August 12, 2015 / 12:44 AM / 2 years ago

Google buys time for bold bets with new Alphabet structure

A Google search page is seen through a magnifying glass in this photo illustration taken in Berlin, August 11, 2015.Pawel Kopczynski

(Reuters) - By separating moonshots from moneymakers, Google founders Larry Page and Sergey Brin are now free to pursue more quixotic business ideas such as glucose-monitoring contact lenses, Internet-connected, high-altitude balloons and even immortality.

Investors cheered the corporate restructuring announced Monday for giving greater visibility into Google's central business and seemed less anxious about zany ventures that may pose as distractions.

But of all the businesses in Alphabet – the new holding company that isolates the core search and advertising business from riskier bets – popular smart home accessory maker Nest Labs is likely the only unit that will give investors the returns they crave anytime soon, analysts told Reuters.

They added that Google's self-driving cars and health ventures, such as storing data on human DNA in the cloud, are potentially profitable, but not for at least several years.  

"In the near term, investors are going to focus on the core business and give them some leeway," said Macquarie Research analyst Ben Schachter.

The company's shares rose 4 percent Tuesday in the wake of the announcement and climbed as much as 7 percent the previous day in after-hours trading.

Under the structure - search, advertising, maps, YouTube and Android will remain part of Google under the leadership of new Chief Executive Officer Sundar Pichai, currently the company's product chief. Search remains the company's financial engine, driving more than 90 percent of revenue, according to analysts.

Nest, anti-aging company Calico, smart cities company Sidewalk, secretive lab Google X, as well as Google Capital and Google Ventures - two investing units - will all be run separately with their own leaders, Google said. Through those ventures, Google has tried to accomplish everything from improving public transportation to prolonging the human lifespan.

Page and Brin will be Alphabet's CEO and president, respectively.

The company plans to combine the financial results of all ventures outside the core Google business, but investors hope that other firms' results will be broken out as they mature.

The prime candidate for such scrutiny is Nest, the maker of smart thermostats, smoke detectors and other security systems that Google bought last year for $3.2 billion.

Although Google has not detailed the company's financial performance, investors have reason to be optimistic, said analyst Avi Greengart of Current Analysis.

"There's a tremendous amount of design and engineering," that go into its products, he said. "They are selling (them) at a profit."

Nest may benefit from more independence, said analyst Jan Dawson of Jackdaw Research. The acquisition sparked concerns among consumers that Google would suck up data from Nest's home accessories or put advertising on the gadgets.

Now the relationship is "at arm's length again," said Dawson.

Analysts are optimistic that some of the other research projects will become profitable businesses. Google has already begun testing its self-driving cars near its Mountain View, California headquarters as it figures out how to crack a potentially huge market, even as traditional auto makers also pursue the technology.

It has also recruited top researchers for its health ventures and will have the flexibility to spend years researching and testing products.

But the fledgling ventures will also be looked at more closely. When investors see just how much money the projects are haemorrhaging, they may call for greater discipline, perhaps hampering development, said analyst Patrick Moorhead of Moor Insights & Strategy.

"Heck, Google itself lost money for years before it went public," he said.

Whether ventures thrive or flop, Dawson said, the new structure leaves Google poised for either course of action.

"If one of the new businesses starts doing really well, they can spin it off more easily," he said. "If they don't want to do something any more, it makes it easier to sell it off."

Editing by Stephen R. Trousdale and Bernard Orr

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