Sieving through Google's Alphabet soup

By The App Business under Insights, News 14 August 2015

In my entire career in tech, I never thought I would type the words ‘Google, a wholly owned subsidiary of…’ So imagine my bafflement (along with everyone else’s) when the arrival of a holding company called Alphabet was announced. However, as more details have emerged, and the more we analysed the situation, suddenly, the more obvious this move became.

Now, cast your mind back for a moment. Google itself burst onto the scene in the late 90s as the upstart new search engine that beat all the incumbents in results and performance with their magic algorithms and their focus on machine learning.

Now, it’s a verb in the English language and has grown at a phenomenal rate since then - from a PhD project on the Stanford website in 1997, to their IPO in 2004 (and for which they were valued with a market cap of $23 billion). This growth has never stopped, and the varied interests of the people at Google kept driving the company to reach out and experiment into a huge amount of new areas. Google just kept on spinning up new ventures and acquiring new companies. In fact, by 2011 they were acquiring on average one new company a week. When you reflect on this history-making growth, it seems almost inevitable that Google was going to need to become a type of classical holding company at some point.

But the real genius behind the Alphabet move is that rather than turn Google itself into a Berkshire-Hathaway style holding fund, or mammoth conglomerate like IBM, there was a recognition that Google is the strong, money-making flagship brand. By making this flagship a subsidiary, they can easily put it into its own column and have it focus on where its strength lies - namely search, advertising, and mobile.

Meanwhile, Alphabet is able to soak up all the experimental Google X / Glass-style ventures and acquisitions in different fields - such as Nest and Dropcam. This enables Larry Page and Sergei Brin to continue to experiment and explore new ways to change the world, all the while minimising the impact on Google itself.

One question is why, after well over a decade of phenomenal growth, disruption and exciting new technologies, Google should feel the need to do that. Well, the answer is in two parts. The first is that as Google has grown and diversified, it has really turned into two different entities under one roof: the wild eyed R&D pioneers doing moonshot projects and experimenting with future infrastructure; and the money-making core search and advertising business. These two different aspects continuously pull in opposite directions - it’s only natural they split.

However - and arguably - the main reason for the overarching holding company is an effort to salve the anxieties of skittish investors. This issue has turned into a particular problem lately, with investors questioning the real need for Google’s health initiative (Calico) and other experimental projects. It’s also become more critical as the growth in advertising revenue has slowed down.

Ultimately, markets are impatient and volatile, and the founders of Google have a much more strategic long-term view than the markets do. Alphabet will allow them to be able to do more, with less investor agitation - as Google will clearly be the leading breadwinner for the short to medium term.

Alphabet will also provide the opportunity to trial new revenue streams without affecting Google’s reputation. For example, when Nest becomes self-sustaining, they can then easily spin it off into its own subsidiary of Alphabet. The effect of this will be to minimise the risk and maximise the profit from their various business segments.

Personally speaking, it’s my hope that this marks the next major and exciting step in Google’s history - and we can not wait to see what tech comes out of it as a result.

What do you think? Let us know over on Twitter @TheAppBusiness.