Over the last decade and a half, Google has evolved from being merely a company known for delivering online search results into an unwieldy behemoth of a tech giant that offers all manner of online services, health technology, smart homes, energy sources, and forms of transport. While the transformation has made Google one of the most influential businesses in the world, some feel it has become a sprawling mess of a firm that suffers from a lack of focus.
In an effort to counter such charges, Google’s founders announced an exhaustive restructuring of the business: creating a parent company called Alphabet, while allowing many of its units to live as distinct entities away from the umbrella title of ‘Google’.
In a blog post on the Google website, Larry Page outlined the reasons for the change in structure: “We’ve long believed that over time companies tend to get comfortable doing the same thing, just making incremental changes. But in the technology industry, where revolutionary ideas drive the next big growth areas, you need to be a bit uncomfortable to stay relevant. Our company is operating well today, but we think we can make it cleaner and more accountable.”
He added the main goals for the restructuring were to be “more ambitious”, to form a longer-term strategy, to empower “great entrepreneurs”, to be more transparent, and to provide the company with “greater focus”.
The surprising news caused a considerable amount of debate within the tech community. Speculation over what the company’s motives were ranged from whether Page and cofounder Sergey Brin wanted to further shift former CEO Eric Schmidt away from running the business, to a simple desire to allow the various companies within Google’s stable space to breathe.
Google’s revenues, 2015 Q2
While the investors who have sought greater clarity from the firm over what it offers have also welcomed the news, others are concerned this new openness will expose the lack of profitability of Google’s many subsidiaries. Indeed, as part of the announcement it was revealed 90 percent of the group’s revenues comes from Google’s paid search and advertising. For a company that creates a whole host of other products – from the Android smartphone operating systems to the automated thermostat Nest – this represents a considerable dominance of its revenues.
The formation of the new umbrella company means Page will focus his efforts on innovation and creating the next revolutionary technologies as CEO of Alphabet. Brin will become the new firm’s president. Schmidt, whose suitability as a CEO was questioned by many during his decade in charge of Google between 2001 and 2011, will become group chairman. Google – which will now focus on search, YouTube, Gmail, Android and Google Maps – will officially get a new CEO in the form of Sundar Pichai, who was previously the company’s Senior Vice-President of Android, Chrome and Apps.
Pichai joined Google in 2004, having graduated from the Indian Institute of Technology in Kharagpur. In 2014, there was speculation the 43-year-old was in the running to succeed Steve Balmer as Microsoft CEO. However, he has now secured the top job at the internet’s most influential company. He is expected to refocus Google towards its core services, many of which are underpinned by the company’s advertising data.
As if to solidify in people’s minds the change of structure, Google announced in September it would be changing its logo. Retiring the small blue ‘g’ that had become commonplace over the company’s 17-year history, Google has replaced it with a capitalised, four-coloured ‘G’ that matches a new four dot logo. The move emphasises the new focus Google will have on its core businesses of search, maps, mail and its Chrome browser, according to the company.
“This isn’t the first time we’ve changed our look and it probably won’t be the last, but we think today’s update is a great reflection of all the ways Google works for you across Search, Maps, Gmail, Chrome and many others”, according to a post on Google’s official blog. “We think we’ve taken the best of Google (simple, uncluttered, colourful, friendly), and recast it not just for the Google of today, but for the Google of the future.”
Alphabet the conglomerate
By creating a conglomerate, Google has followed the path of a number of other big businesses. In particular, it seems the company has been eager to employ a similar strategy to iconic Wall Street investor Warren Buffett, a man the founders have long admired. His Berkshire Hathaway investment vehicle has been steadily acquiring firms from across a broad range of industries for years now, including his recent $37.2bn purchase of aerospace firm Precision Castparts.
Last year, Page spoke of his admiration for Buffett’s investment strategy in an interview with the Financial Times, echoing his outlook by saying: “One thing we’re doing is providing long-term, patient capital.” The company even included in its 2004 IPO shareholder letter that it had been greatly inspired by Buffett’s writing in Berkshire Hathaway’s annual reports.
Alphabet will form a similar structure, with Google acting as the largest player within a conglomerate of firms that include the life sciences operations of its secretive Google X research facility, as well as its health research facility Calico. Each of these individual firms will have its own CEO, who will be ultimately responsible for the operations and success of their business.
