Google to Alphabet: An Ambitious New Conglomerate Experiment

In August 2015 Google Inc. announced a dramatic and sweeping change in its organizational structure: Google would become one of several autonomous subsidiaries of a newly-formed holding company named “Alphabet”.  The restructuring would separate, at least on paper, the company’s wildly successful search business, which was quite profitable and generated significant amounts of cash, from a handful of other initiatives focusing on ambitious and difficult problems such as developing a driverless car and life-extension technology.  While the company’s efforts outside of the search business had attracted a good deal of publicity and scrutiny, they were far from profitable and quite risky.  The company’s founders, Larry Page and Sergey Brin, argued that by putting Google and the other businesses into separate subsidiaries, and forming new subsidiaries for other businesses the company launched or acquired in the future, the operations of the entire company could be made cleaner and more accountable and they could avoid getting too “comfortable”, relying on incremental changes, and continue to pursue the revolutionary ideas that would drive the new growth areas that Alphabet needed to stay relevant.  According to Page, “Alphabet is about business prospering through strong leaders and independence”, and Page explained that each subsidiary would have a strong CEO and that the role of the founders would be to “rigorously handle capital allocation and work to make sure each business is executing well”.

Initially the portfolio of Alphabet subsidiaries would include Nest (smart homes), Fiber (affordable and super-fast Internet and cable television for consumers), Calico (life-extension technology), Google X (drones and self-driving cars), Sidewalk Labs (new technologies to improve urban life) and Google Ventures and Google Capital (early and late-stage investments) apart from the Google subsidiary itself, which would still have a sprawling mandate covering search, apps, Android, You Tube, ads, maps and technical infrastructure.  The company enjoyed a modest bump up in its market capitalization after the restructuring was announced and, not surprisingly, the move was subjected to a high level of scrutiny and analysis.  An article in The New York Times written just after the announcement of the restructuring noted that many pundits had been struck by the decision of the company’s founders to create what amounted to a “conglomerate” and set out to explore what the experiences of three well known 20th century conglomerates—Berkshire Hathaway, General Electric (“GE”) and AT&T/Bell Labs—might tell us about what could be in store for Alphabet and some of the issues that Page and Brin will likely need to address. 

Berkshire Hathaway has been guided for decades by Warren Buffett, who has made himself one of the wealthiest people in the world and turned his company into one of the most valuable in the world through a continuous stream of acquisitions of businesses in a wide array of industries and markets. While insurance is the largest sector in the Berkshire Hathaway portfolio, Buffett has also been willing to place bets on mobile homes, private jets, Heinz ketchup, Duracell batteries and aerospace parts.  One of the apparent similarities between Berkshire Hathaway and the proposed Alphabet structure is the practice, rigorously followed by Buffett, of providing management of the various businesses with broad discretion to manage day-to-day operations.  In fact, Buffett keeps only 24 employees in Berkshire Hathaway’s corporate office in Omaha to watch over businesses that employ 340,000 people worldwide.  A key difference, however, is that Berkshire Hathaway’s portfolio of businesses was carefully culled to emphasize companies that were “well established, with proven models for profitability, at favorable prices” and which were based on proven and/or reasonably projectable business models.  In fact, Buffett rarely invested in businesses that represented large bets on a particular technology.  While Page and Brin promise Buffett-like autonomy for the Alphabet subsidiaries, for now at least they will all be seeking to create products and services that do not exist and for which the markets are far from certain.  As such, Alphabet shareholders cannot expect the same sort of smooth ride that Buffett has provided to his investors, especially since nobody can credibly predict the outcome of the innovative activities the subsidiaries will be undertaking.  There is the possibility that Page and Brin will fold established businesses into future subsidiaries, as Buffett has done, but this would clearly be a radical see change from where they were at the time they announced the restructuring. 

The initial similarities between GE and Alphabet follow from the diverse range of technologies and businesses that GE has been involved with since the company was launched with the help of Thomas Edison.  GE researchers, designers, manufacturers and marketers have played an innovative and pivotal role in the development, improvement and commercialization of light bulbs, locomotives, X-ray machines, electrical appliances, radios and televisions, fiber optic cables and M.R.I. body scanners, to name just a handful of the technologies that bear the imprint of GE.  The businesses of the initial Alphabet subsidiaries—for example, search and driverless cars—are certainly as different as light bulbs and locomotives; however, for Alphabet to be able to tap into GE’s secret formula it will need to find a way to make its various business lines stronger under the Alphabet umbrella than they would be standing on their own.  GE did this by maintaining a strong organizational culture among independently operated businesses by creating and vigorously guardian linkages between the businesses and the people that worked in them that benefitted everyone.  GE was also adroit at leveraging a centralized research and development capacity to create and disseminate technologies that could be applied across a range of businesses (e.g., laser technology developed by GE researchers was used by business units active in medical devices and telecommunications).  The question for Alphabet, as posed in the article: “… is whether it becomes a centralized innovation machine or a bunch of separate projects that happen to have the same corporate parent but not much else in common. Can it make its various initiatives more than the sum of their parts?” 

