Today, Google Overtook Apple to Become the World's Most Valuable Company

What drives Alphabet's growth is still not Google's little siblings

In the early hours of today, Alphabet released its figures for the last three months of 2015: revenue of US$21.3 billion and net profit of US$4.92 billion.

Leaving aside the effect of exchange rates, Alphabet's revenue was 24% higher than a year earlier.

After the numbers came out, Alphabet's shares briefly topped US$800 in after-hours trading, putting its market value at nearly US$565 billion, about US$26 billion more than Apple's. That made it the largest company in the world.

It is the first time another company has overtaken Apple since Apple passed Exxon Mobil in 2012.

Alphabet's revenue growth still comes from the advertising business Google has run for more than ten years

Of the US$21.3 billion in revenue, US$21.178 billion came from Google, and 90% of that was advertising.

The fastest-growing parts were YouTube video ads and mobile search ads.

Search advertising is still some way from hitting its ceiling, and revenue from YouTube and Android is catching up. Credit Suisse estimates that YouTube and Android made up 16% of Google's total revenue in 2015. And figures disclosed last month, when Oracle sued Google, show that Android has earned Google a total of US$22 billion in profit since the operating system was created.

But the shift from PCs to mobile is starting to hurt. This quarter, revenue from Google's third-party ads (the small blocks at the side of websites) grew only 7%, a third of the growth rate of ads on Google's own services.

Google's siblings burned through US$3.6 billion last year

Alphabet also disclosed, for the first time, the revenue of the other companies split off in the reorganization.

The disclosure is thin, though: every business outside Google is lumped together under "Other Bets." In other words, you cannot tell how much the X lab actually spent, or how good the internet services business, said to be doing well, really is.

What Alphabet did disclose is that the subsidiaries outside Google brought in US$448 million in revenue in 2015 and lost US$3.567 billion.

On the earnings call after the release, Google said that the US$448 million came mainly from Nest (smart home), Verily (biopharma) and Fiber (broadband).

Nest: Alphabet's smart home ambitions are not going smoothly

• Founded: 2010; acquired by Google in 2014 for US$3.2 billion
• Head: Tony Fadell, former head of iPhone hardware at Apple

That internet balloons, self-driving cars and longevity drugs are not yet making money is no surprise.

But Nest is more than five years old, and it brought in only US$448 million for the whole year. Things are not going well.

According to figures from before the 2014 acquisition, about 1 million households had bought a Nest thermostat. The cheapest one sells for US$199.

In 2015, Nest launched a smoke alarm and acquired DropCam, another San Francisco startup, which makes smart cameras.

Beyond hardware, Nest also wants to be the brain of the smart home. In 2014, a range of appliances, including Whirlpool washing machines and Philips light bulbs, were announced as connecting to Nest and taking its commands. Google also released Android Brillo, a smart home operating system, at its 2015 developer conference.

Judging from the numbers now disclosed, Nest's own products have not sold well. And the appliance brands that once partnered with it no longer mentioned Nest at CES, the consumer electronics show, in 2016.

Alphabet has poured a lot into Nest. Alphabet CFO Ruth Porat said Nest has "thousands of developers, more than 14,000 people." Alphabet as a whole has only a little over 60,000 employees.

Part of the reason Nest has grown slowly is that the smart home market itself is slow.

Apple, Intel, Qualcomm, Samsung, Xiaomi and others have each launched a standard of their own and are waiting for the smart home to arrive.

But today there may be more standards on the market than smart home products anyone can sell.

Microwaves, induction cookers, kettles, washing machines... Every appliance you can think of now carries a "smart" label and connects to a smartphone, yet none has given people a reason to use it.

Google's other siblings

On the earnings call, Porat said the company will keep investing in these new projects.

With advertising revenue still growing, that investment should not meet much resistance.

Still, these new businesses, which turn up in the press year after year, bring in less than US$500 million a year combined. That shows how hard it is to open up a new field of technology.

Finally, here is a rundown of Google's other siblings:

Access and Energy: the most likely to make money

• Founded: 2010
• Head: Craig Barratt, who previously worked in Qualcomm's chip division

Access and Energy's businesses include:

• Google Fiber: a 1 Gbps ultra-high-speed fiber broadband service, now offered in three US cities
• OnHub: a US$199 router
• Project Link: a program to provide networks in emerging countries
• A partnership with Indian operator RailTel: Wi-Fi at 400 railway stations in India
• Project Sunroof: rooftop solar panel analysis for homeowners in different places
• Project Titan: solar-powered drones that also provide internet access

For now, Fiber's carrier business looks the most likely to make money. Analysts estimate that Fiber now supplies fiber service to 427,000 households and 96,000 businesses, a real foothold in the three cities it serves.

