What Is Alphabet Inc & Why Should You Care?
On August 10, 2015 Google made a surprise announcement. It was not a product launch. It was not leadership change. The announcement was about a new operating structure. It was called Alphabet and the landing page of the website had a playful look. It was not April’s Fool joke.
Larry Page will be the CEO of the new company labeled Alphabet with Sergey Brin as the President. Sundar Pichai will become the CEO of Google, taking over from Larry Page. At a casual glance, we may look at it as administrative details involving restructuring of leadership responsibilities. It is more than that. In fact, it is much more than that.
It is a signal of big, bold ambitions for Google’s two co-founders. It could well be a landmark experiment in the design of new organizational forms for the post-industrial age.
Let us look at their description of what Alphabet Inc is.
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. What do we mean by far afield? Good examples are our health efforts: Life Sciences (that works on the glucose-sensing contact lens), and Calico (focused on longevity). Fundamentally, we believe this allows us more management scale, as we can run things independently that aren’t very related.
This means that the next version of Google Glass in the glucose-sensing contact lens — in partnership with Novartis — is not part of Google but will be part of Alphabet, free to explore options with longer-term payback.
This also means that another bold ambitious play involving, for example, self-driving cars, could be a separate company (although no mention was made in the announcement). But, we know Google is serious about cars.
Larry Page ended the August 10 announcement as follows:
We are excited about…
Getting more ambitious things done.
Taking the long-term view.
Empowering great entrepreneurs and companies to flourish.
Investing at the scale of the opportunities and resources we see.
Improving the transparency and oversight of what we’re doing.
Making Google even better through greater focus.
And hopefully… as a result of all this, improving the lives of as many people as we can.
Is Alphabet the Digital-Era Conglomerate?
So, is the announcement about Alphabet Google’s way of saying that it has diversified far from its original mission?
Google’s mission is to organize the world’s information and make it universally accessible and useful.
As I read it, Google’s mission has not changed but Larry and Sergey are now ready to embark on bigger missions with bolder ambitions.
They want to “invest at the scale of the opportunities and resources we see” and “empower[ing] great entrepreneurs and companies to flourish.” They do not want to just fine-tune Google’s business model (search monetized through advertising). They do not want to fight competitive battles defined as small wins against companies such as Apple, Amazon, Microsoft, Facebook, Netflix and others.
They want to take ‘moon shots.” They want to take many shots. They have created a structure to take many more shots simultaneously.
Their focus is clear — “Get more ambitious things done.” If that sounds like a venture capitalist’s motto, perhaps it is. Their focus is clearer in this statement:
Sergey and I are seriously in the business of starting new things. Alphabet will also include our X lab, which incubates new efforts like Wing, our drone delivery effort. We are also stoked about growing our investment arms, Ventures and Capital, as part of this new structure.
Perhaps, they are redefining the role of venture capital itself. Time will tell…
I see it as different from the conglomerate organizational logic of the late 1980s characterized by companies such as GE, United Technologies, ITT and others. The leaders in those companies essentially allocated financial capital across different “unrelated divisions.” As capital markets punished such conglomerates as bloated bureaucracies, they were restructured one-by-one. Berkshire Hathaway is the last remaining “multinational conglomerate company” that is run in the old model of financial capital portfolio by famous Warren Buffett.
History will record today’s announcement as insignificant if Alphabet merely becomes a holding company that reallocates financial capital from Google (search) to Calico (longevity) or Loon (alternate mode of Internet access) or Wing (drone delivery). It could have been done by merely combining Google Ventures with Google Capital and spinning it off.
I see Alphabet as embarking on a new digital business model — one that is central to creation of entrepreneurs and acceleration of enterprises in the digital era. This business model’s success depends on attracting and integrating two kinds of capital — financial and human —to create enterprises born in the digital age.
Alphabet With Financial Resources for Bigger Bets with Longer Payback Horizon.
Google Ventures and Google Capital are at the core of Alphabet today. Over time, Alphabet may be able to raise additional capital from multitude of external sources without adversely affecting the search business (Google). My guess is that this structure allows Alphabet to invite venture capitalists who believe in the mission. We might know more about the sources and access to financial capital as the company is expected to be more transparent in this area. I also expect Alphabet to be in a position to make bigger bets with longer-term payback (as Google did with YouTube and Android).
It will indeed be interesting to see the financial filing of Alphabet in 2020. How far could Alphabet go in five short years?
Human Talent at the Frontiers of Next-Generation Innovation.
Post-industrial age companies rely on human talent that bring out new orders of magnitude of efficiency from computers. The new core competency is at the intersection of human minds and fast machines.
Marc Andreessen remarked that ‘software is eating the world’ in 2011 and his colleague, Ben Evans remarked that ‘mobile is eating the world’ in 2014. Google’s human talent has been central to the software and mobile revolutions in the early 21st century.
Now, digitization — broadly at the intersection of minds and machines (to use GE’s expression)— is impacting every industry and in every part of the world. Human talent collaborating and working at scale could unleash next frontiers of innovations in different arenas.
Google allowed its talent to innovate in areas such as Gmail, Google Finance and Waze (using the 10–30% time for innovation), the old structure could not attract the talent in areas such as healthcare and space exploration.
Alphabet could attract top talent to scale up Nest Labs at the speed of Internet of Things (IoT). Alphabet could now attract data scientists passionate about healthcare.
Alphabet could attract talent to take self-driving cars beyond the first million miles of test drive to production at scale. Alphabet could scale Calico and Google Glass in multiple different dimensions with sufficient access to financial capital and owners different from Google’s core stockowners.
