The Big AlphaBet

googlecar

If the hubbub on Twitter is any indication, then Google founders Larry Page and Sergey Brin have won the Internet with their announcement that Google will transition to a new holding company structure. The new company is called Alphabet. We should think of its as the Berkshire Hathaway for the Burning Man crowd — where instead of good, old fashioned value investments, the management is betting big on the future possibilities. And every single one of those efforts if done right could be Google sized companies in their own right.

ALPHA-BETTER

Alphabet is a holding company for Google’s investment & growth projects. Classic Google, Google Fiber, Nest, Calico, Google Life Sciences, Google Ventures, Google Capital, and Google X are the components of Alphabet. It will be run by Larry Page as CEO, Sergey Brin as President, Eric Schmidt as Executive Chairman, and Ruth Porat as CFO. Stock tickers for Alphabet will be GOOG & GOOGL. In Q4 2015, Alphabet will report results under new structure and these businesses are going to have separate management from the classic Google businesses. That should satisfy Wall Street, which has not been shy to makes its unhappiness known, so much so that Larry and Sergey had to go out an defend their moonshots in an letter to the investors.

“Just as advancements in miniaturization and power consumption have made the contact lens possible, it was similar progress in computing power and cost that allowed us to create comprehensive search, and make it accessible to anyone with an internet connection,” Sergey Brin wrote in this letter. “The increasing power of computation extends well beyond the internet. One example close to my heart is our self-driving car project. This project and others like it are very challenging, and the outcomes are far from certain. But, just like when we started nearly two decades ago, it is possible to create the technology that allows people to lead healthier, happier lives. And, along with our incredibly passionate employees, I am humbled and excited to try.”

It will be some time before we see the complete impact of taking this direction, I think it is a timely move for a company that has been getting fat and bloated. Google of today is not even a faint outline of a plucky upstart that wanted to simplify the web search. If in corporate America, “too big to fail,” might be a badge of honor, but here in Silicon Alley as someone rightfully said on Twitter, there is such a thing called too big to innovate.

Banking might not be a business that changes that often, the swift currents of change destroy the most majestic of edifices. Remember Silicon Graphics or Sun Microsystems? I didn’t think so. No matter how amazing and technically savvy and inventive they were in their time, today they are mere footnotes in the history of technology.

WHY NOW

The big question on my mind is why this move and why now. For one, the company has been under some pressure from Wall Street, something Larry Page acknowledged in a in a blog post: “Our company is operating well today, but we think we can make it cleaner and more accountable.” Of course, there have been looming dark clouds — European regulators are hostile towards Google and view its growing footprint as a threat to European ideas and local business interests.

I don’t necessarily agree with the European policy makers. Their motives and arguments don’t pass the smell test, however I like how Europeans approach data collection. Like many I have often wondered when will the regulators start putting some check-and-balances around the rampant data collection by Google.

The invasiveness of Nest to Google Car to Google OS(es) into our lives gives them perhaps a deeper data treasure trove than the government. Perhaps the regulators when approving this new holding company structure should ask for citizen centric concessions such as various Google owned entities will not share data with each other.

For me the most exciting and perhaps the illuminating part of Page’s blog post was one around investments, founders, and the longterm. Towards the end of his post, Page writes:

We liked the name Alphabet because it means a collection of letters that represent language, one of humanity’s most important innovations, and is the core of how we index with Google search! We also like that it means alpha‑bet (Alpha is investment return above benchmark), which we strive for! I should add that we are not intending for this to be a big consumer brand with related products—the whole point is that Alphabet companies should have independence and develop their own brands.

To me that that is clear indication that Alphabet is about to make some substantial and interesting bets on companies without regulatory scrutiny. Just like Berkshire Hathaway, Alphabet can contemplate betting for the long term, either by controlling the companies or having substantial stakes, that allow them to also skirt the regulatory limitations. In his blog post, Page said Alphabet is about “businesses prospering through strong leaders and independence. In general, our model is to have a strong CEO who runs each business, with Sergey and me in service to them as needed.”

Nest could become a smart home company and be spun-off as a public company when it reaches maturity? Could Google CarOS become a standalone company? I don’t think why not. Alphabet would, for example, make an ideal Tesla investor. Remember Google founders and Elon Musk are close and Google came close to buying Tesla. Now, it can become large enough investor in the car company and keep Musk in-charge: best of both worlds.

Bottom lines is that Google can buy large enough share of a company like Spotify or Tesla or Twitter and act as a counterweight to short-term quarter-to-quarter approach favored by Wall Street investors. Like Page noted, that they were excited about “Empowering great entrepreneurs and companies to flourish.” Notably, Google Ventures and Google Capital are part of Alphabet.

A CLASSIC HIT

If you take away the distractions of the non-related businesses, what is left is the classic Google: search, ads, maps, apps, YouTube and Android and the related technical infrastructure. It is going to be run by Sundar Pichai, who is now the CEO of the classic Google. This is the money spigot that essentially created an unending stream of cash that is deployed into other non-core adventures such as Calico and Life sciences.

Google, despite spinning up a handful of billion dollar operations here and there, is still really a one-trick pony. It is too reliant on their core bread-and-butter business: search and advertising. Just as the arrival of broadband Internet allowed Google to usurp Microsoft, the rise of mobile has allowed Facebook to surge ahead of Google. Microsoft controlled our attention and thus as able to parlay it into opportunities in desktop applications, developer tools and platforms and of course, in the browser business.

Microsoft didn’t really know how to respond to the twin tsunami of open source software and the internet, which ultimately led to the rise of Google. The search engine became the center of our attention. It slowly started to launch a series of Internet services by leveraging that attention. However, just as Microsoft failed to grasp the magnitude of the Internet, Google failed to understand the power of social.

Google has failed at social and it can hardly be given a bronze medal for its work in mobile. It might seem counterintuitive — after all, they own Android — the company has lost control of its own creation. Sometime you get a feeling that there is more confusion in Android landscape than there is in a conclave of blind monkeys. It acquired companies to become a big player in the mobile advertising market, but has ceded ground to Facebook that has figured out to keep us addicted to its service — an average American spends over 20 minutes a day on Facebook.

As I have said in the past,

In the past, companies that have owned the attention of consumers have been able to diversify into new verticals. For instance, Turner Broadcasting could leverage CNN into other TV networks. Yahoo did well to take the attention from its directory and search services to email, news and sports related products. Google went from search to Gmail and Android. Facebook is following this much treaded path — except for one difference — Facebook has a lot more users and is sitting on a bigger treasure trove of data, much of it behavioral data that can allow it to make smart guesses on where to focus its development efforts.

On the surface, Google’s classic search and advertising business might look unshakeable right now, there is increasing pressure coming from Facebook, which is making us rethink what is search and how advertising in the future should work. The Facebook threat is very real and it is way bigger than most people realize. And same goes for Google’s other forays. Google Cloud, for instance, is a distant contender when compared to Amazon Web Services. YouTube too is under attack from Facebook. Google might be a leviathan, but it has fleas that might be unseen, but are real and can cause long term issues.

I don’t envy Sundar, who has his hands full. And yet I find it comforting that Google is in the right hands. If anyone can figure out the path forward, it would be him.

Now, let’s grab the popcorn!

PS: I shared my thoughts earlier in a tweet storm, but wasn’t able to get nuances around some of the comments and have fleshed out my arguments in this longer blog post.