What Is Alphabet?
Google recently announced last week ‘Alphabet’, the new holding company for Google. The creation of the Alphabet holding company separates Google (search, ads, maps, apps, YouTube, Android, Chrome browser, Chrome OS) from its other higher risk businesses: Google X Moonshots (experimental research), Google Ventures (venture capital investing), Google Capital (another investing arm), Google Fiber (fiber internet in USA), Calico (health care ageing business), Nest (home automation products), Google Life Sciences and other businesses.
Each of the individual Alphabet companies will have their own CEO and leadership team. This means that the non-Google Alphabet companies will now have greater flexibility to raise external funding or develop strategic partnerships in the future. These Alphabet companies could also be IPO’d (listed on the stock market) in the future, which can benefit both investors and employees who hold equity stakes.
Why Did Google’s Co-Founders and Management Create Alphabet?
Google’s co-founders have been outspoken about the risk of increasing bureaucracy and slowing innovation as the company matures. The key risk for Google is becoming complacent as the incumbent player in search, and then becoming disrupted by new upstarts. Alphabet gives its portfolio companies more flexibility as these companies will have separate management, and they will stay smaller and separate from the larger organisation. Employees will be less constrained by bureaucracy and individual employees will have more opportunity for advancement to become CEO’s and upper management of these portfolio companies.
Another key reason behind Alphabet is Wall Street investors. Wall Street is not a fan of Google’s moonshots whereby they invest millions and billions of dollars on experimental R&D projects and loss making companies. The new Alphabet structure will report two separate segments: Google vs all other Alphabet businesses. Essentially what this creates is a profitable consumer facing Google business and a venture capital business with a mix of profitable and unprofitable startups. Individual Alphabet companies will now need to justify their existence based on their own merits.
Who Is Now Running Google vs Alphabet?
Google’s new CEO is Sundar Pichai, who was recently given day to day responsibilities of running Google as Chief Product Officer in October 2014. Sundar joined Google in 2004 and previously ran the Chrome browser and Chrome OS, before taking responsibility for Android and later the other Google products.
Google co-founders Sergey Brin and Larry Page (currently Google CEO) will now become President (Brin) and CEO (Page) of Alphabet. The two co-founders will oversee all of the individual Alphabet companies. However, they are more likely to be spending the majority of their time focused on new revolutionary projects within the smaller Alphabet companies.
What Other Companies Use A Holding Company Structure?
Legendary USA investor Warren Buffett’s Berkshire Hathaway is the most famous holding company structure in the world. Berkshire Hathaway owns companies entirely as well as holding large common share stakes in publicly listed companies across insurance, construction, media, food and beverage, clothing, logistics and other sectors. Berkshire Hathaway also does not pay dividends to shareholders but uses its profits to buy more companies. Google co-founder Larry Page is a big fan of Berkshire Hathaway’s structure.
Japan’s Softbank is another famous holding company, which is a telecom company (it owns a leading Japanese telco as well as the USA’s Sprint mobile network) and venture capital investor (it was an early funder of China’s Alibaba and its stake is now worth $72bn), that holds over 1,000 various company investments. Softbank recently announced that it will stop early stage venture capital investments and focus on bigger investments in fewer, more mature companies.
Personal Opinion:
Google is a pretty unique company which makes a large amount of money from its search business. Because of this ‘cash cow’ search business, it is able to take lots of risks investing in new technologies and new ideas. Google’s Alphabet holding company creates a clear separation of the very profitable core Google businesses from the higher risk, less profitable but high potential startup businesses.
I believe this new holding company structure was largely driven by Wall Street as investors wanted to better understand how much money Google’s core businesses made and how much money Google’s other businesses were costing. It also allows Google’s co-founders to focus on the bigger picture of growing Alphabet into new areas beyond the core Google internet services. I think this is an exciting time to work at Google and it will be interesting to see if other tech companies follow this holding company structure.
Feedback From The giffgaff Community:
Have you heard of Google’s Alphabet holding company? What do you think of this new business model? Do you think Google was right to separate its core Google business from its higher risk, less profitable but high potential startup businesses? Do you think any other tech companies will copy Google’s holding company structure?
Thanks for reading!
Jeff Elephant
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