Google's reorganization into a conglomerate called Alphabet may provide more transparency to investors worried about Google's growing spending on so-called moonshot projects. It also shows the determination of Google founders, Larry Page and Sergey Brin, to distance themselves from the core business just when its business model is being challenged, which is less encouraging.
Through a convoluted legal process, Alphabet will become the owner of all Google stock and supersede it on the Nasdaq later this year, keeping the GOOG and GOOGL ticker symbols. The company that emerges will amount to a collection of frolicking mice and one bloated elephant. In his news release, Page didn't name all the subsidiaries that will make up his new corporate ABC, but, for example: C will stand for Calico, which is working on extending the human life span; L for Life Sciences (glucose- sensing contact lenses); X for X Lab (futuristic projects such as drone delivery); V for Ventures (investment in startups); and C for Capital, another investment arm. Wait, didn't we already have a C? G will unequivocally stand for Google -- the first line of the news release says so.
Google will include all of Google's relatively mature services, such as YouTube, Maps and the Android mobile operating system. It will also be responsible for virtually all of Alphabet's revenue and profit (the other letters in the soup are predominantly money-losing, which is why more transparency is required).CartoonDavies' latest cartoon: Key to the White HouseCommentSubmit your letterReader essaysGet published in Newsday
Google reports about $2.5 billion, sometimes more, in capital expenditure and about $2.7 billion in research and development costs every quarter. The company's segment reporting is for now rudimentary: just "Internet search advertising" and "Licensing and other revenue." Once this becomes more detailed, investors may get a glimpse of how the investments are split among projects, a rare opportunity that I'm sure the market would love for Amazon to provide.
In Google's case, however, the insight may not be particularly valuable, given the company's well-known 70:20:10 framework. Seventy percent of its investment goes into the core business, 20 percent into adjacent areas (mostly the company's cloud business) and 10 percent into long-shot innovations, such as the life sciences projects.
The latter will now be broken out as separate parts of Alphabet, and these will draw a lot of attention.
This, however, is just a distraction from what is perhaps the most important part of the restructuring announcement: Page and Brin will no longer run Google's core business. They are more interested in the allocation of funds among the side projects and the search for the new, new thing. Core Google is now in the hands of Sundar Pichai, its new chief executive.
This may not be the best moment for the founders to leave that business to somebody else. In the second quarter of 2015, 90 percent of Google's $17.7 billion of revenue came from search engine advertising. The revenue still appears to be growing strongly -- by 18.9 percent in 2014 and by 14 percent in the last 12 months -- but Internet advertising is facing two serious threats: ad blocking and exposure as a scam.
According to a fresh report from PageFair, a firm that helps advertisers adjust to widespread ad blocking, 198 million people actively use software that blocks advertising, costing publishers $22 billion this year. Blocking grows much faster than Google revenue, and it will soon be a major threat. Even now, Google pays to get on the whitelist of popular blocking software producer AdBlock Plus, meaning that people who don't shut off that list, too, see its ads. That's not a cure-all, though: Most users of such software don't want to see any ads, period.
Internet advertising is less and less effective: Click- through rates are falling and industry standards for viewability -- used to determine whether an ad has been seen -- are ridiculously lax. The Media Rating Council considers an ad viewable if 50 percent of its pixels are in view for a minimum of one second; for video, the standard is 50 percent for two seconds. For a human brain, that's no time at all. Google may boast of strong growth in video advertising on YouTube (the number of advertisers using this channel increased 40 percent year-on-year in the second quarter, says Chief Financial Officer Ruth Porat), but people aren't really watching these ads. They're waiting for a "skip ad" button to come up once the formal viewability requirement has been met. Plus, a lot of the ads are only seen by bots.
Big advertisers are worried. Kellogg, for example, won't buy ads on YouTube because Google won't allow third-party companies to check viewability there. Many companies suspect -- and in some cases know from experience -- that they're being scammed.
That's only natural: There's a big disconnect between what they're being sold and the ad executives' own experience as consumers, which consists of ignoring ads or clicking them away at the first opportunity.
Targeting, which Internet companies have sold as their advantage over traditional media, is also deceptive: The data collected from people by companies such as Google is too circumstantial and often irrelevant to be of use.
The online ad business, some insiders claim, is broken. Probably not so broken as to call Google a colossus with feet of clay, but broken enough to worry about the long-term sustainability of the company's biggest revenue stream. Of course, Alphabet does need to grow more legs to stand upon, but, in line with the 70:20:10 formula, the core requires a bigger share of the founders' attention. Figuring out how to fix the business model problem is a tough job that Page and Brin don't seem to want. They prefer to play with self-driving cars and delivery drones.
Leonid Bershidsky, a Bloomberg View contributor, is a Berlin-based writer.