AT&T/Bell Labs aligns well with Alphabet’s aspirations for successfully solving difficult and life-changing technological problems.  Just as Alphabet can reasonably expect to generate significant revenues from the Google search business, AT&T could rely on a continuous stream of cash from its position as the monopoly provider of telephone services in the US.  In 1925 AT&T set up Bell Labs as a free-standing research unit and over the next 70 years Bell Labs, using money provided by AT&T, was a preeminent center of basic research that developed technologies that were central to a wide range of inventions including the transistor, the laser, communications satellites and solar cells.  It was not always clear that AT&T shareholders benefitted significantly from the work done at Bell Labs, particularly when the work was basic research that was accessible to other companies; however, the parent company’s support of Bell Labs was not overly concerning to its shareholders as long as the profits coming from the monopoly continued to pour in.  In other words, there was plenty to go around.  The profits from Google might serve a similar purpose within Alphabet: a lot of the research in the relatively new and unknown fields occupied by the other subsidiaries is essentially “basic”.  The  founders will need to strike the appropriate balance in allocating Google-generated profits and will need to be mindful that while Google is strong in search right now there are no shortage of competitors and regulators around the world clearly have reigning in Google’s actual or perceived monopoly on their agendas. 

Google and its founders are not strangers to being compared to iconic businesses frm the past.  For example, in a December 2014 article in The New Yorker, Lemann described some parallels between the “pre-Alphabet” Google and General Motors (“GM”) in its early days.  First, both Google and GM accelerated their growth paths through aggressive acquisition of small companies that provided technology and, in the case of Google, large crowds of users that could be usefully integrated into their larger businesses.  Second, Alfred P. Stone, GM’s iconic leader from the early 1920s, foreshadowed Google’s fixation on “the user” by offering a range of styles and prices for consumers that allowed GM to tap into the subtleties of demand rather than relying on the on-color, one-style and one-price approach used by competitors such as Ford.  Third, Sloan, Page and Brin were all in agreement that they oversaw “engineering” companies.  Finally, the three men also shared a hunger for pursuing high-risk, high-reward projects that flew in the face on the demands for short-term earnings and profits that came from the investment community.  Lemann noted that Sloan actually launched a technical center that looked a lot like something one would see in Silicon Valley decades later, complete with what Sloan called “fine cafeterias”, and implemented programs that tied managerial compensation to the performance of GM stock. 

The Google to Alphabet restructuring was welcomed in many parts of the investment community as a means for achieving more transparency about the financial situation of the company’s “Hail Mary” businesses.  Presumably reporting profits and losses for each of the subsidiaries, as well as the transfers of capital between subsidiaries, will make it easier for investors to understand how the Alphabet portfolio approach is working.  Interestingly, this is another area where Page and Brin are making moves similar to those made by Sloan after he had completed his own “organization study” of GM to find ways to address financial and administrative chaos left by his predecessor.  Sloan was one of the pioneers of new organizational design techniques and decided that the best approach was to establish autonomous divisions based on “product lines” (e.g., Chevrolet, Buick, Cadillac etc.), each of which would have its own president and operating budget.  As autonomy was being disbursed among these new business units the headquarters office would, much like the parent company in the Alphabet structure, monitor performance of the divisions and take the lead in providing specialized services that all of the divisions might need at some point such as finance and research.  While the reorganization at GM did distribute large numbers of employees into different groups, Sloan remained mindful of the advantages of commonality and implemented uniform training and supervisorial programs overseen by professional managers to improve and maintain productivity and instill in all of the employees a sense that they were valued contributors to a larger endeavor that bound all of the divisions together. 

It is fair to suggest parallels and similarities between the initial visions and promises for Alphabet sketched out by Page and Brin and the positive experiences of Berkshire Hathaway, GE and AT&T/Bell Labs; however, Page and Brin will continue to face the classic tradeoffs between doing what is best in the short-term for shareholder value and making long-term bets on extremely risky innovation.  Doubling down on big ideas is not new for the company—it’s already made big investments in the businesses that will be operated in the new subsidiaries and the company’s organizational culture has always included explicit permission for employees to set aside time to work on personal projects.  But, the restructuring invariably changes the entire picture and some of the things that will be watched closely as the Alphabet experiment begins are the following: 

