Google earned so much that it was not necessary to think about money. Until now

Alphabet Chief Financial Officer Ms. Ruth Porat wishes to focus on Mountain View. Will Moonshot factory - research laboratories of “breakthrough projects” be able to adapt to new conditions?

Earlier this year, Astro Teller, a scientist with an original ponytail haircut and a science fiction writer, gave an interview to TED.

It was first for Teller, but not for the X-lab (or Google X), since the research lab he heads is fairly well known. This lab has been in the communication chain for many years. In 2011, Sebastian Tran, the founder of the X-Lab, stepped onto the TED stage and predicted that driverless cars would end fatal accidents. In 2013, Sergey Brin, co-founder of Google, demonstrated the Google Glass wearable computer developed in the X-Lab, claiming that the devices attached to the face are the natural successor to the smartphone. In 2015, Chris Armson, the technical manager of autonomous vehicles at the X-Lab, proclaimed that robots should operate without human supervision at all. In February 2016, Teller’s turn came.

“I have a secret for you,” he began with his confident smile. "Our groundbreaking projects site - Moonshot factory - is a rather unpleasant place."

This comment, it seemed, was caused by a feeling that grows, including on Wall Street and at Alphabet (the parent company for Google and the X-Lab) that Teller throws money on crazy experiments. Google spent a lot of money on bringing augmented reality glasses to the market - the devices were delivered by parachutists during their jump - but the product failed and was removed from the market in early 2015. Car-robot ran into problems in the literal sense (there were several car collisions) and in a portable one (several leading Google experts went to start their own company to develop a car without a driver). In general, the “Other Bets” group (a softening term that Alphabet uses for the X-lab and other non-Google business units) was written off as losses, approximately 3.6 billion. dollars in 2015, which is approximately twice the loss of the previous 2014.
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Antenna for Internet access provided by the stratosts for the Loon project

At TED, Teller attempted to file the failures of the X-lab as part of an overall strategy that ultimately leads to breakthrough success. He spoke briefly about several unsuccessful experiments - robotic vertical farms, giant cargo airships - before moving on to one of the most promising undertakings, the Loon project. "We are trying to build the Internet on the basis of stratostats," he said.

The Loon project - according to some former Alphabet employees - has long been a favorite of Google founders Sergey Brin and Larry Page. Originally intended to send in the stratosphere approx. 100,000 stratostats - huge, home-sized meteo-probes equipped with transceivers. This impressive fleet plus airships, drones, and also underground cables should form a comprehensive worldwide broadband access network, superior to everything offered by traditional telecommunications operators. “The Internet will reach more than 4 billion people,” Teller said in an interview with TED, while on the screen behind him in a widescreen video the stratostat swam over mountain peaks covered in snow. He reported on the success of the first tests conducted by the company. "We will continue to go forward." The audience applauded.

Six months after Teller’s inspirational remarks, Mike Cassidy, Loon’s project manager, stepped down from his post. Around the same time, Urmson, a specialist in auto robots, left Alphabet, as did David Vos, the Wing project manager for using drones. Sean Mulani, Vos's first deputy, also left the company.

Other recent resignations: Craig Barrett, executive director of Access, telecommunications division; Bill Maris, CEO of the company's venture capital division, GV; Tony Fadell, CEO of Smart Thermostats at Nest, who also worked on launching Google Glass. The project, now called Aura, also lost its design and development managers.


Porat

The architect of this reorganization - known as “Alphabetisation” in ever-sunny Google - was Ruth Porat, the new CFO. Ms. Porat, who was born in England but grew up in Palo Alto, California, led the technology banking division of Morgan Stanley during the first boom of Internet companies, then worked as an adviser in the US Treasury during the famous rescue from the bankruptcy of Fannie Mae and Freddie Mac during the 2008 crisis, after which he became the chief financial officer at Morgan Stanley in 2010. She came to Google in May 2015 with an instruction to restore order and focus on a company that had so much money that it never needed most of it. She introduced strict budgeting and, according to people familiar with the actions of Alphabet, forced the group “Other Bets” to start paying for the common Google services that they used. Projects that had a diffuse payback period of 10 years or more, in some cases, had to show the way of making a profit twice as fast.

