Skip Article Header. Skip to: Start of Article. AUTHOR: JESSI HEMPEL. JESSI HEMPEL BUSINESS DATE OF PUBLICATION: 04.01.16. 04.01.16 TIME OF PUBLICATION: 7:00 AM. 7:00 AM GOOGLE’S ALPHABET TRANSITION HAS BEEN TOUGHER THAN A-B-C
469919280Click to Open Overlay Gallery GETTY IMAGES TOMORROW WILL MARK SIX months since Google’s grand experiment in corporate restructuring known as Alphabet was officially listed on the stock exchange. Google’s eclectic founders, Larry Page and Sergey Brin, had a pair of goals in mind when they announced plans last summer to split the search giant into a collection of companies under the Alphabet moniker. They wanted to add clarity to how the overall business runs, and they wanted to enable the company to be more ambitious—to move even more quickly to launch ideas that could have a global impact equivalent to the search box that changed everything.
But so far, Google’s transition into its new form hasn’t been as simple as just changing its name.
Eventually those bets will need to pay for themselves. The market will demand it. The operating idea behind Alphabet has been that, as CEO and president, Page and Brin would allocate resources and act as talent scouts, ensuring each new company has the CEO it needs. Charismatic and successful CEOs, however, have proven hard to find.
As of February, there were ten Alphabet subsidiaries apart from Google, the core business. And nearly a third of them are reported to have faced significant leadership challenges. Bloomberg reports that the company is selling the robotics business Boston Dynamics after concluding the company wasn’t likely to make significant money; it has been unable to find a replacement for CEO Andy Rubin, who left in 2014, shortly after Google acquired it. The life sciences company Verily has been the subject of several damning stories in the online magazine STAT, which calls CEO Andy Conrad “divisive and impulsive.” And last week The Information published a lengthy chronicle of the troubles inside Nest, stemming from the mercurial leadership of Tony Fadell.
Fadell reportedly blamed the new Alphabet structure, in which each business must depend on Google for the capital to grow. “The fiscal discipline era has now descended upon everything.” It’s a reminder that, unlike startup CEOs, all of these guys have to lean on Google for their financing.
And none of the companies has birthed the start of a business model as perfect or profitable as Google’s search business. All the non-Google companies taken together generated just $448 million in revenue in 2015, mostly from sales of the Nest thermostat and Google Fiber. That’s enough to cause some analysts to pronounce the restructure a failure. “In six months, you can say whether the structure has made things better—it has either made them worse or hasn’t change things at all,” says independent IT analyst Rob Enderle.
Making Big Bets Pay For now, none of that matters. By the most important measure to shareholders, Alphabet is working. Investors finally have some insight into the business they have been curious about all along, which had been clouded by the lack of transparency about how much of Google’s revenues were being invested in its wacky moonshots. The news is promising: Google revenues reached 3.6 billion—it’s clear Google’s margins are even better than investors thought. “From an investor perspective, this is great,” says RBC Capital analyst Mark Mahaney. When earnings were announced February 1, the company very briefly overtook Apple as the most valuable company in the stock market.
But conglomerates have fallen out of fashion precisely because they can weigh down the strongest businesses while masking those that aren’t succeeding and should be cut loose. Most of the time, these businesses are more valuable on their own, or combined with similar businesses. The same month Alphabet announced its restructure, GE said it would sell most of its biggest business, GE Capital. (State Street Corporate agreed to buy it this week.) It joins a growing number of the world’s diversified conglomerates, which appear to have realized that combining dissimilar businesses under one holding company almost never works.
RELATED STORIES Alphabet Will Learn Startups Within A Company Never Work Alphabet Will Learn Startups Within A Company Never Work After Today, Google Officially Becomes Alphabet After Today, Google Officially Becomes Alphabet Alphabet Passes Apple to Become the World's Most Valuable Company Alphabet Passes Apple to Become the World’s Most Valuable Company Meanwhile, the core company has not stopped developing its own moonshoots, some of which will invariably compete with other Alphabet projects. Google is reportedly working on a rival to Amazon’s Echo, despite the fact that Nest has said it will soon work with Amazon’s device. In the last earnings call, Chief Financial Officer Ruth Porat said that some of Alphabet’s biggest moonshots are in Google itself, citing machine learning, cloud computing, and virtual reality platforms, among other things. “You should expect Google to continue to invest in efforts to improve life for billions of people,” she said. Yes, it seems, even if another Alphabet company is trying to do it, too.
For now, as Google’s search business kills it, investors are happy to be patient while Alphabet sinks five percent of Google’s sales into “other bets.” But eventually those bets will need to pay for themselves. The market will demand it.
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