At Google, pressure mounts to find something beyond search

The Internet giant built its business on search, but its results failed to wow investors who now want to hear more after a disappointing Wall Street update.

Searching for something more than search.

Armin Durgut/ZumaPress/Corbis

Google became one of the most powerful companies on the planet by addressing a once-in-a-generation problem: Make it easy for people to search for stuff online.

Now it's the one doing the searching -- for the next big thing.

Alphabet, Google's parent company, is hard at work tinkering with a sweep of projects, from Wi-Fi-connected thermostats to nanoparticles for detecting cancer.

That kind of experimentation isn't cheap or quick. Sales from those projects, which Alphabet calls "Other Bets," brought in $166 million last quarter, up from $80 million a year earlier. But losses from those experiments widened to $802 million last quarter from $633 million this time last year.

Normally that wouldn't matter much, but pressure is sure to mount after the company's disappointing earnings report on Thursday. CEO Larry Page missed Wall Street's targets on both sales and profit.

"We're thoughtfully pursuing big bets," Ruth Porat, Alphabet's CFO, said in a statement. The company, she added, is also "building exciting new technologies, in Google and our Other Bets, that position us well for long-term growth."

In the first quarter, sales, minus the costs paid to advertising partners, totaled $16.46 billion. Profit, minus some costs, was $7.50 a share. Analysts expected $16.56 billion in sales and earnings of $7.96 per share.

Investors sent the shares down about 6 percent in late trading. They closed at $759.14. Overall, Alphabet's shares have been flat this year. Google sees this problem of looking beyond search and has tried to address it. The company announced a wide-ranging restructuring last year that chopped its divisions into smaller, quasi-independent companies. The goal was to allow those companies to be more nimble by removing lots of red tape. Basically, they could behave like startups.

The problem, as any entrepreneur will tell you, is that startups are hard.

Nest, the smart-home device company that Google bought two years ago for $3 billion, was once heralded as the model for how one of Google's "Other Bets" should run. It has a tech-celebrity CEO in Tony Fadell, the former Apple hardware guru who nurtured the first iPod. And it has real products in real stores (thermostats, smoke detectors and security cameras, sold at places like Best Buy and Amazon).

But recently there has been trouble at Nest. Its sales have reportedly fallen short of Alphabet's expectations. Fadell, a hard-charging type cut from Steve Jobs' cloth, is apparently grating on the nerves of some of his employees. In fact, Greg Duffy, co-founder of Dropcam, called the decision to sell his company to Nest in 2014 a "mistake." He left Nest last fall.

Asked about Nest on a conference call Thursday, Porat dodged the question, only saying that the company's products are "best sellers" in the category.

There's been other reshuffling too. Google once had outsize ambitions to build a future full of robots. Then project leader Andy Rubin, the creator of Android, left the company in 2014 to start Playground Global, a company that helps guide hardware startups. Last month, Bloomberg reported Alphabet was trying to sell Boston Dynamics, the robot company it bought in 2013. The firm made spectacular-but-terrifying robot prototypes but wasn't likely to produce a marketable product in the next few years.

Still a cash cow

Even though it missed the earnings estimates, Google proper -- the part of the company that controls its Internet businesses, like search and YouTube -- is still dominant.

Sundar Pichai, Google's CEO, said his team is investing heavily in next-gen search, even beyond phones. The next step is artificial intelligence. "In the long run, we will evolve from a mobile-first to an AI-first world," he said.

Google has seven different products with more than a billion users apiece: Gmail, search, the mobile operating system Android, the Web browser Chrome, maps, the marketplace Play and YouTube.

Here's something that puts it into perspective: Google is doing so well that the European Union thinks the company is using its success to tilt the playing field in its favor. Last year, the region's competition regulators formally charged Google with allegations that its search engine favors Google services like search over competitors. On Wednesday, the EU did the same for Android, formally charging Google with unfair business practices for forcing phone makers to install its apps in return for access to Google's Play Store.

While Alphabet tries to untangle all that, the costly and time-consuming search for the next big thing rolls on.

Update, 3:06 p.m. PT: Adds comments from Alphabet's conference call.

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