In most large companies, such financial controls are standard operating procedures, and Alphabet investors are satisfied. Their shares rose by 35% after the arrival of Ms. Porat. However, in the group “Other bets” her actions were evaluated ambiguously, and Ms. Porat received the unflattering nickname “inquisitor”. “She's a professional killer,” says former top manager Alphabet. “If Larry doesn't like something,” he continues, recalling Larry Page, “then Ruth will immediately eliminate it.”

Critics, including more than a dozen former Google top managers, who spoke on condition of anonymity because they signed non-disclosure agreements, indicate that the company had a balance between innovation and its main business, search advertising. For the 12 months ending in September, Google advertising yielded 89% of all Alphabet revenues or $ 76.1 billion. As one former leader put it: “No one wants to admit the reality that this is an advertising campaign with a bunch of third-party hobbies.”

Back to Earth: New Rules for Google's "Breakthrough Projects Site"

“Google is not an ordinary company,” Bryn and Page wrote in a letter to investors when their company entered the public market in 2004. "We do not intend to become an ordinary company."

This document, entitled "Owner's Handbook" for Google Shareholders, is legendary in Silicon Valley, describing a position known at the company's headquarters in Mountain View as "the environment and spirit of Google" or "google". In the letter, Page and Brin noted that Google will never focus on quick profit, but instead invest in benefits and privileges (bonuses) for staff, such as free meals and giving employees the opportunity to spend up to 20% of their time on projects of their choice (this program has already been curtailed). The owner’s manual states that Page and Brin, who continue to manage Alphabet through a complex ownership structure that gives their shares more votes than investors, intended to invest in business lines that are far from the Internet search. “Don't be surprised,” they wrote, “if we make small investments in areas that may seem very risky or even strange.”

Cash Machine and Other Bets Group

- google
Search, Android, Gmail mail, Maps Maps, YouTube, Cloud Cloud, Pixel smartphone.
Earned $ 26.8 billion * .

- Nest
Devices for "intelligent home": thermostats, smoke detectors, security cameras.

- Verily
Contact lenses that read some biometrics.

- Access
It offers broadband internet access through Google Fiber; currently working on wireless access.

- X-Lab
Breakthrough projects (“Moonshots”): Internet stratostats, delivery drones, auto robots, etc.

- Sidewalk Labs
Wi-Fi Kiosks in New York.

- jigsaw
Technical incubator under the control of former CEO Eric Schmidt.

- DeepMind
Software artificial intelligence, incl. bot for the game of go.

- Calico
Attempt to find a cure for death.

Losses of 3.8 billion US dollars

* Operating income for the fiscal year ended for the company 09/30/2016

The basis of what made all this possible was, of course, money. Behind the bizarre spirit of alternative culture was an incredibly profitable business with the potential to absorb entire industries. While traditional advertising campaigns addressed a targeted audience based on demographic profiles, Google’s search advertising could be targeted to people who were already interested in a particular product. AdWords, Google’s pay-per-click pioneering pricing scheme, meant that advertisers only paid for advertisements that worked. The result has revolutionized media and advertising and gave Google a stream of income that seemed almost limitless. Google employees have a name for their advertising business: “cash machine”. Google at the time of the IPO received from advertisers nearly 400 million dollars every three months. In the last quarter, revenues to Alphabet amounted to 18 billion dollars, of which about 5 billion were profits.

But Bryn and Paige were never particularly overwhelmed by all of this — or rather, they focused on this business only insofar as it made even more ambitious technological projects possible. A former Google technician recalls a meeting with Page in the late 1990s. I started asking the question: "Are you interested in ...".

"Yes," Paige interrupted. "We are interested in everything."

Over the years, the acquisition of YouTube and Android (more precisely the organization of the Open Handset Alliance), as well as the invasion of software and hardware, the entertainment industry, telecommunications and media, have become Google’s risky investments. In the mid-2000s, Page and Brin decided to create a kind of digital “Library of Alexandria”, scanning every book printed so far. It was the company's first “moonshot” (“throw to the moon”) when Marissa Mayer, then vice president of Google (now she’s the CEO of Yahoo!), reported it to the weekly New Yorker in 2007.

