ve seen that with the likes of Google’s extension into a voice-based user interface. Google launched Google Assistant in the hopes that people would simply talk to their phones (and eventually find a way to monetize that). And then it quickly followed Amazon into created a living room-based speaker that its users can talk to for simple tasks like queries and streaming music.

All of this helps Google get its users more accustomed to “asking” Google for answers and actions in a more conversational way, where it finds itself quickly diving into a massive competition with Amazon and Apple’s Siri. Conversational user interfaces seem like they may have snuck up on us, but it over time became very clear to Google that it couldn’t just be a box where users could type in keywords with results that it could advertise against.

 

Google’s pitch to Wall Street over the past year or so seems to have been good enough. So far, its advertising business is good enough — and continuing to grow as mobile devices continue to proliferate — while it figures out what comes next with its voice-enabled interface and also future platforms like VR.

Alphabet, for its part, has a huge window in 2017 to reclaim its crown as the most valuable company in the world — something it’s held for a brief moment over Apple. Apple’s growth strategy came to a halt in 2016. While it’s signaled it’ll return to growth on the strength of the iPhone 7 and other products in the first quarter this year, it’s opened a massive hole for a company to come in and scoop up potential new users in new avenues — like a voice-based UI — that Apple hasn’t captured just yet.

Featured Image: Jeff Chiu/AP



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