Alphabet Loses $859M on 'Moonshots' in 2Q 2016

I don't see anything wrong with this approach, especially since the company can actually sustainably afford to keep placing these bets.

And perhaps "bet" is the wrong word being used here. Usually with a bet in gambling terms, you either win big or you lose it all.

When Alphabet tries a "moonshot", they come away learning a lot about whatever problem it is that they were trying to tackle. They build expertise in-house, and they flex the idea muscle within the company. That isn't zero-value activity. In fact it's very valuable.

$1B a year is a small price to pay for what could eventually spurn a sustainable $10B per year or $40B per year business in the future (self-driving cars, for example).

Now this is just me being optimistic. It could also very well be the case that the X division is horribly mismanaged and the moonshots fail for more nefarious reasons, but I'm willing to give Google the benefit of the doubt.

Google's S-1 April 24, 2004 https://www.sec.gov/Archives/edgar/data/1288776/000119312504...:

RISK VS REWARD IN THE LONG RUN

Our business environment changes rapidly and needs long term investment. We will not hesitate to place major bets on promising new opportunities.

We will not shy away from high-risk, high-reward projects because of short term earnings pressure. Some of our past bets have gone extraordinarily well, and others have not. Because we recognize the pursuit of such projects as the key to our long term success, we will continue to seek them out. For example, we would fund projects that have a 10% chance of earning a billion dollars over the long term. Do not be surprised if we place smaller bets in areas that seem very speculative or even strange. As the ratio of reward to risk increases, we will accept projects further outside our normal areas, especially when the initial investment is small.

We encourage our employees, in addition to their regular projects, to spend 20% of their time working on what they think will most benefit Google. This empowers them to be more creative and innovative. Many of our significant advances have happened in this manner. For example, AdSense for content and Google News were both prototyped in “20% time.” Most risky projects fizzle, often teaching us something. Others succeed and become attractive businesses.

We may have quarter-to-quarter volatility as we realize losses on some new projects and gains on others. If we accept this, we can all maximize value in the long term. Even though we are excited about risky projects, we expect to devote the vast majority of our resources to our main businesses, especially since most people naturally gravitate toward incremental improvements.

"Moonshot" is the Google term for R&D.

Google's R&D budget in 2014 wasn't even in the top 5: http://www.neowin.net/images/uploaded/2014/12/screen_shot_20...

Problem for Google might be that Wall Street may look at a word like "moonshot" and basically associate it with wasting money whereas if you call the same things R&D, it's something companies have been showing as an "investment"(not loss) for decades.

> When Alphabet tries a "moonshot", they come away learning a lot about whatever problem it is that they were trying to tackle. They build expertise in-house, and they flex the idea muscle within the company. That isn't zero-value activity. In fact it's very valuable.

This might work for "moonshots" that are closer to their core business, but in other areas there's not going to be any inherent value in building expertise if the "moonshot" itself ends up failing, because at that point they will cease needing any expertise in that area at all.

Likewise, "flexing the idea muscle" would be a benefit if it was regular Google employees that were working on these projects but it's not. It's Alphabet's X lab which is it's own thing, with people working full time on these moonshots.

And there are so many side benefits. Obviously Google employees are likely to be capable and smart individuals. So I wonder how much value is in having these type of employees take ideas to the company rather than planing to branch off for most companies that would scoff at letting you do a side project for a while.

In a region like silicon valley the opportunity and availability to walk away for a startup is huge this could act as a retention tool also. Better to let a talent disappear for 20% of their time than lose them altogether.