Regardless of whether the policy remains in place today, one of Google’s (GOOG) most famous management philosophies has been the “20% rule”. Legend goes that especially in Google’s earlier days, employees were encouraged to spend 20% of their time working on new initiatives that could potentially benefit Google outside of their regular workflows, teams, and projects. This meant there was time to explore new ideas or to challenge existing status quos within the organization.
It’s a seemingly arbitrary and systematic way to spur innovation, but it has worked well over the years. The 20% rule has apparently led to new products such as Gmail, Google News, and AdSense, which are all important aspects of Google’s business today.
It should not be surprising then, that Google’s parent company Alphabet also takes a systematic approach to innovating outside of its core search business. By making ambitious “Other Bets” and keeping investors up-to-date with their own segment on the company’s financial statements, Alphabet shows both commitment and discipline in finding its next multi-billion dollar game-changer.
In 2016, Alphabet was a cash machine. The company raked in $19.5 billion of profit off of a whopping $87.4 billion of revenue.
The only challenge? If you do the math, 99% of that revenue comes from Google, which currently dominates digital advertising with a 41% share of the entire market.
Wisely, the company does not want to put all of its eggs in one basket – and it spends about 7% of its annual operating costs on facilitating “Other Bets”. Here is what else Alphabet is up to:
- Google Fiber – Google Fiber aims to provide internet at super speeds across the United States. Rollout has been costly though and only nine locations have been launched since 2010.
- Calico Labs – Calico Labs is made up of elite scientists with $1.5 billion worth of funding to research the causes of aging and how to expand the human life span.
- Nest – Founded by two former Apple engineers, Nest produces smart-home technology such as sensor-driven, Wi-Fi-enabled thermostats.
- Verily – Verily’s mission is to reinvent healthcare using groundbreaking technology and data, such as a glucose-sensing smart contact lens for diabetics.
- GV – GV, formerly known as Google Ventures, is Alphabet’s venture capital investment arm, making strategic investments in startup companies in fields such as life sciences, agriculture, and robotics, to name a few.
- CapitalG – CapitalG makes investments that are “return-driven”, focusing on growth stage companies, such as Stripe, Airbnb and SurveyMonkey.
- X – X uses breakthrough technology as a radical solution to big problems. Its most famous projects are its self-driving car and Google Glass.
Which “Other Bets” Are Paying Off?
“Other Bets” generated $809 million in revenue in 2016, which is a 82% increase over 2015. This revenue came mostly from Nest, Fiber, and Verily.
Nest, which aims to dominate the smart home of tomorrow, was acquired for $3.2 billion in 2014. And while it does generate revenue for Alphabet, it has been viewed mostly as a disappointment even from the company’s perspective.
Verily is Alphabet’s business in life sciences, and is apparently profitable already. The unit partners with pharmaceutical companies to make money, and it will also eventually move forward with human clinical trials on its smart contact lens product.
Lastly, Fiber has been rolled out in nine cities across the United States to provide ultra-fast broadband speeds for internet and television. In recent news, Fiber has laid off employees, while halting many further expansion plans.