Now consider another puzzle concerning Google, also widely considered among the world’s most innovative; it is No. 2 on BCG’s 2014 list and No. 4 on Fast Company’s and likely in the top five of the five random people one stops in the hallway. How would Google rate on 3M’s index? Very poorly, it would seem. In 2004, 99 percent of Google’s revenues were from its core product: advertising. Since then the best it has managed to do is to get that number down to 90 percent in 2014.
As you factor in spending, the picture for Google darkens further. Whereas 3M spent only under 6 percent of revenues on research and development, Google spent 15 percent last year. (That other poster child for innovation, Apple, spent only 3 percent.) And for all this money, Google, fails many times over – and is celebrated for it.
Orkut, Google’s social networking site, switched off on September 30, 2014 and tears may have been shed in India and Brazil where it was once popular.
In its relentless hunt for innovation, Google is a voracious acquirer of innovative companies. In the two years prior to 2014, it outspent its five closest rivals combined on acquisitions. Here, too, it has failed in dramatic ways. A single acquisition, Motorola Mobility, cost $12 billion — almost half the amount that Google spent on all its acquisitions over a decade — which it sold for $3 billion two years later.
None of these factors deters Google’s leaders or its many admirers. Much of the public focus has shifted recently to its Google X unit, which not only has a chief most appropriately named, Astro Teller, it has a manager with an official job title of Head of Getting Moonshots Ready for Contact With the Real World. Now, the drumbeat has picked up as some of Google’s moonshots come closer to landing. The Google self-driven car is coming around the corner quite literally. Google’s high-altitude balloons are being tested to offer Internet access to those without access. And the latest: Google intends to take on the myriad urban innovation challenges with its brand new Sidewalk Labs. Beyond the roads, sidewalks and the skies, Google wants to tinker with life itself, from glucose-monitoring contact lenses to longevity research.
Google’s revenue source is essentially unchanged and yet it spends disproportionately to move the needle. But these unprecedented moonshots could simply be money pits. If we were to take the 3M metric seriously, consider all the investments and giant failures, Google’s reputation as an innovator would peel off as fast as an overused Post-it note. You might conclude Google is on its way to being remembered as the innovation emperor with no clothes.
Yet when you analyze these three elements of Google’s strategy, it’s clearly a well-clad emperor.
1. Feed the advertising beast.
Google continuously innovates in the technologies and applications that produce ad revenue. As a result, advertisers and users stick with Google, as reflected in Google’s 17 percent growth in ad revenues last year. This is particularly impressive given the ferocious competition for eyeballs and the challenges facing the media industry broadly. Even the moonshots have value here as a powerful signal: search consumers stay with Google, despite the low switching costs, because they associate the moonshots with better science going into the mysterious search algorithm.
2. Take many moonshots; some will deliver “giant leaps.”
One reason why Google’s NPVI looks bad is because it hasn’t had enough time for the moonshots to translate into revenue. Even if most of them fail, with enough of them, some will succeed and can even fund ones that take even longer to deliver results. Already, the outlines of business models for some of these moonshots have begun to take shape. For example, if 5 percent of the 4.5 billion people without Internet access pay a small portion of their monthly income, say $5 a piece, “you’re going to be in a billion dollars a month in revenue, tens of billions a year in revenue,” according to Mike Cassidy, Google’s lead on Project Loon.
3. Preserve a climate for innovation.
A perennial challenge for large public companies is to create environments where employees are emboldened to take risks. Google motivates employees to engage in experimentation with short-term advertising projects and long-term moonshots. It organizes the very distinct activities within different groups of like-minded individuals with different time-horizons and budgets: Google Research, Google X, Calico, etc. With its $66 billion revenues and 25 percent income from operations, it has plenty of resources to play with for now. Failing, and doing so in public, is a hallmark of a confident innovator; it empowers its employees with a “what’s the worst that can happen?” attitude. While Google was clearly inspired by 3M’s “15 percent” culture to offer employees time to pursue their own project ideas, it offers a model for innovation very different from that of 3M.
While this three-part strategy helps explain Google’s lack of concrete innovation, there are risks.
One, traditional advertising revenue will eventually decline as usage shifts to mobile and consumers spend time on apps other than searching the web. Two, the moonshots could be monetized by others; the ghost of Xerox PARC should be present at every Google strategy table. Three, while innovating in the process of innovation preserves a climate for nurturing creative individuals, it often benefits other companies more as they learn from Google’s approach and hire away its stars. Ensuring that its moonshots develop into valuable businesses is critical to preventing Google from falling victim to its other risks.
No matter how much awe, love and fear Google inspires today, unless compelling products and revenues appear soon Wall Street – and even main street — have been known to be tempted by fresh, exciting alternatives from start-ups that are the “next Google.” The remarkable 113 years of 3M is testimony to paying attention to old-fashioned indices. Google’s leadership will have to find a way from the moon to the bottom line in at least one of its many expeditions – and it is wise to do so soon.
Bhaskar Chakravorti is senior associate dean of International Business & Finance at Tufts University’s the Fletcher School. He’s also the founding director of the Institute for Business in the Global Context and author of The Slow Pace of Fast Change. Formerly a partner at McKinsey, he taught innovation at Harvard Business School.