In a press release, Page wrote: “Alphabet is mostly a collection of companies. The largest of which, of course, is Google. This newer Google is a bit slimmed down, with the companies that are pretty far afield of our main internet products contained in Alphabet instead. What do we mean by far afield? Good examples are our health efforts: Life Sciences (that works on the glucose-sensing contact lens) and Calico (focused on longevity). Fundamentally, we believe this allows us more management scale, as we can run things independently that aren’t very related.”
The X laboratory will continue to invest in radical new technologies, such as the drone delivery firm Wing that it is developing. It will likely include other areas in which the founders are eager to make breakthroughs, such as self-driving electric cars and smartglasses. Alphabet will also include a Ventures and Capital division, which will allow it to use its considerable wealth to invest in a range of other companies and help acquire the latest start-ups.
Within the Life Sciences division of Alphabet, there will be companies that include the home automation platform Nest, which Google acquired for $3.2bn in 2014. The health services division, which has been known as Calico since its launch in 2013, will focus on researching cures and treatments for some of the world’s deadliest diseases. These have included partnerships with pharmaceutical firm AbbVie, the University of Texas South-Western Medical Center, 2M Companies, the Broad Institute of MIT and Harvard.
Of Alphabet’s profits come from Google’s paid search and advertising
Google’s total debt prior to the restructuring
While this seems like a distinct group of companies all acting independently of each other, the reality is likely to be quite different. Google’s user data, which it harnesses to sell online advertising, will likely be shared among all these divisions, meaning the search business will remain the key component of the group. It is because of this that many within the industry remain sceptical of Google’s ambitions.
Fleeing the regulators
Many are speculating Google’s transformation into Alphabet is merely a cynical ploy to avoid the attentions of regulators around the world: regulators who have been getting increasingly concerned about the breadth and influence of the company.
Google has been the target of a number of regulators in recent years, mostly as a result of competition concerns. The European Union is already taking Google to court over antitrust issues, having received 19 complaints from companies in both Europe and the US. These reportedly include Microsoft, as well as many smaller businesses that feel Google has an unfair advantage within the digital marketplace. Other firms include (according to a report by Reuters) French legal search engine eJustice, German business listing firm VfT, and British comparison site Foundem. Other bigger firms include travel sites Expedia and TripAdvisor.
The change in structure, with distinct companies operating under the Alphabet umbrella, could be seen as a way of forcing each of them to fend for themselves within their specific markets. In so doing, Google would hope regulators and competitors would be placated. However, the chances are that nobody will be fooled by this strategy and regulators will increase their pressure on the company to either properly spin off some of its operations or make some form of concession to rivals.
For the group as a whole, the move makes financial sense, and investors on Wall Street have welcomed it. Google’s total debt prior to the restructuring was roughly $8bn, which represents a very small amount for such a large company, but many expect the group to soon begin issuing more debt in order to invest in new products. While lenders would happily help out a profitable business such as Google, the rest of its operations – such as self-driving cars and smartglasses – might receive less enthusiasm. With the new structure, Alphabet can borrow against the profitable Google business at a lower rate than it would as a group.
Lassoing the Moon
Perhaps one of the main reasons for the move is the ambition of Google’s science-based founders; Page and Brin are both innovators, and they have surrounded themselves with some of the smartest brains in the scientific world. But up until now, Google’s business has been based on advertising, which doesn’t represent much in the way of the exciting ‘moonshots’ the founders like to fantasise about. Indeed, in the second quarter of this year, Google announced revenues of $17.7bn, and the vast majority of that – over $16bn – came from advertising revenue. Many think both Page and Brin want to focus their attention on the sort of revolutionary ideas X Labs works on, while allowing others to run the profitable, more staid business that is Google.
While the new Alphabet structure will undoubtedly still revolve around Google’s profitable online business, it will be intriguing to see just how many of the group’s subsidiaries will fair with the spotlight now on their operations. With visible CEOs and financial statements that aren’t buried among those of their parent companies, many of these firms will have to prove their products make commercial sense.
If these subsidiaries are to fend for themselves in the future, then a number of significantly loss-making areas could be revealed – more than previously thought. While Nest seems to be relatively successful, other subsidiaries might not be. The driverless electric car business has had years of research and investment without a product launch. Perhaps even worse is Google Glass, which got a consumer trial but had development “paused” after much public derision.
However, what regulators, investors and competitors are likely to welcome is this greater transparency from Google. For their part, the pioneering founders of the firm might be able to spend less time talking about the financial success of online advertising and instead focus on their passion for innovation.