News Column

Google Projects Can Pay Off -- Even Crazy Ones

May 13, 2013

John Shinal

Halfway through Google's quarterly conference call in late April, CEO Larry Page sounded a bit exasperated after a stock analyst asked him how much the company planned to invest in some of its more speculative ideas.

"I feel that when I say anything, I always get asked that question," Page answered, just after he'd spent several minutes talking enthusiastically about self-driving cars, Google glasses and other projects that as yet contribute nothing to the bottom line.

Wall Street concerns about such spending are understandable after Google reported that Motorola Mobility, the phone maker it acquired a year ago for $12.5 billion, had an operating margin of -18% in the first quarter. And that excluded stock compensation charges.

Motorola's results, charges related to its acquisition, and Page's rapid pace of investment all helped to push down Google's overall operating margin significantly during the quarter, to 25% of revenue from 32% a year ago, when all expenses are included.

It's enough to make an investor wonder why Google -- whose $50 billion in revenue and $32 a share in net income last year were due wholly to its online ad business -- would want to be in any hardware business at all.

Yet, as the company gets set to host its annual development conference this week, the thousands of eager software developers who will gather in San Francisco for Google I/O offer proof that what seems zany one year can become a highly profitable business a few years later.

That's because every good piece of software needs a hardware platform to run on, and Google is continually pushing for a world in which online advertisers can find consumers no matter how they access the Internet.

Google's ability to maintain its sales and profit growth as the online world goes mobile is proof of the success of what it calls its "multiscreen" strategy.

When Google acquired a small company called Android in 2005, few outside Silicon Valley even knew what a smartphone operating system was.

Eight years later, Google's mobile OS is the most popular around the globe, and millions of consumers have smartphones optimized to show Google ads.

As Page said on the conference call three weeks ago, in explaining Google's investments in speculative projects, "There's not much competition, because no one else is crazy enough to try."

This year, the newest and most speculative hardware platform at Google's I/O conference will be a computer for your face, which the company calls Google Glass.

Page couldn't hide his excitement when he talked about the project on the April call.

"I get chills when I use a product that is the future, and that happens when I use Glass," he said then.

Within months of its public debut, the Internet-ready half-pair of glasses that makes a wearer look like a Borg extra in a Star Trekmovie inspired strong reactions -- both pro and con.

In early April, two of Silicon Valley's most prominent venture capital firms agreed to share with Google's own venture unit all funding proposals from start-ups that use Google Glass in their business plans.

(While the partnership, called the Glass Collective, garnered headlines, it also raised the question of why entrepreneurs would want to let three different VC partnerships compare notes on their start-ups, rather than force the firms to compete for an equity stake, as is common practice among VCs.)

On the downside for Google Glass, one Seattle bar made a bold statement -- and acquired a lot of publicity -- when it banned the device due to concerns for the privacy of its patrons.

Raising privacy concerns is nothing new for Google, of course, something understood by those who had their home wireless networks invaded without their knowledge by Google's Street View project in 2010.

The company has paid fines both in Europe and the U.S. over Street View, but the fine amounts were mere rounding errors for Google, which is still making money hand-over-fist selling ads alongside Street View results -- and all its other services.

While Google's strange glasses are creating a lot of buzz, it's another new product, called Google Now, that may prompt developers who attend this year's I/O show to write apps that will help boost Google's bottom line sooner, rather than later.

As a voice-based digital assistant that's a rival to Apple's Siri, Google Now is an advance in a technology that's at the heart of Google's success: Internet search.

Now that the company has released tools for developers of its Chrome mobile Web browser that take advantage of voice capabilities, Page says "we'll be amazed" in the future to find that Internet computing once required cumbersome human actions such as typing on a keyboard or clicking a mouse.

Then again, we may all someday marvel that anyone ever had a problem with the Borg.

John Shinal has covered tech and financial markets for 15 years at Bloomberg Businessweek, San Francisco Chronicle, Dow Jones MarketWatch, Wall Street Journal Digital Network and others.

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Source: Copyright USA TODAY 2013

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