Google is one of those companies the world can’t live without. Launched in September 1998 by two Stanford PhD students as a research project, the company went from start-up to mega corporation status with a market cap of over $400 billion, all in less than two decades. Not bad for a research project, huh?
Today, Google has become inevitably intertwined with much of the Internet. At its core, there is its search engine business, the world’s most widely used, facilitating more than three billion searches each day and generates the majority of Google’s revenue. The company also owns YouTube and Android, two subsidiaries that are leaders in their own fields.
Over the years though, Google’s leaders decided that being an Internet based technology company wasn’t enough. So came a slew of ventures into different businesses that operated outside Google's core: Venture capital (Google Capital, Ventures); home automation systems (Nest Labs); broad band internet and cable television (Google Fiber); life sciences (Calico); and experimental projects (Google X).
These very different, wide ranging ventures all came under the banner of Google Inc. Some were very profitable, while others were not. All of them were in separate industries from Google’s core business. This inevitably led to Google’s investors clamoring for greater transparency. This can lead to potentially unprofitable ventures being stifled out by investor activism, something we've seen happen many times before.
That would have been fine at any other company. However, Google isn’t like any other company. Google is an innovator – its leaders aren’t afraid to take serious risks and test new waters. Google was never satisfied with existing status quo's. Unfortunately for many, this doesn't always gel well with the expectations of shareholders.
So, how did Google solve such a problem?
Alphabet is a proposed holding company in which Google’s different business will be held and managed under. The current Google leadership will move up to manage Alphabet: CEO Larry Page, President Sergey Brin, Executive Chairman Eric Schmidt, CFO Ruth Porat, and Chief Legal Counsel David Drummond.
This means Google itself will be a slimmed down creature, with a new CEO-designate (Sundar Pichai) and a more streamlined focus on its core competencies. These include: Search, Android, YouTube, Apps, Ads, Maps and other related technologies.
Google Ventures, Capital, Nest, Calico, Fiber and X will be run independently as wholly owned subsidiaries, with little interference from each other and most importantly, operate discretely from Google’s core internet and mobile business. Clearly a step forward.
“We are not intending for this to be a big consumer brand with related products – the whole point is that Alphabet companies should have independence and develop their own brands,” said Larry Page, Google co-founder.
This structure is markedly similar to billionaire investor Warren Buffett’s Berkshire Hathaway, where each company has been run independently with their own respective CEOs. Berkshire owns a diverse and complex portfolio, including condiment producer Heinz, insurance provider Geico and private jet-sharing company NetJets.
So what does this all mean for Investors?
A lot apparently. But here are some of the key implications:
- Investors will enjoy greater transparency and visibility. The new, standalone companies will be allowed to innovate as much as they want while being separate from Google’s core businesses. This eases the pressure on Google’s early-stage ventures and gives room for them to grow. Investors will be watching closely, though.
- Google itself will just be an alphabet in Alphabet’s portfolio, something that both Google founders Page and Brin have stated. We could very well see more potentially world-changing innovations from the company to come.
- Google shares will be automatically converted to Alphabet stocks later in the year. The company will continue to trade under the ticker symbol ‘GOOGL’ for Class A shares and ‘GOOG’ Class C shares. All shareholders retain the same rights as before.
All in all, it remains to be seen whether Google’s rebranding as Alphabet will have the intended effects of its creative, innovate founders. The move came as a surprise to many, but then again, Google has prided itself in being a very different company from the rest of the corporate world.
On the bright side, it allows for focus in each of the companies under the Google banner. However, the transparency Alphabet brings to investors on its businesses means that unprofitable, money-losing ventures could face an even greater pressure to shut down or change.
It’s worth remembering that these were the reasons why Alphabet was created in the first place. Page and Brin have to tread carefully on this one. The glare of the public markets can be vicious and dangerous; investors will have to wait and see how this turns out.