Partly due to the structure and partly due to the inconsistency of Page, who became the CEO in 2011, these new business ventures evolved into a kind of “fiefdom”. At the head of each direction was some kind of enthusiastic leader - almost always a technical specialist who endured the idea and managed to get the support of Page or Brin, which meant huge resources for working on it. There was so little control in the X-lab that, as one former employee recalled, one day, CFO Patrick Pichet could not enter the building and had to wait outside in the rain. Teller says that this story is the Google equivalent of city fables, but does not question whether access to the X-lab is tightly controlled. “I’m sure that someone had a problem with a pass at some point,” he says.

Such corporate fragmentation had its rationality. Parallel projects, then considered as “self-supporting units”, often directly competed with Google advertising partners, and it seems difficult to imagine that a traditionally organized company would be able to launch services such as Google Fiber (home broadband). Internet) and Project Fi (virtual mobile operator), while also trying to convince large telecommunications companies to introduce Google development software into their devices.

But this fragmentation created a lot of overlap. At some point in 2016, the company had two music subscriber services (YouTube Red and Google Play Music), two venture capital groups (GV and CapitalG), two mobile operating systems (Chrome OS and Android), and two advanced research laboratories - X and ATAP; Last created Page in 2014, when he recruited Regina Dugan, former director of the Defense Advanced Research Projects Agency (DARPA) at the US Department of Defense. (Ms. Dougan left Google for Facebook in early 2016.)


Model of energy generating kite being developed in the X-Lab

All this duplication created tension, partly because, as former Google employees say, Paige tries not to notice the employees with whom he is dissatisfied. “Larry’s approach to dismissing someone is to make it as unpleasant as he can,” says a former employee. Eric Schmidt, the former CEO of Google, and Bill Campbell, a member of the board of directors of the company and mentor Page, helped to smooth out these conflicts. But Schmidt, who is currently the chairman of the board of directors / board (with the functions of directing current activities), began to be more engaged in lobbying Google in Washington, and Campbell became seriously ill (he died of cancer in 2016.)

The lack of structure, in addition to internal difficulties, made it more difficult for Google’s breakthrough projects to explain themselves to the world. Many former employees of the X-Lab blame a hostile reception, which was met by Google Glass Augmented Reality Glasses, a re-evaluation shown by part of Google’s marketing division. With the assistance of Bryn, who ran the X-Lab at the time, Google agreed to partner with fashion designer Diana von Fürstenberg to put Google Glass glasses on fashion models during New York Fashion Week in the fall of 2012. The following year, Google Glass glasses were shown in a 12-page portfolio in the American women's fashion magazine Vogue . Such aggressive advertising increased frustration when glasses were released in 2013. They “collapsed”, earning horrible reviews and causing real clashes between the first followers and, for example, the regulars of bars who did not appreciate the fact that the tiny camera was aimed at them. The term “glasshole” entered the vocabulary of Silicon Valley (Note of the translator: a play on words glass and asshole - literally, “idiot with glasses”).

Teller hesitates when asked what caused the failure of augmented reality glasses. “I think we were right to try,” he says after a long pause. “At that time, it was not obvious whether something like such glasses should be tied to Google in terms of the brand or not. And we learned something. ”He notes that although glasses were put on the market as a research project, many people perceived them as a finished product.


Teller

Teller established procedures to avoid such failures, including the formal process by which novice project managers, in order to continue, would be required to have a sound business case, as well as a working prototype. “It was some kind of germinal soup, where everything gurgled and bubbled, but it was extremely unstructured,” says Obi Felten, whose business card identifies her as “the head of preparing breakthrough projects for dealing with the real world.” (Positions in the X-lab are called extremely “Google-style.”) The X-lab started paying bonuses to managers who eliminated their projects before expenses got out of control, and this stopped the development of at least one green light was given. This attempt, known internally by the company called Tableau and protected by Brin, was a plan to create giant television screens.

After the close of the X-Lab, Page went into his own search mode. Beginning in 2014, he began transferring daily responsibilities to Google, Sundar Pichai, a longtime product manager, and assembled a small in-house research center. This group worked in secret - employees in the X-Lab, who felt its impact, began to call it mockingly as Google Y. Page called the group Javelin (spear). The Javelin team discussed various ideas for a long time, including a plan for building mass skyscrapers and others aimed at creating an “intelligent city”, which led to the opening of Sidewalk Labs, a startup led by Dan Doctoroff, a former CEO at Bloomberg LP.

However, the additional goal of the Javelin group - in the words of its two former employees - was to solve the problem of “estates” once and for all. Page's idea was to proclaim a “Google federation,” as one employee said. Page wanted to see independent companies that could plan and execute their budgets, business models, and branding, regardless of parent Google.

