The Pros And Cons About Google’s Alphabet

The creation of the new holding company will have profound effects on Google (GOOG). The current structure, mixing organic initiatives with a kind of venture capital, has allowed for the emergence of interesting new services like Android and Chrome, that have strengthened Google’s position. However, it has also masked a lot of underperforming experiments.

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(photo: Karen Horton)

Although, this might not be the currently accepted mainstream management philosophy, I believe that the current structure was good in terms of managing an innovative organization. It allowed for young initiatives to grow under the protection of Google’s cloak. Unfortunately, it also created a conglomerate discount on the company stock price.

So, the biggest advantage of this transformation lies on the fact that Google as a standalone business unit will have much cleaner financials. Investor can look at the search engine as the fillet mignon and value the company through sum of the parts. On the medium term, financial exercises striping Alphabet of all the money absorbing activities will become a common exercise between analysts. This is Wall Street’s dream.

Cooperation or Competition?

However, this new structure might create new obstacles to innovation within Alphabet. Firstly, will the usual freedom for employees to invest time in new projects be maintained? The creation of new cost centers might raise incentives to each business unit to compete between them, removing the possibility of employees allocated in a given unit to participate in new ventures elsewhere. Employees are considered a cost in the companies where they belong, therefore, to have them working for other units for free is helping others at the cost of our own budget. You can extrapolate the previous example to other types of resources. This myopic view is very common when the management allow silos within the organization.

You can’t handle the truth!

Secondly, disclosing detailed financials for incubated ventures might trigger a reaction from activist investors demanding for the management to get rid of the underperforming units. Obviously, this could meant the death of projects like the self-driving car, the Google Glass and Google fiber among others. Allowing investors to know where the money is going might not be the wisest thing to do in companies that bet so much in an uncertain variable like innovation.

No vision, no hope

Finally, the company might lose its purpose and unifying vision. Although, many of Google’s projects don’t seem to have much to do with search engines, the truth is several of the high profile projects respect the company’s main activity: creating audiences for ads.

Yes, creating audiences is Google’s main activity. The indexation of online information and development of a way to find it easily through something commonly known as search engine was the first step to dominate the online ad market. So, when the internet started to become a reality in mobile phones, Google was already working on an operating system. As the search market spread to mobile phones, Google was effectively working on increasing its audience.

Google Chrome and Chrome OS are also initiatives pursuing the goal of consolidating a loyal audience. From here on I am merely speculating, but I believe that the Google Glass, the self-driving car, the Google Fiber, and the Project Loon (internet balloons) are also projects respecting the pursuit of a broader audience. The Google Glass could expand Google’s dominance to augmented reality, which could mean increasing a lot the number of hours that each user passes using Google services (i.e., being part of the audience). The self-driving car could allow users to free up commute time that they can use to access the internet. Project Loon is about bringing the internet to remote areas thus increasing the audience. Even Calico could be seen by as a way to extend the life of its loyal audience (maybe too much Machiavelli on this one though).

Conclusion

Obviously, effective results will depend a lot on how this new structure is implemented in practice. Alphabet might end up being the best move that Google’s management has ever done to avoid becoming another dull corporation but it just seems to be the other way around. Wall Street is clearly euphoric with the idea of having detailed numbers for each unit, however, a conglomerate of individual units means raising walls within the company – which is exactly what decadent corporations do.

Google has beaten the broad market (SPY) by a heavy margin since the IPO. The secret sauce has been applied innovation. The new structure indicates that Google wants to become a conglomerate of diversified innovative business units. Although, this might seem interesting in theory, I think this might create a destructive competition within the company. For instance, I am not seeing Apple (AAPL) dividing its operations in standalone business units. We won’t see Apple creating a company for the Macintosh and other for the tablets. The Macintosh business unit would have never allowed the rise of the tablet unit knowing that it would end up cannibalizing the Mac sales. The tablets were allowed to grow and thrive thanks to a vision of a greater good for the whole company.

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