Google surprised the world with a sweeping organizational change this Monday by creating a new holding company, Alphabet Inc., which will act as the umbrella brand for its growing cast of businesses. Alphabet will be run by Google’s current leaders, including Chief Executive Larry Page, co-founder Sergey Brin and Chief Financial Officer Ruth Porat. This restructuring will help the company take the long term view, make the Google business more focused and improve the transparency and oversight of their business. It will also help Alphabet, get more ambitious things done.
Google has separated its highly profitable search and advertising business from fledgling efforts in an array of so-called moonshots, including those building robots and self-driving cars, helping to cure disease, developing nanoparticles and extending Internet connectivity via balloons, under the new entity. Alphabet’s new Google subsidiary, which generated nearly all of Google’s $66 billion in revenue last year—including the search business, YouTube and the Android and Chrome operating systems—will be led by Sundar Pichai, who has been in charge of product and engineering for Google’s Internet businesses for some time now. All other subsidiaries will have separate CEOs reporting directly to Page.
Why the change?
One wonders why a company like Google would look at doing a complete overhaul of its structure at a time when it is doing remarkably well. The reason seems to lie in the quest for innovation and balancing the same with management and financial implications.
Business Management: This change reflects the view of the co-founders’ on the size and complexity of running a company which is now worth some $445 billion and has a diverse portfolio of companies under its wing. Last year, Larry Page had referred to Warren Buffett’s Berkshire Hathaway Inc. as the model he was looking at for running the company. This new change seems to be in keeping with that sentiment. “Fundamentally, we believe this allows us more management scale, as we can run things independently that aren’t very related,” Mr. Page wrote in a blog post, when announcing the change.
Financial implications: While the market has been supportive of Google always, some of the new ventures have even spooked investors in the recent past. Investors are hopeful this move will mark a new era of transparency at Google, which so far has kept a tight lid on the financials of YouTube, Android, and other properties. Wall Street is clearly excited by news of Google’s massive overhaul and the company shares surged up 6 percent following the news.
The cultural DNA of innovation: Google has prided itself on its inclination for innovation. Page and Sergey wrote in the original founders’ letter 11 years ago, “Google is not a conventional company. We do not intend to become one.” In the current letter, Page wrote, “From the start, we’ve always strived to do more, and to do important and meaningful things with the resources we have. We did a lot of things that seemed crazy at the time. Many of those crazy things now have over a billion users, like Google Maps, YouTube, Chrome, and Android. And we haven’t stopped there. We are still trying to do things other people think are crazy but we are super excited about.”
This restructuring will help keep this spirit of innovation alive. While the main Google subsidiary will include search, advertising, maps, YouTube, Android and the data centers and networks that run all these Web businesses, non-Google units will include Nest, the connected-home business run by Tony Fadell; Fiber, Google’s fast Internet service; Calico, the health research lab headed by Art Levinson; Google X, the company’s research lab that pursues long-term risky projects like the self-driving car; Google Ventures, its venture-capital arm; Google Capital, a late-stage investment unit; and Sidewalk, a recently formed urban technology project. Starting with the fourth quarter, Page said Alphabet will break out Google’s financials but report the remaining subsidiaries in aggregate. Considering the aggregate financial reporting of the subsidiaries, this will also help Google obscure its non-Google businesses and give the company freedom to follow unconventional projects.
Google has been an exceptional company in so many ways. From being innovation pioneers to topping charts everywhere for being the best employer, Google seems to be working towards a well thought future. This change seems to be ringing the right bells, even though concrete changes will take time to emerge. Google is and always has been a company to watch out for!
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