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A Deeper Look at the New Google

Google’s new structure has few historical precedents, in tech or outside it.
August 11, 2015

Before Apple’s Steve Jobs died in 2011, he told Google cofounder and CEO Larry Page that his company was trying to do too much. As Page later told the Financial Times, he replied, “If we just do the same things we did before and don’t do something new, it seems like a crime to me.” Yet Page also acknowledged that Jobs was right in one sense: he could manage only so many things before too many would get lost in the shuffle.

Those twin desires—to do new things regardless of how weird and unrelated they seem to Google’s core search and advertising business, and yet still find a way to manage them to fruition—explain Page’s surprise announcement Monday that he was creating a holding company called Alphabet. It will separate Google’s lucrative ad-related businesses, including Android mobile software and the video site YouTube, from the company’s wide-ranging efforts on self-driving cars, human longevity, Internet access balloons, the Nest connected-home devices, and more, each of which will probably become discrete subsidiaries.

But the move, while cheered by investors, is just the first step to fulfilling the company’s long-standing goal to “make Google a long term success and the world a better place.” In the view of several management experts, Alphabet will be successful only if the individual projects and companies can be successful enough on their own to be spun off into freestanding companies eventually. The new corporate structure enables that to happen, but it surely doesn’t guarantee it.

First, it’s important to dispel the assumption that Page and cofounder Sergey Brin have created something like the Berkshire Hathaway of the Internet, an updated version of Warren Buffett’s conglomerate. “The comparison is silly,” says Michael A. Cusumano, a professor at MIT’s Sloan School of Management. Buffett, he says, invests in existing, undervalued companies, a bit like a mutual fund—precisely the opposite of Alphabet’s VC-style focus on risky new ventures like Calico, which wants to somehow fight aging.

If Page and Brin try to run Alphabet like an updated Berkshire Hathaway or even General Electric, a more tech-focused conglomerate, they will run into trouble, says David B. Yoffie, a professor of international business administration at Harvard Business School. “They’re run very differently from successful tech companies,” he says. “I’m skeptical because it’s very hard to have a conglomerate structure in the tech world.”

Even with closely related businesses, conglomerates such as Samsung, Microsoft, IBM, and Hewlett-Packard have been difficult to manage. Worse, they have found it even more difficult to capitalize on new products and services. Traditional measures of return such as cash flow don’t apply to emerging technologies, Yoffie says, so new businesses tend to get short shrift in resources and management attention.

That’s precisely what Page and Brin aim to avoid with Alphabet—which, as Page wrote in a blog post also means “alpha-bet,” or an attempt to get returns above “alpha,” a standard benchmark. “There may be a longer leash for each project,” says Sezer Ulku, an associate professor of operations and information management at Georgetown University’s McDonough School of Business. “Each business could get more fairly treated.”

The timing of the reorganization, in fact, may indicate that at least some of the seemingly out-there projects could be closer to commercialization than they seem. Nest, acquired in January 2014, was already shipping its home thermostats and smoke alarms. Google’s self-driving car seems to work well so far, even if it’s not yet apparent what kind of business it might become. Project Loon’s Internet-access balloons now look less like a science project. “They’ve crossed the risk point on at least a half-dozen of these technologies,” says Vivek Wadhwa, a fellow with Stanford Law School’s Rock Center for Corporate Governance. “There are already two or three possible Googles in this portfolio.”

Still, the benefits of more focus on each new project or business will ultimately be realized only if some can become independent businesses—and if others that don’t perform are shut down. “This is still a crazy portfolio,” Ulku says. “At some point, it has to be split into more rational pieces.”

In particular, those pieces that do perform need to become independent companies in the reasonably near term, not just remain part of Larry and Sergey’s big technology sandbox. The strategy “only makes sense if they spin these companies off” to create value, Cusumano says. “Investors want to see results before we’re dead.”

In any case, the sweeping reorganization sets Google/Alphabet on a path that may be difficult to change in the future if it doesn’t work, because it’s more than simply a promise to report the financial results of Google and the alpha-bets separately. “It demonstrates their commitment,” says Yoffie. “But it gives them less flexibility in the future.” For better or worse, Page and Brin have made a bet on which they can’t easily renege.

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