Innovation

Google's search for a new corporate structure ends with Alphabet

Andy Wolber explores the long-term implication of the new Google/Alphabet corporate structure.

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Google's initial success stemmed from a technology solution: better search. Financial growth resulted from ad revenue. Growth enabled both acquisitions and research and development. Because of that growth, Google, before August 10, 2015, operated many businesses: advertising, operating systems, knowledge and communication tools, home automation systems, self-driving cars, a fiber-based internet service provider, and many more. Led by Larry Page, Google pursued tech solutions with massive impact and business potential, which he called "moon shots."

But companies don't live forever. According to a study published in April 2015 by researchers at the Santa Fe Institute, "the typical half-life of a publicly traded company is about a decade, regardless of business sector." Google was founded in 1998.

And technological revolutions, according to Carlota Perez, happen in two phases: installation, then deployment. Each phase lasts about 20-30 years, with a major "turning point" between the two. Installation is technical: companies build new tools, infrastructure, and systems. Deployment is social: people and organizations adjust—or reconfigure—as a result of the the innovations. Between the two phases, a financial crash usually occurs.

Google's previous structure encapsulated tension between investors and technologists, who aren't always in sync. Technologists build better solutions, better products, better experiences. Investors want more customers, more revenue, more profits. A long-term focus on technology creates future customers, but public market investors often prefer a focus on current customers to produce near-term profits.

The restructuring of Google announced by Larry Page on August 10, 2015, solves several problems—and it may position Alphabet to succeed in the next phase of the internet revolution.

First, the announcement clarifies the Google brand for customers. Life Sciences, Calico, Nest, and Fiber can be separate companies, separately managed. Alphabet will refer to all the companies. Google will refer to the "wholly-owned subsidiary of Alphabet." Google will mean search, advertising, and online services, including YouTube. Android will stay within Google, too.

The restructuring simplifies the story for investors. The structure of Alphabet more closely aligns with a conventional corporate conglomerate. For example, General Electric notably operates in a variety of unrelated businesses, with diverse customers and purchasing cycles. A corporate structure that separates distinct business will be easier to understand.

The new structure may also help attract—or retain—top leadership. Talented leaders often want the chance to run their own company. Alphabet creates the opportunity for leaders to operate a bit more independently. Sundar Pichai's promotion to CEO of Google serves as an example.

And the leaders of each subsidiary gain increased focus. When Larry Page was CEO of Google, he had to think about Nest and Fiber, along with the core advertising and search services. The new structure allows Sundar Pichai to focus on a narrower range of products and services. Increased focus may allow Google to compete more vigorously with a recently rejuvenated Microsoft.

The new structure isn't entirely without risk. Alphabet could become a conventional conglomerate that buys and sells subsidiaries based on financial analysis, but a business measured solely on the numbers might not have supported a self-driving car or pursued Project Loon. How Alphabet's leadership will allocate assets among subsidiaries—or to new research projects—will now be a significant concern.

Google's founders built the company on a technology solution. The business model came later. The August 2015 changes create a business structure to enable future technology innovation. They prepare Alphabet for a time when businesses other than Google increase in importance.

What's your take on the new Alphabet structure or on Google's increased focus? Let us know in the discussion thread below.

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About Andy Wolber

Andy Wolber helps people understand and leverage technology for social impact. He resides in Ann Arbor, MI with his wife, Liz, and daughter, Katie.

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