Pay with Equity. It is generally easier to attract top-talent to smaller, nimbler organizational entities and also reward them with “growth stocks” that have significant upside exponential potential than what Google stock has been (despite the recent uptick).
It also allows Larry and Sergey to retain the top-talent inside the bigger tent (Alphabet) than lose them to younger, more ambitious upstarts like Uber or Palantir.
Alphabet is now well positioned to attract human talent capable of next-generation of digital innovation — beyond search.
It will be interesting to see if Alphabet indeed becomes the magnet for top talent as Google did in the late 1990s and Facebook did early this decade.
Alphabet’s Business Model is “Orchestration of Digital Ecosystems”
So, what is Alphabet’s business model? There will be those that will call it a holding company — a conglomerate. There will be many stock analysts who will apply conglomerate tax to Google stock in the coming weeks and months.
For Alphabet to be successful, it should do something that Larry Page mentioned explicitly in the announcement:
We also like that it means alpha‑bet (Alpha is investment return above benchmark), which we strive for!
For Alphabet to earn returns above benchmark, it must earn conglomerate premium, not trade at discount. That means, Alphabet must add value beyond allocation of capital. That is what ecosystem orchestration is — knowing how to pull together complementary companies beyond the corporate portfolio to work together to scale up at speed. It is also about identifying next-generation opportunity and putting together a system of companies that could collectively work to address bigger, bolder, ambitious challenges facing our lives.
It is about not just exploring new ideas — such as Loon and Glass — but making them central to the shifts to the digital world. Google did it with YouTube and Android but monetized them with advertising (related to search) but other models may require innovations in monetization approaches beyond advertising.
Alphabet may be more unconstrained in examining new business models.
Venture capitalists strive for extraordinary returns from small number of success cases and are disciplined (ruthless) in jettisoning others that may not be on track to scale and win. Alphabet has to be different in the sense of nurturing its companies and orchestrating multiple ecosystems to allow different go-to-market models? In that sense, Larry and Sergey are different from John Doerr at Kleiner Perkins and the two principals at Andreessen Horowitz. Venture capitalists orchestrate the ecosystem to get companies at scale for IPO or sale. But Alphabet’s role in orchestrating the ecosystem for its companies to thrive and grow is more comprehensive and less hands-off.
Alphabet’s Role in the Creation of Future Unicorn Companies?
The Economist graph below shows the growth in the number of ‘unicorn companies’ over the last decade. Google’s role in such companies have been minimal. Alphabet has the freedom to incubate and scale-up next-generation of Unicorn companies.
Digital Competencies and Dynamic Ecosystems
Google has demonstrated its competency in orchestrating independent ecosystems with search and mobile (Android). Now, Alphabet needs to orchestrate multiple interdependent ecosystems at scale and speed to earn returns better than benchmarks.
The interdependencies may appear minimal now across healthcare (Calico), automobiles and Glass. So, casual observers may call Alphabet as new-age conglomerate. The digital competencies across the different areas rely on machine learning, algorithms, analytics and cloud. They combine human minds and complex machines.
While the companies within Alphabet may have autonomy to develop their own “brands” and pursue their goals, I believe that the different nodes within Alphabet will be linked with financial and human capital. And being embedded within the Silicon Valley ecosystem is a big plus.
Who Should be Worried about the ‘Alphabet Announcement’?
Advertising executives were not concerned when Google launched search engine focused on organizing World’s ‘information.’ It did not directly aim at disrupting the advertising industry but it has changed the structure and monetization logics of advertising with algorithms and analytics. Google is capitalized at $445 billion (end of trading on August 10, 2015 before the ‘Alphabet announcement’) and the traditional advertising incumbents could not have anticipated the influence of Google on their sector sitting at their offices in 1998.
As of August 11, 2015, the creation of Alphabet has allowed Google’s Sunder Pichai to focus on Facebook, Apple, Twitter, Yahoo, AOL (and any other corporate combinations that could happen with digital advertising).
It is wakeup call to executives in healthcare. Many healthcare executives have mistakenly believed that digitization of their sector is far off. Google Health (as part of the old company) may have been a peripheral experiment that shut down on January 2013. Health & Life Sciences as part of Alphabet will be different and fierce. IBM should be worried if it cannot retain top talent within its Watson Unit.
Automotive executives have already recognized the power of Google’s Android Auto initiative. Three German automakers bought Nokia’s HERE maps as defensive move. What more do they need to do as defensive moves against Alphabet’s likely moves in the automotive sector? Is it conceivable that Tesla somehow could be part of the Alphabet ecosystem?
What could Alphabet do with Fiber? Could it take on Comcast and AT&T/DirecTV and Verizon FIOS without being constrained by Google Android and Nexus?
What about Apple? Can it go beyond mobile phones and expand the scope of Apple iOS into areas such as home, automobiles and entertainment within the same structure and one integrated stock (that is not seen as growth stock by Wall Street)?
Every company looking to attract top technical and managerial talent should be worried. Alphabet as a company with Page and Brin at the helm have emerged as leading contenders to attract talent. Those young start-ups hoping to attract Googlers to their fold now have tougher (and expensive) propositions.
Of course, there are risks. And there are challengs. The two co-founders have revealed their ambitions to take on bigger risks with bigger opportunities with this bold stroke on August 10, 2015.
Alphabet is a portfolio of companies embedded in an ecosystem of talent and financial capital to take on the toughest challenges in the world today. In few short years as we approach 2020, Alphabet could influence and impact business models in many industries just as Google did in advertising and mobile telephony.
Alphabet’s URL communicates its bold ambition and reach. It is https://abc.xyz