  • Loose supervision, lack of formality and “ship and iterate” have been mainstays of Google’s organizational culture and managerial practices since the very beginning.  All of this obviously worked very well as the core business grew and prospered; however, maintaining some semblance of order has become a higher priority and the restructuring likely represents an effort to clarify who does what and how decisions will be made.  It is imperative that the found clearly and cleanly demarcate the boundaries of the businesses and construct the links between them that will facilitate communication and tap into the value of having small groups collaborate to solve mutual problems.
  • While Alphabet enjoys substantial cash reserves built up from Google’s past successes, Google’s path remains crucial to the progress of all of the businesses until they reach a point where they can sustain themselves on their own and attract investor capital independently without the search business being offered as collateral.  Google is under a lot of pressure to keep users engaged, which means finding ways to continuously add new users, more information, new reasons to engage with Google, and new search features.  To be determined is whether or not Google will need to continue its strategy of acquiring small companies, most of which have been unprofitable or barely profitable, at obscene valuations in order to maintain the growth path of audience share and/or applications that will help keep existing users from straying.
  • While the ambitions of the founders are clearly sprawling, doubts have been raised about the company’s ability to internally develop groundbreaking new products and critics have often pointed out that the products that have been most successful for the company—Page Rank and AdWords, YouTube, Google Maps and the Android operating system—came into the fold through acquisitions.  All of this raises questions about the value that the “parent” can provide to its subsidiaries apart from cash and close attention will be paid to how delegation and autonomy is handled.  Early indications were that the founders were indeed committed to selecting strong CEOs for the subsidiaries and following the approach they took after acquiring NEST of leaving them alone to carry on with what had worked well in the past.
  • All of the letters in Alphabet, perhaps none more so than Google, will operate in a turbulent external environment that is rapidly changing and populated by competitors and stakeholders from all over the world.  Google must fend off threats to its market dominance, which is solidly but tenuously based on its intellectual property, and appears to be destined to decades of arm-wrestling with regulators.  Google cannot reasonably expect to fend off the rise of large competitors in the search area in enormous markets such as China.  One must wonder how much time the founders will have to divert their attention from the Google business.
  • While an “alphabet” implies order, the letters can be moved around to form new words and letters can be added and subtracted.  Will the founders add new areas and challenges to their list and, if so, how will those be supported and how will that impact other pieces of the structure.  Will the founders follow the path of Bell Labs and throw money at basic research to generate ideas to refresh the structure?  What will be the growth and exit strategies for each of the subsidiaries: spinoff, public offering, alliances or what?
  • A uniform culture is difficult to maintain even when employees remain in close proximity but in different buildings spread out among several locations.  While the founders see Alphabet as a noble pursuit to better many parts of our world, it will be difficult to create and maintain an Alphabet organizational culture that will provide the foundation for collaboration and communication. The burden falls heavily on the founders to make this happen.  Will that culture track the early days of Google?  Difficult to see that given that company is now much larger and those who have stayed on and become managers have graduated to middle age.  Moreover, identifiable sub-cultures will like emerge in each of the businesses in the subsidiaries.
  • Google, like many other modern companies in the technology space, lacks the social vision that bound employees to their companies for decades and organizational culture must be built in an environment in which both the company and its employees do not expect that employees will remain with the company for long and both side will do what is best for them in terms of economic efficiency.  As such, work-life balance has seemingly not been a priority at Google and the line from the Google evangelists has been that employees get to focus on things that are so interesting and meaningful that they rarely see any of it as being “work”.  Smart people come there to work with other smart people, experience what they need for themselves, and then move forward on their own.

The questions and challenges above are specific to Alphabet and its founders; however, all growth-oriented entrepreneurs should recognize a universal set of imperatives that apply regardless of the size and scope of the enterprise: striking the proper balance between autonomy and collaboration across businesses, managing formality and establishing and maintaining the “parenting value” to be provided by headquarters and the founders, maintaining a lazar focus on the core business and competitive advantage, guarding tested values and norms of the organizational culture while skillfully executing appropriate acquisitions of technologies and human resources and allowing sub-cultures to emerge and flourish, continuously scanning the external environment, making sure that the customer’s expressed needs rather than founders’ notions of how their lives should be remain the focus of product development, tracking and appreciating legitimate concerns about the social impact of the products being incubated, and forging a social contract with knowledge workers which respects and meets the needs of both sides.  

Sources for this article included J. Yarow, “Google just announced a massive overhaul of its business structure”, Business Insider (August 10, 2015); N. Irwin, “Alphabet, Viewed Through the Lens of 3 Companies”, The New York Times (August 12, 2015), B3; L. Page “G is for Google” (blog post to employees and investors at https://abc.xyz/); and N. Lemann, “When G.M. was Google”, The New Yorker (December 1, 2014), 76.

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