Something is going on at Alphabet (Nasdaq:GOOG), parent company of Google. This past Tuesday, the company announced that it was essentially abandoning Google Fiber, its high-speed broadband internet business. The business will “pause” expansion efforts into new cities and will reduce its employee base. The head of the unit is also stepping down. If that is anything other than a big corporate pink slip, then call me a lumberjack.
I’ve never been much of a fan of Google’s fiber effort. The company was always pushing a monolithic boulder up a Mt. Everest sized slope. It was taking on deeply entrenched incumbent service providers in the cable and telco companies. If you have read our thoughts on FISF holding Cable One, Inc. (NYSE:CABO), then you probably know that we have a great appreciation for those very boring cable businesses. Google was attempting to differentiate itself with a superior service (gigabit speed connection), but the latest announcement implies that its selling proposition failed to find traction. Or at least enough traction to earn an attractive return on Google’s investment.
But the changes at Google Fiber do not stand in isolation. On the same day, YouTube CEO Susan Wojcicki shot down speculation that YouTube might begin to invest more aggressively in scripted original programming. She essentially stated that YouTube’s ad-based business model didn’t generate enough profit to successfully compete with behemoths like Netflix and Amazon. Note the eye on financial discipline.
There have been other signs as well. Back in August, a number of key employees of Google’s self-driving car program left the company, including its Chief Technology Officer. While it remains a mystery as to the reason, rumors abound that he was frustrated with a change in strategy. Google was gearing up to separate the unit from its home within the Google X division and prepare it for life on its own. In other words, management had had enough theory (aka spending money), and now wanted a business (the payoff).
Keeping the Google soul
Taken together, it strikes me that CFO Ruth Porat is having a massive impact. We have noted in the past that her joining the company spurred us back in to the stock. But not even we could have hoped for this level of financial rigor. My guess is that if you worked at Google three years ago and wanted a billion dollars for a ping-pong table, a wet bar and an engineering team to develop a humanoid yogi, you probably got it. Those days are long gone.
But at the risk of biting the hand that feeds, I hope Google is not losing its soul. The company has a unique essence that has enabled it to continue to grow at a rate unheard of for a mega-sized company (unless you’re Amazon). Pouring money into R&D, encouraging its employees to spend time on unsanctioned side projects, its apathy towards money-losing ventures, the moonshots. Collectively these qualities represent an attitude that has led to major businesses like YouTube, Gmail, Android and others. Google Cloud looks primed to be the next in that string. I hope that the company finds the right balance, an appetite to fuel innovation without starving itself, but within a more fiscally reasonable paradigm.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.