Without any prior warning, Page 10 on August 10, 2015, on Monday afternoon sent a letter to investors and the public. He established Alphabet, a new holding company. Google and Others were to become subsidiaries, each with its own CEO. “Alphabet Holding is focused on companies that thrive on strong leadership and independence,” wrote Larry Page. "The main thing is that companies in Alphabet must be independent and develop their own brands." Alphabet should also begin to report Google’s earnings separately every quarter, so investors could finally find out how much X-labs and the Other Bets group are losing and how much the Google cache machine is profitable. At the end of the letter Paige tried to joke. “Do not worry,” he wrote, “we ourselves are still getting used to the new name!”

Alphabet Revenue Reports revealed how healthy Google was under the guidance of Pichai. Google, in addition to double-digit revenue growth over the past year, introduced a promising new assistant in its advertising business to compete with Amazon's Echo, and strengthened its cloud service division. “The more information, the better for investors, since no one wants to invest in black boxes,” says Dan Niles, founding partner of AlphaOne Capital Partners, an investment management company that has Alphabet shares in its portfolio. But Niles adds: “The real solution was that they attracted Ms. Ruth Porat.”


Liquid fuel from sea water. The fuel turned out to be too expensive to manufacture, and the X-lab closed this project.

Almost no one foresaw the imminent changes. Most of the top executives found out about this only the next morning. “It was overwhelming,” says Rich Devol, who is the “director of rapid assessment and insane science” in the X-lab. He helped launch the Loon project and, by 2015, was responsible for examining breakthrough projects, which meant that he had the Google equivalent of access to the most sensitive information. He spoke to Brin and Paige more than once. And yet he says: "I had no idea that they were going to do it."

In many of the Other Bets, the change manifested itself as a departure from the principles of Google’s “environment and spirit”. Two years earlier, for examples, Google allocated $ 3.2 billion to buy Nest, explaining the acquisition, as part of a plan to create an ambitious hardware division, led by Fadell, a former Apple technician known for creating the original iPod prototype. According to two people close to Nest, this company was initially promised greater autonomy in creating products and a budget that would allow it to work at a loss of $ 500 million each year for the next five years. Fadell, when he left in June 2016, said in an interview with the Bloomberg News, that he began thinking about leaving at the end of 2015, shortly after the formation of Alphabet. People familiar with him say that he blames the budget restrictions imposed by Ms. Porat, which limit the possibilities of Nest. Another person close to Nest challenged the figure of 500 million dollars.


Included in the new release of Bloomberg Businessweek, December 12-18, 2016

The Google Fiber division, which Brin helped a lot with startup, was also scheduled for shrinking. This direction received solid feedback and its CEO, Craig Barrett, a former semiconductor entrepreneur, was given control over several other Google projects known as Access and Energy. Barrett's extensive project portfolio included plans for clean energy, projects to develop wireless routers for the home, and a plan for laying fiber optic cable in sub-Saharan Africa. "Craig thought he had a chance to become like the architect and inventor of Buckminster Fuller and rebuild the world," said a former Google employee.

“Alphabetisation” reduced the size of Barrett’s field of activity to Fiber, which he tried to expand by declaring plans to provide Google’s Internet access and cable TV services in more than ten US cities. But obtaining permits for fiber optics installation takes a lot of time, and the installation process itself is quite expensive. Former employees say that Page was disappointed at Fiber’s lack of progress. “Larry just thought that the unit wasn’t able to completely restructure enough,” said Page’s former consultant. "There is nothing difficult in laying fiber."In October 2016, the company announced that it was laying off about 130 employees and stopping the creation of a fiber-optic network in eight cities. Barrett resigned that day.

