Google rewrites the Alphabet: They’re coming for your industry too

Aug 12, 2015

In less than 1000 words, Larry Page just created a new company big enough to own Google

Google, the Silicon Valley search giant, has just announced plans to reorganize under a new name: Alphabet. On Monday, Larry Page released a blog post detailing the birth of the new parent company, under which the distinct businesses of Google today will be separated into fiefdoms under the control of newly-elevated CEOs. More specifically, the “moon-shot” and venture arms, things which cannot be truly reconciled with Google’s search core, will be separated under the Alphabet umbrella.

Since Google’s early days, it has been clearly search-focused. While Google was founded with this core, it has since diversified into healthcare, drone delivery and venture capital. These areas’ synergies are difficult to explain to investors, but are necessary for the longevity of the business to extend beyond the decline of advertising revenue and the draw of Google search.

Google has shown it is willing to listen to Wall Street, without losing power to maintain its non-search research and development in Google X and Ventures. The company’s July hire of Ruth Porat as their new finance chief, an ex-Morgan Stanley CFO, was noted by many as a potential bridge between Silicon Valley interests and Wall Street, given a background in both. Presumably the hire was also aimed at improving the poor transparency and communication which has led to the search giant’s underperformance relative to analyst targets.

Larry Page neatly underscored this in his announcement blog post: “Our company is operating well today, but we think we can make it cleaner and more accountable.” Wall Street is broadly positive on this move towards greater transparency, with the expectation that it will give better insight into revenue and expenses for each segment and the profitability of each newly-distinct business.

Page and Brin get to work on their CEO Top Trumps deck

Alphabet will be led by Larry Page as CEO, and Sergey Brin as President, and a “slimmed-down” Google, still consisting of its core search functions, maps, advertising, YouTube and Android, will be led by Sundar Pichai. The separate units will include Nest, Google Capital, Google Ventures, Fiber, Calico, Google X and Sidewalk Labs, each with their own CEO who will be accountable to Page and Brin.

Alphabet’s structure is a solution to a core problem that Larry Page faced as CEO of Google. Talented individuals from core Google departments would often be switched out to lead different segments in order to keep ambitious personnel and maintain the talent pool. Now that pool can be maintained all the way up to CEO level, without risking the departure of key players after a new acquisition.

Google is formalizing a new model for the tech giants of Silicon Valley

The analysts of Wall Street have been referring to Alphabet as “the Berkshire Hathaway of the Internet”, suggesting Larry Page and Sergey Brin as mirrors of Warren Buffett and Charlie Munger.

Investment advice has been mostly bullish, having promised investors the clarity they wanted, and a strong case for realignment towards future growth prospects and a shareholder-value focus. Equal praise has been given for the distinct business units given leave to operate with a good level of autonomy.

The problem with the Berkshire Hathaway comparison is that things like Google X Labs, Sidewalk Labs and Calico are all experiments, by design. While this echoes Buffett’s long horizons, this also entails a level of risk which cannot be positively compared to Berkshire Hathaway.

These allusions to Berkshire Hathaway and, from other journalists, General Electric, are both positive ones. However, it is important to note that there are also many parallels with some of the inefficient conglomerate behemoths of the 70s; good business practice has advocated specialization ever since.

The new model is Alphabet’s (Google’s) way of giving us an important message

Even the biggest companies need to innovate, and that means Google is looking at your industry, too.

Since the early days of Google, Page has had a vision for Google which stretched far past the horizons of search advertising. While Google’s search and mobile strategy has led it to major success, the long-term viability of the advertising revenue model is declining. Page has separated himself from the day-to-day running of the central Google revenue engine so he can exercise a broader view across their technology and investment spectrum towards the next big thing.

The classic story of incumbents in Clayton Christiensen’s Disruptive Innovation theory is a large company brought low by unwillingness to part from or reconsider the business model of a traditional core business. The flexibility and autonomy given within Alphabet’s new operating structure keeps the independent businesses more agile and responsive, and keeps the incentive for one to push towards becoming the new key profit driver for Alphabet in the future.

This new formalized portfolio model may also hold some promise for firms in a similar position to Google’s. It gives flexibility to spin off components, reallocate resources to emerging technologies, a holistic view of a broad sector and a powerful talent pool.

 


Vijay Michalik

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