Google investing in some eye-popping projects
With mountains of cash and some of the world’s smartest engineers, Google Inc. has always set aside research and development dollars for futuristic ventures that appear to have little in common with its core business of Internet search.
But lately, it’s been backing some eye-popping projects. In recent weeks, the company has revealed it’s working on self-driving cars and a multibillion-dollar windmill farm — in the middle of the Atlantic Ocean.
Crazy? Like a fox, analysts say. The projects, no matter how far afield from the company’s ambitious mission of organizing the world’s information, may turn out to be more calculated — and prosperous — than they initially appear.
“Some of these things will turn out to be wildly successful and others will just fade away,” said Jay Wong, portfolio manager with Los Angeles investment firm Payden & Rygel, which owns Google shares. “It’s part of their creative culture and what makes them so successful.”
Or as Silicon Valley author John Battelle put it: “We should be pleased we have a company that is throwing spaghetti at the wall.”
Google can afford to gamble because it rules the Internet’s most lucrative market: the text ads that run alongside search results, a giant business that is booming even as the rest of the economy lags. It has allowed Google to amass more than $33 billion in cash, and third-quarter net income of $2.17 billion.
“We don’t think about what these things will eventually be used for,” Google sales chief Nikesh Arora said. “We try many things and some of them work.”
Consider Google’s mobile strategy. Google caused a stir on Wall Street in 2005 when it bought a tiny start-up in Palo Alto called Android. But Google gobbled up a wealth of talent, including co-founder Andy Rubin, and software that is now giving Apple Inc.'s iPhone a run for its money.
In fact, it is one of the best investments that Google has ever made. It created mobile software to give away to handset makers that was cheap and easy to customize. Today that software powers millions of smart phones and is a significant part of the company’s advertising strategy.
In 2008, Google bid $4.7 billion for rights to the nation’s airwaves in a government auction that sent investors into a tizzy over what would have been Google’s biggest single investment. It would have landed Google in the wireless business with the likes of AT&T and Verizon. Google lost the auction but won anyway: an open wireless network allowing all sorts of devices and software to run over it.
Equally baffling to observers was the $1.65 billion that Google paid for video-sharing site YouTube in 2006, a blockbuster all-stock payout for an 18-month-old start-up that drove values of other technology companies into the stratosphere. Now YouTube, increasingly popular with marketers, is playing a big role in Google’s growing display advertising business. It has 2 billion views of videos with ads each week.
And analysts could not fathom why Google bought a small satellite mapping company called Keyhole in 2004. Today Google Earth has turned millions of users into world explorers, giving them a bird’s-eye view of the planet through detailed satellite imagery.
Even Google’s popular free e-mail service Gmail was a head scratcher in 2004 when Google rolled it out. Now it’s one of the most popular.
So what about the millions of dollars it is investing in windmills and robotic technology?
Google, which guzzles massive amounts of energy to run its computer data centers, could benefit from new sources of cheaper renewable energy while making those resources commercially available to the Eastern Seaboard.
And Google could one day provide navigation and other services for self-driving cars or use fleets of them to take photographs for its online mapping service. The technology could also help make highways safer and lower the nation’s energy costs.
“When I came to Google six years ago, the question I would get often was: Is Google a technology company or an advertising company? Every time I answered the question, the answer I would give is the one I heard from the founders, that Google is a company that likes to solve problems of scale using technology,” Arora said.
Google says its unorthodox approach was set out in a now-famous letter from the company’s two founders before they first sold stock to the public in April 2004. Larry Page and Sergey Brin pledged to sacrifice short-term financial results to pursue lofty goals and dish out generous and costly perks to recruit the brightest people.
Google has developed what it calls a disciplined approach that gives it the latitude to take on those kinds of projects: Seventy percent of resources go to its core search business, 20% to other projects related to search and 10% to other initiatives.
Brin, a mathematician by training, determined the breakdown. But underlying the approach is what the company describes as a deep desire to crack the code on the world’s serious and elusive challenges.
Page and Brin, two of the world’s richest men, seem to be not just concerned with the World Wide Web but with the whole wide world (not to mention the moon). They invest their money and energy through Google’s business and its philanthropic arm, Google.org, and their own private efforts. Google has sponsored a $30-million international competition to land a robot on the moon, has tinkered with geothermal energy in West Virginia and plans to offer ultra-high-speed Internet access in some communities to push for faster broadband networks in the United States.
But that hasn’t always played well on Wall Street. Investors for years have fretted that Google spends too much money and time straying too far from its core business. And for all the big winners, there have also been big losers, such as Google’s much-ballyhooed collaboration tool Wave, virtual world Lively and SearchMash, a website to experiment with ways to organize search results.
Arora says Google experiments “within reason.” Google engineers are encouraged to spend 20% of their time on side projects, some of which pay off.
“We say to investors that you can’t have constrained innovation,” he said. “If you want to encourage a culture of innovation, you have to allow people to experiment.”
The perception of a deeply innovative, risk-taking company also helps Google strengthen its brand with the public and compete for the top engineers in the increasingly cutthroat Silicon Valley talent wars.
And it’s that success that has made investors stick with the stock. They also say projects that at their inception seem outlandish can surprise.
“We don’t spend a lot of time analyzing automated vehicles and wind farms. These are not needle movers like the core business,” said John Lutz, senior research analyst with Frost Investment Advisors, which owns Google shares. “But it’s less than 1% of cash flow, so let them have their fun. They’ve earned it.”
But, he cautioned, Google does not have a blank check. “As long as the core search business remains strong, investors are more inclined to look the other way,” Lutz said. “Once the core business matures, you will see investors scrutinize investments to a greater degree.”