Update Oct 2: It’s happening. With the close of the market today, Google as we know it will become “Alphabet.” Stay tuned as investors react after-hours and on Monday. Check out our story below for more.
This week, Google founders Larry Page and Sergey Brin did something baffling: They created a new company called Alphabet.
So what is it?
As Page explained, “Alphabet is mostly a collection of companies. The largest of which, of course, is Google. This newer Google is a bit slimmed down, with the companies that are pretty far afield of our main internet products contained in Alphabet instead.”
In short, it’s a holding company. Rather than producing tangible goods, Alphabet will be responsible for owning shares of each of its companies. As such Google will trade under the Alphabet name, but using the same GOOG and GOOGL stock symbols.
What happens to Google’s leaders?
Page says he will serve as CEO of Alphabet and Brin will take on the role of president. Google’s current CFO, Ruth Porat, will become CFO of Alphabet and remain CFO of Google, while chief business officer Omid Kordestani will transition into an advisory role.
Sundar Pichai will take over as the CEO of this new “slimmed down” Google. As such he will oversee YouTube, Google Search, Chrome, Android, Google Play, and Google Apps such as Maps, Photos, Drive, and Gmail.
That means that projects that aren’t tied to Google’s main advertising business will be broken out into their own companies. Among these will be the X lab, Sidewalk Labs, Calico, Nest, Fiber, Google Ventures, and Google Capital.
Let’s take a minute to review what each of these are and note the changes.
This is Google’s research arm. It’s the kooky laboratory that built the foundation for projects like Google Glass and Project Loon, Google’s balloon-connected Wi-Fi system.
Sergey Brin currently oversees the lab and may very well end up as this company’s CEO.
A former division of Google X, Life Sciences has become its own entity. The new company is known for developing things like smart contact lenses and its famous self-driving car.
Andrew Conrad leads this division and will likely take on the CEO role when Alphabet and Google officially merge.
You may not know this, but Google has an anti-aging business called Calico Labs. The biotech arm is researching technology aimed at health, wellness, and reducing the side effects of old age (sickness, death, etc.).
Two years ago, Google named Art Levinson as Calico’s chief, and he’s likely to become the company’s CEO. Prior to Calico, Levinson was CEO of Genentech, a company that develops medicine for life-threatening illnesses.
Google purchased connected home startup Nest for $3.2 billion last year. So far Nest has produced a smattering of smart home appliances like a thermostat, smoke alarm, and security camera.
The company is led by founder Tony Fadell, and it’s likely he’ll remain as Nest’s CEO.
Sidewalk Labs is Google’s urban planning project. The business “aims to foster the development of technology products, platforms and infrastructure that help improve life in cities around the world,” according to its site. This is where Google tinkers with solving major energy, transit, and housing problems.
Dan Doctoroff heads up this division, making him the likely candidate for CEO.
Google’s fiber optic network, which provides high-speed broadband and television services, has already rolled out to Austin, Texas; Kansas City, Missouri; and Provo, Utah. It’s slated to come to a growing list of regions including Raleigh-Durham, North Carolina; Charlotte, North Carolina; Atlanta, Georgia; San Antonio, Texas; and Salt Lake City, Utah.
Former Qualcomm leader Dennis Kish was named senior VP of Fiber last year.
Google has two investment arms, one of which is Google Capital. The fund is largely devoted to capitalizing late-stage growth companies and is led by David Lawee.
The second of Google’s investment teams is Google Ventures. With Bill Maris at the head, the firm has invested in 300 companies including hot startups like Uber and Slack.
Aside from Google and YouTube, Alphabet’s other businesses are largely investments (read: they lose money). An argument could be made that its investments in outside companies through Google Ventures and Google Capital do make money, though it’s safe to say that Google isn’t getting a giant return on every investment it makes.
Because Google is constantly pouring money into new projects, Brin and Page may have felt pressured to reshape their business in order to keep investors clued in to how Google makes and spends money.
“Our company is operating well today, but we think we can make it cleaner and more accountable,” Page wrote this week.
Why do this?
That brings us to the why. As in, how does forming Alphabet benefit Google? There are a few different reasons and a ton of speculation about why the search giant made this move, but the two main ones come down to financial transparency for investors and more leadership opportunities for its employees.
Google comes of age
Some think that Google is maturing in its old age. The company has been around for 20 years, and while it is profitable, its organization structure is a bit untidy and investors are frustrated. Though Google still leads the pack when it comes to digital advertising dollars, it’s not growing as rapidly as it once did. Meanwhile, it’s hemorrhaging money on new projects.
So in March, the company hired Morgan Stanley’s CFO Ruth Porat to head up its financial operations. I imagine she fine-tuned a reorganization that was already planned.
Ultimately, Alphabet enables Google’s founders to do more of what they like doing: tinkering with new ideas. Meanwhile, Sundar Pichai can keep doing what he’s been doing: successfully leading many of Google’s moneymaking products.
The new Berkshire Hathaway?
Still others are guessing that Google formed Alphabet so it can start buying big companies without regulators batting an eye.
— Om Malik (@om) August 10, 2015
Perhaps inspired by Warren Buffett’s holding company Berkshire Hathaway, Alphabet’s structure allows Google and its investors a better view into which segments of the business are driving returns and which areas need improvement. For instance:
“YouTube has lots of usage and is running break even at least, but trying to figure out how they can drive more value on that usage is probably a goal for them for the future,” said Dave McClure, founder of 500 Startups, who also noted the comparison between Alphabet and Berkshire Hathaway in a tweet.
The big difference between Google and Berkshire Hathaway, however, is that Google has one core cash-cow business and a lot of smaller businesses that suckle off of it. But transparency into the amount of money Google spends overall on its moonshot projects could prove popular among investors.
Investors like it
Google’s stock jumped four percent the day after it announced Alphabet, bringing its price per share to a high of $674.90. Though it’s dropped some in the days since, at $658.13 the company is still trading well above Monday’s closing price of $643.44.
So at the very least, traders are looking favorably on the decision. Perhaps that’s because Google is showing that despite its age and size, it’s still capable of innovating.