These changes have pushed many in Silicon Valley to accuse Page of concessions to investors - in other words, in actions that are completely normal for the CEO of a normal public company. “The company definitely looks almost normal,” says Randy Comicher, a partner at Kleiner Perkins Caufield & Byers. “This is the classic model of the General Electric conglomerate,” he says, comparing Page with Jack Welch, known for his General Electric transformation, during which research units were removed from the company and costs were reduced. To Wall Street listeners, this sounds like a compliment to Page, but, in fact, this is certainly not the case. Comisar assesses Ruth Porat’s focus on spending as a positive development, but adds: “I still hopethat Larry and Sergey will be able to share financial discipline and the cessation of innovation. "

Alphabet Holding refused to provide an opportunity for its managers - Porat, Page or Brin - to be interviewed, but in October, during the most recent teleconference devoted to the company's financial activities, Ms. Porat spoke out in favor of the holding's increasingly rigorous approach to innovation. “As we strive for incredibly high goals,” she said, “it’s inevitable that course corrections will occur on this path.” She said about the "need to pause" in some areas of business in order to "lay the foundation for a more secure future." In the third quarter of 2016, Alphabet allocated $ 3.6 billion in research and development, an incredible amount exceeding Alphabet’s expenditures by 11% over the same period in 2015. Losses of the group “Other bets” (“Other Bets”) for 2016 amounted to 865 million dollars.Such a figure would represent a very serious investment in a new business in any company other than Alphabet.

In an interview at the headquarters of the X-Lab, where the offices of Page and Brin are also located, Teller stressed that Alphabet is still a paradise for technical specialists. With earrings, hair-tailed hair, elastic, roller-skating, and a shirt with a pattern that incredibly combines Turkish cucumber patterns and a Scottish cage, Teller embodies the “delicate balance” between discipline and freedom, causing doubt that the Other Bets group has been subjected to an undesirable critical impact from Ms. Porat, and denying that they are losing strength. “It’s impossible to force people to create,” he says. "But you can not just take and release the steering wheel."

Cuts in the X-Lab were in many cases necessary, he says, citing as an example the recently closed Google robotics division. This division, codenamed Replicant, managed by Andy Rubin, the creator of Android, united 11 companies that Google acquired in 2013. Having accepted Replicant from Rubin, who left in 2014, Teller disbanded it. “You don’t have to be a group of exactly robotics,” he recalls his speech to the new staff. “You will determine the problem you are working on. Robotics is a tool, not a problem. ” (Alphabet put the largest part of Replicant, Boston Dynamics, for sale in 2015. The company, which develops two-and four-legged all-terrain robots, is still waiting for a buyer.) Teller introduced into the X-Lab a permanent financial director, Helen Riley, a Google veteran who worked under the guidance of Ms. Porat during the “alphabetization”. Porat meets with Teller regularly and works with Page, Brin, Schmidt and David Drummond, Alphabet's chief lawyer, on a committee that decides whether to accept or reject some of the next “throw to the moon.”


One of the first options for a drone to deliver (Wing project)

“Let me draw you a picture that we often draw for ourselves,” says Teller, turning with his chair to a white board with a felt-tip pen in his hand. He writes the word "progress", crosses it out, and then he writes the same word again above the resulting dollar sign. The challenge is, he says, to engage in such innovations that are worth their money. Flying saucers should pay for themselves. “If you work for me, you will understand this better,” he says.

The Loon project, currently run by Tom Moore, the former vice president of the satellite company ViaSat, is still living. “If you want to work with great and difficult problems,” says Devol, one of the creators of the Loon project, “I don’t know anyone else in the world who deals with such problems as seriously as we do.” According to him, the Loon project has progressed markedly. Two months after Google’s entry in 2011, Devol tracked and returned balloons filled with helium in Central Valley, California, a few hours by car east of Mountain View. Soon after, he added a payload — a block of wireless equipment packed in a small foam beer cooler. "Safe scientific experiment," was written on the outer plate. “If found, please refer to Paul."The note indicated the phone number with the San Francisco code. The recipient was Paul Acosta, one of six Loon project engineers.

Now the marking used in the Loon project is more formalized, and each device has telephone numbers with dozens of codes from different countries. A team of more than 100 people (according to a former employee) works in a laboratory complex, in which there is a huge dark room, where used cylinders are cut and photographed on an almost 12-meter long light table, thanks to which controllers can detect microscopic holes. In another room, air controllers monitor the movement of about twelve balloons.

At the picnic area outside, the X-lab staff slowly eats bean curd, while a few meters away from them, buzzing drones take off and land, and cars without a driver leave the garage and drive into it. Nothing unusual from the position of Googleplex - Google's California Mountain View complex. “Because we are working on a really serious problem,” says Teller, “this motivates people to come here and stay here. It acts very much. This is not some kind of marketing ploy for Google. And that's why everything works here. ”