Google's balloon project Loon crashed, but some investors are happy with CEO Sundar Pichai putting limits on money-burning 'moonshots'

  • Alphabet has grounded Loon, bursting its dream of balloons that would deliver internet access.
  • But some investors and analysts are glad to see Alphabet entering a "maturing" phase.
  • Alphabet canned another moonshot last year, in what could hint at more changes to come.
  • Visit Business Insider's homepage for more stories.

When Google blew up its corporate structure in 2015 and became Alphabet, it was a way for the internet giant to pursue "moonshot" ideas outside of its core search and advertising businesses.

Loon, which became one of what the company terms "other bets," was the closest thing to an actual moonshot: a mission to use low-altitude helium balloons to transmit internet access to some of the furthest reaches of the world.

But this week, nearly a decade after creating it, Alphabet brought Loon back down to Earth.

"The road to commercial viability has proven much longer and riskier than hoped," wrote Astro Teller, Google X's moonshot "captain," in a blog post announcing Loon's folding.

It's the latest moonshot to come crashing down. Last year, the company folded its wind-kite company Makani and abandoned plans for a a billion-dollar smart city from its urban innovation arm, Sidewalk Labs.

But many Google's investors and analysts don't mind. Some of them told Insider that they see these moves as an encouraging sign that the company is shifting its strategy with moonshots and changing its mentality toward how it bets on the future.

"I think this is just another part of their maturation," Ron Josey, a JPM Securities analyst that covers Alphabet, told Insider. "I'm actually surprised we haven't seen more projects being culled."

'It's becoming a bigger thing'

Loon's concept was to use high-altitude helium balloons, hovering between 60,000 and 75,000 feet above the ground, and beam an internet signal back down to Earth. Its creators argued that traditional internet infrastructure wouldn't work in some of the most rural places, so it made sense to put the internet in the sky instead.

It was an ambitious idea, which over the years saw increased competition from companies such as SpaceX, which gradually found cheaper and more efficient ways to get off the ground.

"I do believe there is a timeline to when these bets can be viewed as viable or not," said Josey, referring to Loon.

"The fact they've taken the time to be so analytical about a project as small as Loon tells you that there is a fair amount of financial discipline brought in since [Alphabet CFO] Ruth [Porat] joined a few years ago," Truit Securities analyst Youssef Squali told Business Insider.

Loon was forged inside Google's "X" skunkworks division in 2011 and unveiled in 2013. Five years later, it "graduated" into a standalone company that sat next to Google and a scattering of other moonshot companies, including self-driving division Waymo and life sciences business Verily.

Many of Google's "other bets" were pet projects of the founders, who wanted to fund big ideas that would take years, potentially decades, to see a return. But few of these companies are showing promise, all while burning through stacks of cash.

So long as the cogs inside Google's core moneymaking business keep turning, investors have largely turned a blind eye to Google's zanier ideas, but the cash burn has become more noticeable. The other bets segment reported an operating loss of $3.3 billion for the first three quarters of 2020, up from $2.8 billion over the same quarters in the year prior.

Alphabet had revenue of $125.6 billion in the first three quarters of 2020.

"We're now at the point where analysts and investors are having to pay attention to the other bets," said Shane Obata, a portfolio manager at Middlefield Capital, an Alphabet investor. "It's becoming a bigger thing." 

In recent years, Alphabet has tightened the purse strings and pushed its subsidiaries to seek new lines of revenue.

Pichai hinted as much in an interview with Fortune last year, shortly after he became CEO of Alphabet."I think with the 'Other Bets' we are definitely at a phase where, while we take a long-term view, we also want to marry that with the discipline of making sure they are doing well."

Last year, both Waymo and Verily raised funding rounds that included a crop of outside investors.

This is where Loon became unstuck. In November, The Information reported the business was struggling to secure outside investment and that Alphabet was reluctant to use its own money to keep it afloat. 

"That's typical of companies that go from being founder-led to the next stage of their growth, when handling the founders pet projects, some of which can cost a lot of money," said Truit Securities' Squali.

"Sundar is more of a professional manager, and Ruth is very much of that ilk as well, where the focus is on clear ROI thresholds, otherwise they'll spend the money somewhere else."

Some analysts have told Business Insider previously that they believe even one huge success among the coalition of other bets could justify the existence of their collective losses.

"These are very interesting projects and knowing the caliber of talent that sits within these subsidiaries, something is going to work.," said Middlefield's Shane Obata.

To be sure, there are no signs that Google X is going to stop betting on the future. In December, The Information reported that X is working on an industrial robots project that could be launched into the next standalone bet.

But JPMorgan's Ron Josey also thinks we'll likely see Alphabet continue to rein in its biggest loss-makers. "I do think this is a broader shift, and probably under Sundar, to bring more accountability across the organization," he said.

"We're not looking at a hyper growth company anymore."

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