The Real Reasons Google Will Become Alphabet

Google CEO Larry Page, has another bright idea (Photo: David Paul Morris/Bloomberg)

Google CEO Larry Page never fails to surprise. Google just renamed itself Alphabet, creating a holding company that includes the search company (Google) and a bunch of others that no one could figure out why it was doing. Page will be CEO of Alphabet, Google cofounder and executive-in-charge-of-cool-stuff Sergey Brin will be president, and senior VP Sundar Pichai becomes CEO of Google.

It sounds like a big deal, and in a sense it is always a big deal when a company changes its name and corporate structure. But in other ways, not much has changed, because Google has essentially run its far-flung collection of businesses, from its Calico human longevity company to its X lab that’s working on Internet balloons, self-driving cars, and drone product delivery to investment arms Google Ventures and Google Capital, pretty independently already.

Either way, the move raises a few questions:

* What’s the big idea?

Well, it’s probably not just one idea, but let’s start with one: This will keep left-brain investors happy, or at least happier. They’ve always been wary of all the non-search, non-advertising businesses Google has entered, and their inevitably uncertain prospects have no doubt weighed on the shares if only because they’re much more of a cost for years to come rather than significant revenue generators.

So this is a way for the company, which will now report the core Google business results separately in earnings reports, to make the company’s various businesses clearer to investors. It worked, at least for now: Google’s shares rose more than 6% in extended trading after a nearly flat day today. As Pivotal Research Group analyst Brian Wieser put it in a note to clients, “Perhaps there will be incremental value assigned to the totality of the new Alphabet because, undoubtedly, real value exists within the company’s emerging ventures.”

But given that Google rarely seems to make big decisions to please investors, it’s probably best to take Page at his word that the main impetus was to make each business able to operate more independently–and thus more likely to succeed or at least to get the chance to succeed without needing to be related to the core ad business. As he put it in his blog post:

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. Alphabet is about businesses prospering through strong leaders and independence. In general, our model is to have a strong CEO who runs each business, with Sergey and me in service to them as needed. We will rigorously handle capital allocation and work to make sure each business is executing well.

This new structure will allow us to keep tremendous focus on the extraordinary opportunities we have inside of Google.

Not least, Sundar Pichai, the senior VP who has gradually taken on much of the responsibility for the core business, gets a title worthy of his efforts, making it more likely he’ll stick around for a good long while.

* What’s with the name?

With a funny name like Google, you certainly have to come up with something for the holding company that’s at least a bit whimsical (the URL is or you will look lame. So that’s one. (Another interpretation from my wife: “Are they going to control everything from A to Z?”)

But as Page puts it in his blog post, it also fits:

We liked the name Alphabet because it means a collection of letters that represent language, one of humanity’s most important innovations, and is the core of how we index with Google search! We also like that it means alpha-bet (Alpha is investment return above benchmark), which we strive for!

Yeah, he’s still a nerd at heart. (And can you tell he’s stoked?!)


* So the guy running the main business will still run the main business. What does this mean for all those other businesses?

It probably means Google becomes even more serious about making them real businesses–and axing them if they don’t. In the same way that Google no doubt hopes Pichai will stick around with a CEO title, appointing a real (not just de facto) CEO to each one not only will aid accountability, as Page says, it also will attract, or keep, some of the best and brightest executives out there who may not want to labor even on a big hairy audacious project with a lesser title.

What’s more, the new structure could lead to more incentives to other employees. “This news can’t be separated from one of the key issues facing virtually all technology companies today: employee acquisition and retention,” Macquarie Securities analyst Ben Schachter wrote in a note to clients. “GOOG management clearly understands that this news will be beneficial for employees in terms of their own stock holdings. This also sets up the potential for spinouts that, down the road, could help to better incent key business leaders.”

For better or worse, the move also may mean more money could go into these currently ancillary business. “This new structure looks likely to also lead to more resources going toward non-core initiatives (though we think this is a positive for the long term),” Schachter said.

Oh, and YouTube, no doubt because it’s squarely in the ad business like Google itself, will remain under the Google corporate umbrella, not Alphabet (YouTube chief Susan Wojcicki already has the CEO title). Android also remains part of Google.

* What should we make of Page’s failing to mention a couple of other big bets, such as Nest, self-driving cars, and all those robot acquisitions?

Not much. He probably just didn’t want to go through a laundry list just to make sure he didn’t leave anybody out. After all, all the other businesses are in fact mentioned in the regulatory filing.

It also could be that he doesn’t want to emphasize them at a time when there are surely more management changes likely to come as a result. Page mentioned specifically that he and Brin will “also make sure we have a great CEO for each business,” which implies it does not yet have one for each business.

* Do we have to learn another new ticker symbol again?

No. Not long ago, the stock symbol for the company’s main class of public shares switched from GOOG to GOOGL. That, at least, won’t change.

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