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Technology Stocks : Alphabet Inc. (Google)
GOOGL 1,459+1.4%Sep 28 3:59 PM EDT

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From: Glenn Petersen12/7/2019 10:05:36 AM
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Larry, Sergey, and the Mixed Legacy of Google-Turned-Alphabet

With Larry Page and Sergey Brin stepping back (again!), Google CEO Sundar Pichai is now in charge of Alphabet—and its dysfunction.

Steven Levy
Wired
December 5, 2019



Sergey Brin and Larry Page first stepped back from running Google when they created Alphabet, in 2015. Now they're taking another stride away from the mammoth company they built.Photograph: Markus Kirchgessner/Redux
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August 10, 2015, Google CEO Larry Page shocked the business world by announcing he was restructuring the company he cofounded into a holding company called Alphabet. Page would head the new entity, and Google itself would be one of a number of companies under Alphabet’s control—like Google X, Google Fiber, Google Ventures, and Nest—each with a separate CEO reporting to him. The idea was to make The Company Formerly Known As Google “more clean and accountable.”

Now Page and Brin are gone, kind of. In a letter they released on Tuesday, they explained that while they will continue to advise and stay on the board, they are removing themselves from “day to day responsibilities.” That’s an interesting claim, because the Alphabet structure had freed them of a lot of those responsibilities already, allowing them to pursue the bigger, moonshot-y ideas they preferred to corporate wranglings. Brin embedded himself in X, Alphabet’s long-range research division. Page also pursued his passions, while doing a disappearing act that didn’t live up to the “more accountable” part of the bargain. He gave no press interviews, stopped participating in earnings calls, and didn’t even go to the last shareholders meeting.

Now Sundar Pichai, while still running Google, will add CEO of Alphabet to his chores, with oversight from the board. He’s inheriting a sprawling entity that’s more determined by the ambitions and fever dreams of the cofounders than what necessarily makes sense for the world’s most important search, video, and artificial intelligence company. So maybe it’s time to assess how well the Alphabet move worked out.

The Alphabet structure seemed motivated by two factors. The first was to allow Page to remove himself from the rigmarole of running the Google business. I used to half-joke that he did it so he’d never have to talk to a reporter again. Now I’m down to 30 percent joke. (Oddly, in interviews—my last with him was in 2013—Page can be fascinating, candid enough to provide an illuminating view of his innovation-obsessed mindset.)

The second was to become more friendly to Wall Street, a factor usually attributed to Alphabet’s canny CFO Ruth Porat. Breaking out Google from the as-yet-unprofitable “Other Bets,” like the capital intensive health-care division Verily or new spin-offs like Loon, makes the company’s financial reporting more palatable to bankers and analysts. Also, by making the individual CEOs responsible for the performance of their domains, they might find themselves more compelled to make their divisions profitable.

In one sense this seems to have worked brilliantly. Alphabet’s share price has skyrocketed, roughly doubling since the announcement. Could a non-alphabetized Google have performed better? That depends on whether you think the move made the pieces more valuable, or whether it created a mélange of companies worth less than the sum of its parts. In the original Google structure, the point of those other ventures was to bolster the mothership itself. In an Alphabetized world, the focus is on incubating companies that will one day become big businesses themselves. It’s the Berkshire Hathaway model, a corporate Gladstone bag where Geico and NetJets and See’s Candies are happily stuffed inside. But Warren Buffet doesn’t have a flagship to nurture.

Consider the VC firm Google Ventures. It originally made its investments with a strong eye towards companies that might enhance Google’s business. But by running Ventures as an independent entity, the incentive shifts naturally to wagers that pay off, as opposed to financially less promising bets that would nonetheless make Google more valuable to users. Some might counter that Ventures has reaped hundreds of millions with big wins like Uber; but that haul is relatively insignificant compared with the billions Google brings in every quarter. Starting a great VC firm is nice, but an investment arm that could accelerate the mature search business might be even better.

One clear casualty of Alphabetization is what used to be called Google Fiber. Founded in 2010, its mission was to spread high-speed internet without worrying much about profit, on the theory that the more people had speedy bits, the more they would use Google and YouTube. But when Alphabet started, Fiber moved into a division known as Alphabet Access. Faced with an imposing bottom-line issue, Access has cut back on its initial plans and churned through several CEOs.

Sometimes turning a division into an Alphabet company (or acquiring it and not integrating it into the whole) caused more problems than it solved. Nest, for example, was purchased for $3.2 billion in January 2014 because Google wanted to augment its hardware might, especially in the so-called smart home. In the Alphabet world, though, keeping it separate put it in competition with efforts inside the mothership, as some of its efforts ended up overlapping or conflicting with the work of the hardware division inside Google.

That was only one case where tensions arose because of redundancy or conflict. Because Google—whose own ambitions are huge—did not control what happened in other divisions, it sometimes had to duplicate what another part of Alphabet was doing. In the case of Nest, the situation was resolved by sucking the smart-home newcomer into Google. But in other cases, duplication continues. Alphabet possesses one of the world’s premier research divisions in X, yet Google now also has its own extensive research operations. Google’s AI resources are unmatched—expect maybe by Deep Mind, an Alphabet company based in London.

And what has been the financial impact of giving all that individual responsibility to Other Bet CEOs? To be sure, some of those bets are still very early and may well turn into multibillion-dollar businesses. But as of the most recent quarterly earnings call, four years into the Alphabet experience, the total revenue for all those Other Bets is still less than half a percent of Alphabet’s revenues.

Now that Pichai is in charge of both the division that brings in over 99 percent of the cash and all the rest as well, he has the perspective to determine whether the Alphabet experiment has been worth it. Some of the Other Bets fall, in Page’s term, “far afield” of the Google mission. Pichai might wonder why he shouldn’t spin them off with a load of venture money and a promise to send back the loot after an IPO, instead of having to pay attention to them when Google and YouTube have huge internal and external challenges.

Even if he does decide Alphabet was a misstep, Pichai doesn’t necessarily have the freedom to make big changes. He’d have a lot of inertia to overcome: Insiders refer to a continental drift occurring where some of the divisions have become less “Googley” as they develop their own cultures. And Google itself now has workplace issues—political protests and me-too problems—that some in the Other Bets might be wary of. Finally, Brin and Page between them still control a majority of Alphabet’s voting shares, so if they are happy with the structure—their farewell letter indicates they are—nothing will change.

It all comes down to what kind of enterprise those cofounders and their chosen CEO want. Only they can rethink whether Google/Alphabet is a holding company of disparate parts, or a powerful entity with helpful satellites contributing to its might and mission. This week’s reset may be the perfect time to wonder whether it makes sense to reset the Scrabble board of letters that Larry and Sergey left behind.

wired.com
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