Investors anxious for Google’s return to Earth

Google's research arm, Google X, is called the company's Moonshot Factory. One reason the company picked the word "moonshot" was to remind people to tackle big problems that may well blow up in their faces.

Last month, after years of promotion, Google ended a test trial of its Internet-connected glasses called Glass. While the device seemed to have promising commercial applications in hospitals or on factory floors, its first pass at the consumer world was unsuccessful.

The very public failure of Glass points to a bigger question.

After patiently abiding a steep increase in research and development spending on efforts that range from biology to space exploration, Wall Street is starting to wonder when – and if – Google’s science projects will pay off.

"We want companies to continue to push out the envelope, but there has to be some financial responsibility around that," said Ben Schachter, an analyst at Macquarie Securities. "We have no real insight into what's going on."

So investors are left to guess. Two years ago analysts estimated that Glass sales would be $3 billion to $11 billion by 2018. Google’s self-driving car project, which faces huge technological and regulatory hurdles, has been called a $200 billion opportunity by Gene Munster, an analyst at Piper Jaffray.

The wisdom of financing wild cards would not be under question if Google’s core advertising business - which accounts for about 90 per cent of its revenue - were roaring. But its growth, while still up about 20 per cent from a year ago, has slowed, and the company’s dominance in desktop search engines has been eroded as consumers spend more time on mobile phones whose tiny screens are a less lucrative ad space.

Now, instead of pie-in-the-sky estimates for products that may never become reality, the focus is on more mundane issues like costs and profit margins.

Research and development costs grew to about 12 per cent of gross revenue last year, the highest share since the company went public in 2004.

The most unusual projects are at Google X, in a brick building about a half mile from the main company campus in Mountain View, California. Google X focuses on technologies that are likely to be five to 10 years away from being commercialised.

Its leader, Astro Teller, whose business card reads “Captain of Moonshots”, is a polymathic computer scientist who moonlights as a novelist and used to manage a hedge fund.

Google X’s best-known projects are Glass and the self-driving car, but inside there is much more, like an effort to make wind power with kites, or a project to deliver packages with drone aircraft.

Add this to the things Google X has tinkered with – jet packs, hovering skateboards – and it is easy to see why investors are getting antsy.

As out there as the projects sound, Google is going down a familiar road. Today Google is so dominant in search advertising that it has almost no choice but to spend lavishly in search of future businesses.

For Google, as for any company, innovation is no guarantee of success. Even when companies do invent revolutionary products, someone else may commercialise them.

The graphical computer interface and mouse were invented and refined by companies like Xerox, then popularised with Apple’s first Macintosh computer. But Microsoft won the personal computer market.

Companies tend to sprinkle researchers throughout an organisation, or, as in the case of IBM, throw them into the real world to see what problems need solving.

"We have put IBMers side by side with our clients to work with them on their problems," said Zach Lemnios, the vice-president for research strategy. "These are PhDs – people who might not have matching socks."

But for shareholders, whose patience is not usually as long as that of researchers, nothing is quite as reassuring as a shiny new product whose profits they can measure with each passing quarter.

And if they cannot have that now, they would at least like to know when to expect it. – 2015 New York Times News Service