The most recent earnings report for Alphabet, Google’s parent company, indicated that the company’s big bet moonshot businesses did not perform well in terms of revenue and earnings. The article “Big ‘Bets’ Temper Google’s Earnings” by Jack Nicas in the April 22, 2016 issue of the Wall Street Journal, reported that losses from Alphabet’s moonshot laden non-Google units increased to $802 million, although revenue from those units more than doubled to $166 million. As the article points out, Alphabet “posted healthy increases in first quarter revenue and profits, driven by the growing strength of its core Google business on mobile devices,” but in the company’s non-Google businesses, losses grew.
The weak financial performance of Alphabet’s moonshots is not surprising. Nor, is it necessarily discouraging.
It is not surprising because those moonshots entail big bets, yet in business, it’s generally smaller bets that succeed, even in big bet companies. Thus, especially in the short term, Alphabet’s moonshots are unlikely to produce impressive revenue and earnings, and their potential for long term payoff is uncertain. So, their weak results are not unexpected.
Less obvious, however, is the fact that those recent weak results for Alphabet’s moonshot businesses are not necessarily discouraging. These moonshots can still benefit Alphabet, although not as a clear cut contributor to revenue and earnings. Instead, Alphabet’s non-Google moonshots may have the kind of value that comes from doing pure R&D (research and development). Pure R&D is oriented toward discoveries that enhance understanding, regardless of whether or not they have future commercial use. Although its potential contribution is very indirect, pure R&D can still be valuable.
Bits of what is discovered from pure R&D may be applied to the company’s business, possibly in ways not necessarily anticipated when the research work began. Thus, applying moonshot gleaned knowledge may be able to help better run Google, even if it doesn’t yield revenue streams from entirely new lines of business. And, in technology oriented companies like Alphabet, expertise that emerges from moonshots can help position the company at the forefront of technological change.
This doesn’t necessarily mean moonshot R&D work should cover an endlessly vast array of areas. Some limitations or priority setting may very well be reasonable. Furthermore, this doesn’t mean companies should not strive to translate pure R&D into new revenue streams when and if the right opportunities present themselves. Companies can certainly try to do that. Nonetheless, pure R&D by its very definition is not tied to direct commercialization. So, it is a luxury that many companies will not have the budget for. But, even while striving to rein in costs, a company of Alphabet’s financial stature can probably afford some pure R&D spending, and may be able to reap benefits from partaking in this purported luxury.
One possible benefit is brand building. Brand building depends on image and perception. So, in many companies, brand building entails spending heavily on advertising. Yet, as the recent rise of content marketing demonstrates, advertising is not the only way to drive the perceptions that contribute to a brand’s image. Other factors can affect perceptions and image as well. In fact, unlike many other high powered consumer brands, Google’s brand was not built with heavy ad spending. And, for Alphabet, moonshot R&D may help with brand building by contributing to the company’s favorable image as a leader in advanced technology, both for its Google unit and for its non-Google endeavors.
Furthermore, such a reputation can be valuable when competing to attract and retain skilled technology talent. Competing for such talent is increasingly important today, now that it is said that every company must become a technology company, and many more companies will be trying to attract high tech talent. Also, since there is now a greater recognition of the role of marketing in talent recruitment and retention, being perceived as a sophisticated, cutting edge researcher into the latest technology can have talent management value. Even if it does not generate new revenue, moonshot R&D spending by Alphabet’s non-Google businesses may help to create or enhance those kinds of perceptions.
Finally, the intent of this blog post is not necessarily to justify Alphabet’s moonshot spending. This post merely seeks to emphasize that moonshot R&D spending can have beneficial roles beyond being a hoped for long term source of new revenue streams, which may or may not ever materialize. Thus, taking a broader perspective can be worthwhile when evaluating the value of moonshots in situations like Alphabet’s.
