Why Alphabet keeps betting on Other Bets
Alphabet's Q1 2017 earnings report showed that their "Other Bets" category was doing better than this same time last year in revenue. The same chart also showed that Other Bets was doing worse than this time last year – in operating loss. It might seem on the surface like a losing strategy to push more money into parts of the company that could be considered "bets". But Alphabet isn't the sort of company that drops and runs at the first sign of failure.
The phrase "you gotta spend money to make money" comes to mind while looking at these numbers. Other Bets operating loss for this quarter last year was $744-million USD, while the same operating loss for this quarter in 2017 was $855-million. Revenue for this quarter last year in Other Bets was $165-million, while this year it's $244-million.
How important is the category in Alphabet that swings for the fences – or stands outside the fences and aims for the moon? Like NASA exploring space beyond our galaxy, like ocean explorers diving deeper than anyone else dared go – this part of Alphabet is paramount to the future of the company. Some day we're not going to be able to stay on this planet – at that point, we'll be glad for NASA having already found another set of habitable places for us to move.
Alphabet isn't quite headed for a new home planet at the moment, but their Other Bets category of companies is, in my opinion, the most important part of the company. The part of the company that might not otherwise have been able to exist – the moonshots and the groups making solutions to problems we don't yet have. Included in this collection are the following:
• Nest: Smart home technology• X (formerly Google[X]): Moonshots, all moonshots• CapitalG: Return-driven investments• GV (formerly called Google Ventures): Venture Capital Investments• Verily: healthcare devices and data• Google Fiber: Super-speed internet at low costs• Calico Labs: Human lifespan research
Over the course of the year in the year 2016, Alphabet spent 7% of its total operating costs on Other Bets. In the 4th quarter of 2016, Other Bets had a whopping $1.24-billion in operating losses, while a year before that (Q4, 2015) the same category had $1.08-billion in operating losses. Over the course of the entire year in 2016, Other Bets cost $3.6-billion USD for Alphabet to run, while revenue generated was $809-million total.
It's not easy defending the importance of this category of companies within Alphabet. Of that much we can be sure. But Alphabet has given no indication that it'll ever wipe the category out entirely. Might one or two of the companies with the lowest performance peter out? Probably – but Other Bets will likely remain part of Alphabet until Alphabet no longer exists – if that ever happens.