Google began building its own fiber network, Fiber, in 2012, and it put the incumbent carriers under heavy pressure. Those companies had never had much reason to upgrade their networks, but Google offers 1,000 Mbps (fast enough to download a 1GB movie in a few seconds) at almost the same price as the carriers.

Fiber is also going after the cable TV business with a TV subscription service for households; subscriptions in Kansas City grew 40% over the past six months.

Fiber has not won many users yet, but it plans to enter nine more cities, and analysts estimate it will need to spend another US$1-2 billion next year on network infrastructure. And when faster, cheaper service comes along, consumers show little loyalty.

Verily (formerly Life Sciences)

• Founded: 2013; graduated from Google X in 2015
• CEO: Andy Conrad

Verily was once part of the Google X lab. Earlier this year it was spun out as an Alphabet subsidiary. Its current projects include a smart contact lens that can detect diabetes indicators; the Liftware Spoon, a smart spoon for people with Parkinson's; the Baseline Study, which collects genetic and molecular information from a population to build a map of a healthy human body; and health-monitoring wristbands.

Verily wants to break away from traditional medical technology: "Now, as an independent company, Verily will focus on using technology to better understand health, as well as prevent, detect and manage disease."

Profits from these projects still look a long way off, but product development is moving faster than expected. Verily is reaching an agreement with DexCom, a continuous glucose monitoring company, to develop continuous glucose monitors for people with diabetes.

Under the deal, DexCom will pay Verily about US$35 million upfront in stock, and a further US$65 million later in cash or stock. DexCom becomes the exclusive licensee of Google's glucose monitoring intellectual property and gets the right to use Google's data analytics. If DexCom's annual revenue exceeds US$750 million, it must also pay Alphabet an undisclosed licensing fee. In the first half of this year, DexCom's revenue was US$166 million.

The smart contact lens Verily developed with Swiss drug giant Novartis will begin testing at clinics this year.

Calico: the biotech company working to extend human life

• Founded: 2013
• CEO: Arthur Levinson, current chairman of Apple

Calico was founded in 2013 and focuses mainly on major life-threatening diseases, mental illness and related areas. On the product side, in February this year Calico teamed up with drugmaker AbbVie to set up a research center in the San Francisco Bay Area to develop drugs for diseases of old age, such as dementia. The initial investment is US$500 million, split equally between the two companies. Calico handles drug research and trials, while AbbVie assists and handles product development and bringing drugs to market.

Most recently, Calico has partnered with genetic analysis company Ancestry. Using analytical tools and algorithms on Ancestry's huge genealogical and genetic database, it will study the family trees of long-lived people and what their genes reveal about life, model the results and turn them into products that analyze and predict an individual's lifespan, and gradually develop drugs that slow or stop aging.

X (formerly Google X): an incubator for future projects

• CEO: Astro Teller

Since being renamed X, the company has cast itself as Alphabet's incubator. Projects that have come out of the X lab so far include the deep learning team of the Google Brain project; Project Insight, which works on indoor maps and has joined the Google Maps team; and the Life Sciences group, which graduated to become an Alphabet subsidiary and was renamed Verily.

But X may be better known for a failure: Google Glass, which stopped selling last year. To improve its success rate, X set up an internal group called Foundry to decide which projects stay.

Projects X is still running include the Replicant robotics team, self-driving cars, Project Loon, the internet balloon program, and Wing, the drone delivery program.

GV (formerly Google Ventures): an investor in Uber

• Founded: 2009
• CEO: Bill Maris

The firm has so far invested more than US$2 billion in 300 startups, with an annual budget of US$300 million. Last year GV invested in 39 startups, mostly in life sciences and health. From here it will put more into artificial intelligence and machine learning, and less into mobile internet.

GV has taken part in the early funding rounds of many star startups, such as Uber, Slack and Medium.

Over the next three to five years, these unicorns will be acquired or go public. Google Ventures owns only small stakes in them, but because it got in early, it can expect handsome returns.

Google Capital: the traditional investment arm

• Founded: 2013
• Head: David Drummond, Google senior vice president

Google Capital focuses on mature companies. It is a 15-person investment team, and its three heads report directly to Google senior vice president David Drummond.

Capital never discloses the size of individual deals, but it spends roughly US$300 million a year.

Capital invests in relatively mature startups. It has so far backed 24 companies across a wide range of industries: education, software, healthcare and finance. These companies have proven business models for their technology, and the kind of returns an investor can already see.

Cover image from The New York Times