Hoping Google’s Lab Is a Rainmaker

GOOGLE

SAN FRANCISCO — Google’s research arm, Google X, is called the company’s Moonshot Factory. One reason the company picked the word “Moonshot” was to remind people to tackle big problems that may well blow up in their faces.

Last month, after years of promotion, Google ended a test trial of its Internet-connected glasses, called Glass. While the device seemed to have promising commercial applications in hospitals or on factory floors, its first pass at the consumer world was unsuccessful.

The very public failure of Glass points to a bigger question. After patiently abiding a steep increase in research and development spending on efforts that range from biology to space exploration, Wall Street is starting to wonder when — and if — Google’s science projects will pay off.

 

“We want companies to continue to push the envelope, but there has to be some financial responsibility around that,” said Ben Schachter, an analyst at Macquarie Securities. “We have no real insight into what’s going on.”

 

So investors are left to guess. Two years ago, analysts estimated that Glass sales would be $3 billion to $11 billion by 2018. Google’s self-driving car project, which faces huge technological and regulatory hurdles, has been called a $200 billion opportunity by Gene Munster, an analyst at Piper Jaffray.

“These are guesses at best,” he said. “Our price target is based on things that are tangible, but we say on top of that there are wild cards.”

The wisdom of financing wild cards would not be under question if Google’s core advertising business — which accounts for about 90 percent of its revenue — were roaring. But its growth, while still up about 20 percent from a year ago, has slowed, and the company’s dominance in desktop search engines has been eroded as consumers spend more time on mobile phones whose tiny screens are a less lucrative ad space.

 

Now, instead of pie-in-the-sky estimates for products that may never become reality, the focus is on more mundane issues like costs and profit margins. Research and development costs grew to about 12 percent of gross revenue last year, the highest share since the company went public in 2004. That includes the vast majority of engineers and technical expenses at the company.

The most unusual projects are at Google X, in a brick building about a half-mile from the main company campus in Mountain View, Calif. Google X focuses on technologies that are likely to be five to 10 years away from being commercialized. Its leader, Astro Teller, whose business card reads “Captain of Moonshots,” is a polymathic computer scientist who moonlights as a novelist and used to manage a hedge fund.

In an interview, Mr. Teller said that his division’s responsibility was to produce financial results on par with what a venture capitalist might expect when putting money into a new company. “Because risk abounds, we owe a very strong return,” he said.

 

Google X’s best-known projects are Glass and the self-driving car, but inside there is much more, like an effort to make wind power with kites, or a project to deliver packages withdrone aircraft. And all across the Southern Hemisphere, the company has stratospheric balloons that aim to connect people to the Internet. Add this to the list of things Google X has tinkered with — jet packs, hovering skateboards — and it is easy to see why investors are getting antsy.

 

As out there as the projects sound, Google is going down a familiar road. Today, Google is so dominant in search advertising that it has almost no choice but to spend lavishly in search of future businesses.

“If you think historically, go back 30 or 35 years, the organizations with big R.&D. divisions were AT&T, IBM and Xerox,” said Ed Lazowska, a computer science professor at the University of Washington. “Notice that each of those companies had a de facto monopoly.”

 

Google still dedicates a lot of time and money to deep computer science research that is woven into its core business. Two years ago, for instance, the company introduced a feature on its Google Plus social network that allows people to search their photos for subjects like “dogs” or “jewelry.” Behind that initiative was years of math and tinkering intended to make computers better at recognizing images.

“We judge ourselves by ‘Does the research end up being used in products?’ ” said John Giannandrea, who oversees several research projects at Google.

And, on occasion, Google X will send projects back to the core company so they can have a more immediate benefit. That is what happened to Google’s neural network project (formerly called “Google Brain”) a so-called machine learning effort in which researchers use algorithms to teach computers to do things like read text or understand spoken language.

 

“It would be fair to say Google Brain is producing in value for Google something that would be comparable to the total costs in Google X — just that one thing we’ve spun out,” Mr. Teller said.

For Google, as for any company, innovation is no guarantee of success. Even when companies do invent revolutionary products, someone else may commercialize them. The integrated circuit was independently developed by two companies, Fairchild Semiconductor and Texas Instruments, but Intel took the market from both of them. The graphical computer interface and mouse were invented and refined by companies like Xerox, then popularized with Apple’s first Macintosh computer. But Microsoft won the personal computer market.

“It’s fair to say that there is a lot more we don’t know than we do know,” said Josh Lerner, an economics professor at Harvard who studies innovation and entrepreneurship. There is no easy answer to the Xerox problem of coming up with a great idea that someone else turns into a successful product, he said.

Companies have tried to deal with this by moving away from the sort of fundamental research for which people win Nobel Prizes, and instead focusing on problems whose underlying technologies have largely been figured out. They also tend to sprinkle researchers throughout an organization, or, as in the case of IBM, throw them into the real world to see what problems need solving.

“We have put IBMers side by side with our clients to work with them on their problems,” said Zach Lemnios, the vice president for research strategy. “These are Ph.D.s — people who might not have matching socks.”

But for shareholders, whose patience is not usually as long as that of researchers, nothing is quite as reassuring as a shiny new product whose profits they can measure with each passing quarter. And if they cannot have that now, they would at least like to know when to expect it.

In a recent conference call with investors, Patrick Pichette, Google’s chief financial officer, was asked about the company’s many big investments.

“I just want to kind of reaffirm to you that we do it in a smart way and a disciplined manner,” he said. “We’re driving forward to make sure we don’t waste our shareholders’ money.”

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