Pando

Alphabet is trying to outrun middle age

By Kevin Kelleher , written on September 12, 2016

From The "You know, for kids" Desk

Oh look, Alphabet is testing drone deliveries!

Okay, maybe Jeff Bezos isn't freaking out just yet. Alphabet's drone test is with Chipotle, whose brand has been tarnished by a series of food-poisoning incidents. Don't worry, no drone is coming to a Chipotle near you, unless you are near Virginia Tech's campus, where one will be piloting burrito bowls with sour cream and melting cheese under the glaring sun to the hands of test consumers. Who may not even eat the drone's cargo, or even want it. Because it's just a test.

After all, Google is all about tests. That was the whole idea behind Alphabet, right? Forge the future by testing the hell out of the present. Google started out as an idea in graduate school that worked surprisingly well in the marketplace: a better search engine, one that ordered results according to what was then the democratic nature of the Web. The more hyperlinks pointed to a particular web page, the higher that page ranked. But as the web matured, people tried to game Google's idea. The rules changed. And Google had to become a full-time adult.

As a grown-up company, Google did everything it could to keep thinking like a startup. Against the odds, this worked for years: a Silicon Valley giant, finally, wasn't aging into obsolescence, but had somehow preserved in amber the DNA of a startup, grafting the archetypal code into its corporate structure, even though that structure was getting bigger and bigger.

Last year, when Alphabet was formed, it was clear that the new corporate structure was about Google's founders trying to preserve that magically pure, quixotic, yet obsessive-compulsive sprite of genius that seems to haunt Stanford dorm rooms more frequently than it does Silicon Valley office cubicles. Google kept the sprite alive, even though Larry Page and Sergey Brin were starting to enter the slower-paced rites of middle age. They had the best of both worlds: the inspirational genius early 20s, the mature decision making that develops as one surpasses 40.

This works for a while, but has its limits. In Anton Chekhov's play The Cherry Orchard, there is a character called Trofimov who is repeatedly described as an “eternal student” given to idealistic proclamations like this one, which could have come from either of the Google co-founders:

"everything that is unattainable now will some day be near at hand and comprehensible, but we must work"

Alphabet should be a paradise for modern-day Trofimovs, given that it's run by a pair of them. But the thing about middle age is it has a way of catching up to you, and should you choose to outrun it, then it really catches up to you. And that is the best explanation I can think of to explain what is happening at Alphabet this summer. Because otherwise, I can't understand what's happening to Alphabet this summer.

To be clear, Alphabet is far from being in trouble. According to the superficial metrics that make investors either happy or hostile, it's going quite well. Alphabet's stock was trading near a record high last week, and when the Nasdaq swooned 2.5 percent Friday, Alphabet fell a more moderate 1.8 percent. Revenue at the core Google business is growing by more than 20 percent a year as it splits with Facebook the lion's share of the digital-ad market. Google has ridden the two biggest trends in online ads – the rise of mobile and the rise of video – remarkably well.

But search advertising was always merely a first act for Google. Over much of the past decade, the company put feelers out into all kinds of areas that could generate new, long-term growth. When several took root, the company reorganized and began marshaling more investments on what it calls Other Bets – primarily Nest, Fiber and Verily but also a host of so-called moonshots. Last year, these Other Bets saw $448 million in revenue and an operating loss of $3.6 billion. Just like a startup! Capital expenditures for the Other Bets totaled $869 million.

In the first half of 2016, Other Bets saw revenue of $351 million, operating loss of $1.6 billion and capex of $560 million. From an investment standpoint, those numbers seem to be moving – inching, really - in the right direction. Revenue is tracking higher than in 2015 while the operating loss is on pace to be a slightly lower $1.2 billion. Capex began 2016 at a higher pace. Assuming for a moment that Alphabet maintains its $280 million per quarter rate of investment, the figure would be about 30 percent higher than it was in 2015.

Again, all these numbers look just encouraging enough to keep investors happy, especially since Google has said ever since it went public it would spend heavily for long-term growth. But in the past few months, more and more anecdotal evidence has been emerging from Google that signals a possible retreat from some of these other bets. The clearest example is Google Fiber, the most cost-intensive of the Other Bets, and potentially the most disruptive one in the next couple of years.

On the one hand, Fiber keeps making modest strides forward. It launched in Salt Lake City, pushed for faster access in Nashville and charted expansion plans in cities like San Francisco. All of this has irked telecom incumbents that have long smiled at their consumers even as they pushed aside their best interests. Fiber - more than Verily, the hapless Nest, or any of the X moonshots – is a flagship for the new products, righting an industry full of wrongs and pushing for the Internet access we always knew we deserved.

The thing is, Alphabet is putting the brakes on Fiber, ostensibly to focus more on wireless, and renaming its connectivity initiative Google Access. The move smacks of the “do more with less” thinking that companies try to peddle when they are primarily interested in cutting costs. Page is reportedly slashing Fiber's workforce in half to 500 people and demanding customer acquisition costs drop to a tenth of their current levels. Software may be eating the world, but it has no taste for that oldest and dreariest of mundane tasks: digging a hole in the ground.

The fate of Fiber is only one in a series of retrenchments at Alphabet in recent months: The retreat from robotics with the sale of Boston Dynamics. The departure of Google Ventures CEO Bill Maris, who had been its “driving vision.” The “fiscal discipline” at (and possible sale of) Nest. And the reports that the Alphabet moonshot factory was "sputtering, unable to bring projects to life.”

This feels very different from Google rethinks in the past. Some (iGoogle) were copycats of dying technologies that probably shouldn't have happened. Others (Reader) shouldn't have been shut down but at least had a business case behind the move. Still others (Orkut, Buzz, Wave, Plus) represented a company banging its head against a brick wall of social networking it could never break through. And then there was Glass, which you knew would fail the first time you saw someone wearing it, but will probably be remembered as an early, interesting experiment in augmented reality.

All those were worthwhile efforts that ended in failure inside a sandbox where failure was simply acknowledged and then shrugged off. This feels different. It's Alphabet giving up on promising ideas before it needs to, or before the evidence makes it clear that any of this isn't working. And it doesn't seem to be coming from CFO Ruth Porat, who vowed prudent spending but who also, quarter after quarter, defended hundreds of millions of dollars in capital expenditures on big bets like Fiber. It feels more like a loss of conviction higher up, with Page and Brin so focused on the long, long, long term they are losing sight of the false starts, the setbacks, and the unimaginable difficulties involved in the medium-term - all the endless nitty gritty along the road to any long-term goal.

In other words, Alphabet is dealing with Fiber, along with some of its other bets, with less moral fiber. One hopes this attitude doesn't extend to its self-driving cars, because that is shaping up to be as tough a market as Alphabet or Google has ever faced, one that even Apple is said to be rethinking. Uber is hell bent on winning that contest, just as Amazon for that matter is in the emerging market for drone delivery, and going against either company with a half-hearted diffidence is unlikely to end well. Maybe the goal is to focus all of Alphabet's capital and innovation on extending human lives, so that Page and Brin can remain eternal students forever. Always with their eye on some distant moon, never quite committing to whatever it takes to get there.