Google X faces innovator's dilemma: Wow factor has to pay

Has Google's moment of radical innovation been exposed as only that? A moment? In an economy where everyone is counting on innovation, and counting on the private sector to provide it, two events at the end of last week leave me worried.

The first one was Google's plunging share price. The company is still doing well. But suddenly shareholders came face to face with what in Canada we might call "the Nortel realization." That is, the sudden comprehension that a share price based on expectations of ever higher future returns cannot be sustained by high, but constant, returns.

The other event was ostensibly positive. For the first time, the world's biggest internet search company gave a reporter a behind-the-scenes look at Google X, the company's division charged with engineering a radical future.

Big ideas

While Google plods along doing the journeyman work of generating online advertising revenue, Google X, sometime described as "clandestine," is the division that generates the headlines. "X" as it is known for short within the company, is the birthplace of the driverless car, Google Glass, the contact lens with an embedded chip, and Project Loon, a balloon- or drone-based internet service to spread Wi-Fi to the world.

A space elevator, "something X was widely rumoured to be working on but has never confirmed until now," is the latest breathless headline, based on Fast Company's exclusive peek inside the secretive R&D division. Space elevators make great headlines and it is fun to dream, but like the other ideas coming out of X, the economics of such a radical innovation is tenuous.

And herein lies my worry. With the exception of military spending from sources such as the Defence Advanced Research Projects Agency (DARPA), government spending on radical — as opposed to incremental — innovation is drying up. NASA's budget was seriously cut while billions went to bail out the banks.

Here in Canada, like elsewhere, the ideology is: Leave it to the private sector. But the two windows that opened last week, one into Google's exciting research lab, one into the books of Google the prosaic cash cow that sells online ads, reminds us of a harsh reality. Radical innovation, while a huge generator of wealth for countries and for humankind as a whole, rarely turns a profit for the companies — or shareholders — paying for it.

Cash is king

The times when radical innovation and profit come together, like that celebrated moment when Tesla turned a corner, are wonderful to behold. And even Tesla is balanced on a financial knife-edge. As recently revealed by Elon Musk, Tesla's CEO with Canadian roots, without an unexpected injection of NASA cash for his other company, SpaceX, Tesla could well be history.

Radical innovation is only rarely profitable. So rare, that it is hard to make a business case for it. When British pharmaceutical giant Glaxo held the patent on Zantac, the world's best-selling drug at the end of the last century, the company invested its windfall profits to try to repeat the success. It soon realized radical innovation did not pay, and turned instead to buying up companies with existing or promising drugs.

The list of failed radical innovators is long. Better Place, Shai Agassi's company that promised cars with instant battery exchanges, went bankrupt. In Canada, Hemosol — the company that promised artificial blood — is just one example of a radical innovator that came to a bad end. Others, like B.C. fuel-cell innovator Ballard never profited from their own ideas, forced to sell off more and more of the company's assets to cover the cost of "capital burn."

I was surprised that the Fast Company article about Google X never mentioned a similar hotbed of radical innovation from another era, Bell Labs.

Though its terms of reference were different, it was also funded by a company with deep pockets. While it generated brilliant ideas, now incorporated into the technology that powers the digital economy, it was seldom Bell that profited. Eventually, market forces prevailed and the funding ran out. Innovation is a public, not a private good. It benefits us all.

And while there are privately motivated innovators inspired by some sort of higher public goal, the Brins and Pages, the Musks, the Agassis, the Ballards, we can all reap the benefits. Wearable computing will continue to exist even if Google Glass does not. 

Google may or may not benefit from patents for driverless cars technology. A space elevator may one day exist, but it is improbable that Google will build it. For now, Google X is generating the hype that says, "Google is hip, an innovator, a company with potential." But last week's Google results remind us that, eventually, the shareholders will take over and demand that it generate profits. Or die.