Alphabet (GOOG 5.34%) (GOOGL 5.32%), the parent company of Google, recently established a new cybersecurity subsidiary called Chronicle. Chronicle was initially formed in 2016 inside X, the company's experimental unit, which also develops driverless cars, drones, Internet connectivity solutions, and augmented reality products.
Former Symantec chief operating officer Stephen Gillett, who led the unit since its inception, will become Chronicle's CEO. Chronicle stated that it would leverage Alphabet's cloud infrastructure and machine learning technologies to counter cyber threats, and that it was testing an early version of its services with some unnamed Fortune 500 companies.
In a blog post, Gillett stated that Chronicle's services would "help organizations see their full security picture in much higher fidelity than they currently can." Gillett didn't reveal any additional details about Chronicle's business model or upcoming products, but its establishment as a full subsidiary -- instead of an X "moonshot" -- indicates that it's ready to generate meaningful revenue for its parent company.
Why is Alphabet launching Chronicle?
Alphabet isn't the only tech giant with an in-house cybersecurity unit. IBM's (IBM -0.04%) Security business, which offers various enterprise security solutions, is one of the five "strategic imperatives" (cloud, analytics, security, mobile, and social) which gave Big Blue its first year-over-year revenue growth in six years last quarter.
Cisco's (CSCO 1.17%) Security business, which was expanded with big investments and a long list of acquisitions over the past few years, bundles security solutions with its networking hardware and software. That unit is now Cisco's fastest growing business, and partly offsets the ongoing declines in its core businesses of routers and switches.
Microsoft (MSFT 0.58%), one of Google's main rivals in the public cloud, plans to invest $1 billion per year on cybersecurity R&D. That amount doesn't include the money Microsoft is spending on acquisitions, which include smaller cybersecurity companies like Aorato, Adallom, and Hexadite. It also bundles subscription-based security services into its cloud platform Azure.
Amazon's (AMZN 1.63%) AWS (Amazon Web Services), the biggest cloud infrastructure platform in the world, also offers a wide range of cloud-based security features for its customers.
Alphabet likely launched Chronicle as a new subsidiary for three reasons. First, a tech giant like Google shouldn't depend on third-party cybersecurity products when it has the resources to create its own in-house solutions. Second, bundling cybersecurity services with its other services -- as IBM, Cisco, Microsoft, Amazon have done -- locks in customers and generates subscription-based revenues. Lastly, Alphabet should diversify its business away from online ads, which accounted for 87% of its revenues during the third quarter.
The cybersecurity market is a high-growth one due to the surge in data breaches worldwide. Research firm Markets and Markets estimates that the global cybersecurity market could grow from $137.9 billion in 2017 to $231.9 billion in 2022. Therefore, it makes sense for Alphabet to establish a firm foothold in that market.
What to expect from Chronicle in the future
Google acquired several security firms over the past few years, including GreenBorder, Postini, Zynamics, VirusTotal, and SlickLogin. Looking ahead, Chronicle will likely acquire more cybersecurity companies and boost its R&D investments.
That expansion could mean more competition for smaller stand-alone cybersecurity companies, many of which are already struggling with pricing pressures. But it's still unclear if Chronicle can generate meaningful profits on its own, since cybersecurity companies usually have much lower operating margins than online advertising ones.
The bottom line
Chronicle should be considered an expansion of Google's Cloud services and a way to keep pace with rivals like Microsoft, IBM, and Amazon, instead of a meaningful source of top or bottom line growth. Nonetheless, its separation into Google's sister subsidiary should give investors a clearer overview of its financial growth.