Google forms new holding company, Alphabet
Monday, August 10 has gained a huge significance in the long history of Google, the world’s most successful, wealthy, and simultaneously admired and criticized web search company. That’s because, on that day, in what must have initially seemed a rather inconspicuous blog post that was published just after closure of the stock markets, Larry Page, one of the company’s co-founders, announced that Google will soon be no more. A whole new company, called Alphabet, will be taking its place.
Phrased in this rather straightforward manner, the change sounds like a major upheaval for Google. However, the above is really only a basic and, it would be sensible to suggest, not entirely accurate description of the change, while closer inspection of both the rhetoric dispensed by Larry Page - who, with Sergey Brin, set up Google as a very modest Internet search page nineteen years ago - and the more technical details reveals that the true long term influence of Alphabet could be difficult to assess.
IS IT REALLY THE END OF GOOGLE? NOT QUITE...
Before we get too far ahead of ourselves, however: what exactly has Page himself said is going to happen to Google? Well, as we described in the very first paragraph, Google is indeed being replaced. However, that is largely just on the stock markets. In many ways, Google as we currently know it - as, for example, a search company, the YouTube owner, the Android maker, the app developer - is actually remaining very much intact.
Basically, Alphabet is a new holding company that will now have Google as its biggest wholly owned subsidiary. Alphabet will have many other subsidiaries, of course; however, entirely fittingly given this structure, they will have very different aims to Google, which will now return closer to its 1990s roots as predominantly a search company rather than a technology corporation. On the front page of Alphabet’s website, Page describes the new Google as “a bit slimmed down”, but set to become “even better through greater focus”.
Given the manner in which Google has, over many years, expanded into a high number of different, previously unexplored markets in an apparent bid to keep pace with formidable tech rivals like Microsoft and especially Apple, the restructuring under Alphabet certainly seems rational. Various unorthodox ventures previously embarked on under the Google banner, including the broadband division Fiber and investing operations like Capital, will now be run separately - but still under the watchful eye of Alphabet. Page has expressed his company’s belief that “this allows us more management scale”.
SHOULD INVESTORS REALLY BE CHEERING?
So, that’s precisely how Google will be changing. The stock market has certainly given its stamp of approval, with a sharp 5% increase in the value of Google shares in after hours trading. Julian Birkinshaw, Professor of Strategy and Entrepreneurship at London Business School, has noted that it is “understandable” for investors, eager for more detailed insight into the sources of Google’s revenues and the profitability of its different divisions, to applaud the new structure.
However, Birkinshaw has been quick to emphasize the “enormous problems” that could await for these investors as this greater transparency brought about by the emergence of Alphabet begins to exert its influence. The apparent theory behind this new transparency is that, as investors become happier, the company will perform better. This contrasts with Birkinshaw’s insistence that, as “investors are notoriously short-sighted” and “rarely supportive of big risky bets”, projects that necessitate short term risk but could prove much more fruitful further down the line could be shut down before they are even given sufficient time to grow.
THE BEGINNING OF THE END FOR A TECH GIANT?
Such a situation could lead Alphabet to dedicate more of its resources to those initiatives that have already long proven successful; think, most obviously, the search offer, plus thriving YouTube and Android projects, all of which will remain the responsibility of Google. Ironically, this strategy could severely handicap Alphabet in what Page has described as one of the biggest objectives with the new company: to make progress in uncharted waters and break new ground.
As Page says himself on the Alphabet website, “in the technology industry, where revolutionary ideas drive the next big growth areas, you need to be a bit uncomfortable to stay relevant.”
This leaves Page’s public pledge to make his self-knowingly well-operating company “more accountable” rather... worrying. Could Google gradually fall behind Apple in the competition to innovate? And could this, in turn, encourage stagnation in the tech industry as a whole, as one of its biggest standard-bearers slowly fades?
THE MORE THINGS CHANGE, THE MORE THINGS STAY THE SAME
However, Birkinshaw’s gloomy predictions could be on the assumption of a much more revolutionary restructuring for Google than what is actually on the cards. The list of staff changes, for example, reads like a kind of musical chairs; Page and Brin will leave Google, but only to take up the respective new positions of CEO and President at Alphabet. Meanwhile, Sundar Pichai - who, as made clear in documents filed with the Securities and Exchange Commission, has already held many key positions at Google since joining the company in 2014 - will take over the new, subsidiary Google.
Furthermore, it could be suggested that, in a similar vein to Apple, Google’s first steps into unfamiliar business sectors have typically been tentative, with the company only ramping up its sense of adventure in these projects once they have shown genuine signs of promise. For example, in 2006, Google acquired YouTube for $1.65 billion; Morgan Stanley analyst Brian Nowak reckons that the video sharing site will bring in revenues of $11 billion next year. Google’s travel business has similarly much developed after a small acquisition.
This helps to explain why, as MarketWatch’s Tim Mullaney has observed, “when Google does screw up, it tends to screw up small.” He has even pointed out an example of the company making money from what was, on the whole, a failed deal: its $12 billion purchase of the mobile phone manufacturer Motorola Mobility. It all suggests that Google’s most established successes, which will all pass to the subsidiary Google and are responsible for 90% of the company’s revenues, could long remain the chief breadwinning projects even for Alphabet.
PERHAPS THERE’S LESS THAN WHAT MEETS THE EYE...
The stronger investor influence could, therefore, simply reinforce, rather than rein in, the strategy that Google has already long followed. This is hardly what Page has envisioned in his big, headline-grabbing announcement about Alphabet - but it does suggest that the new company can look forward to a long period of consistently healthy financial development through continuing to work to Google’s traditional strengths.
The high approval rating recently handed by Apple employees to CEO Tim Cook, largely thought to be due to Cook’s tendency not to overly deviate from the template set down by the popular Steve Jobs, hints at the importance of a conservative streak in helping a successful company to maintain its position - even as it continues to take occasional risks on unusual projects. This rather begs the question: should many people associated with Google - staffers, investors and consumers included - really feel anything more negative than indifference to the arrival of Alphabet? by Benjamin Kerry & Gavin Lenaghan