Google to Reorganize in Move to Keep Its Lead as an Innovator
Google to Reorganize in Move to Keep Its Lead as an
Innovator
By CONOR DOUGHERTY AUG. 10, 2015
SAN FRANCISCO — Google was founded as a company that did
Internet search. Over time, it has broadened into areas as varied as drones,
pharmaceuticals and venture capital, none of which make much money, and some of
which have spooked investors.
Now Google is listening to Wall Street, while also trying
to keep its innovation going. The Silicon Valley behemoth is reorganizing under
a new name — Alphabet — and separating its moneymaking businesses from the
moonshot ones.
“For Sergey and me this is a very exciting new chapter in
the life of Google — the birth of Alphabet,” Larry Page, the chief executive of
Google, wrote in a blog post on Monday. “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.”
Under the new structure, Mr. Page is to run Alphabet
along with Sergey Brin, who co-founded the web search business with him in
1998. Alphabet would be the parent entity, housing several companies, with the
biggest among them Google. In addition, the portfolio would include Nest, the
smart-thermostat maker, and Calico, a company focused on longevity, among other
things. Sundar Pichai, who had been senior vice president in charge of
products, will be chief executive of Google, which will encompass Internet products
like search, maps, YouTube and applications like Gmail.
Google’s move is the most significant step by a Silicon
Valley giant to get a handle on the sprawl of businesses that it has entered,
an issue that increasingly afflicts other technology companies like Facebook
and Amazon. While all of these tech companies began as entities focused on one
main business, online bookselling or a social network, for example, many have
diversified over the years into numerous side businesses including cloud
computing, photo sharing and even satellites.
Some of those tech companies have started to give more
clarity to their fast-growing new businesses. This year, Amazon broke out the
results of its cloud-computing unit for the first time. But Google is going a
step further than the rest by formalizing a portfolio-like approach to its
various businesses.
The change is an effort to keep Google innovative. As
other big technology companies have gotten old, some have been felled by a
desire to remain wed to their traditional core businesses. With its new
structure, Google can give operating divisions more leeway in making their own
decisions and keep the businesses more nimble. The configuration is reminiscent
of that of Berkshire Hathaway, Warren E. Buffett’s industrial empire, a giant
conglomerate that includes railroads and Fruit of the Loom underwear.
“We’ve long believed that over time companies tend to get
comfortable doing the same thing, just making incremental changes,” Mr. Page
wrote. “But in the technology industry, where revolutionary ideas drive the
next big growth areas, you need to be a bit uncomfortable to stay relevant.”
A holding company structure also gives Mr. Page and Mr.
Brin, who became multibillionaires when Google went public in 2004, room to
make big new bets to add to Alphabet’s portfolio — without annoying Wall
Street. Over the last few years, investors have expressed concern that Google
has become distracted from its core web search, instead pursuing projects
fancied by its founders, like self-driving cars or a pill to detect cancer.
The holding-company structure is set to provide more
financial transparency. Starting in the fourth quarter of this year, Alphabet
will break out financial results for Google Inc., as well as for the overall
company. While investors will not be able to see individual results for other
companies, the system will make it easier to get a sense of how Google’s core
business is doing.
Colin Gillis, an analyst at BGC Financial, said the
reorganization laid a foundation for making further disclosures later, such as
unveiling results for YouTube — which has become a driver of the company’s advertising
business — or a better sense of how much money is being spent on initiatives
like drones.
“How much money are they wasting or investing outside of
their core?” Mr. Gillis said. “We’ll get to see how much is that overhead.”
Google discussed increasing its transparency in the last
year, which lifted its stock.
Yet the move raises questions, including how Alphabet
will dole out money for more speculative projects and what this means for
Google’s regulatory and legal issues, like its antitrust battle in Europe.
David Larcker, a professor at the Stanford Graduate School of Business, said a
holding company was a complicated structure that Wall Street had lately frowned
upon. Most recently, investors pushed General Electric to spin out its finance
unit after the business, which had long raised profits, became a drag on the
company after the 2008 financial crisis.
“If you go backward in time, the gigantic conglomerates
unraveled between the 1970s and the 1990s because it became too unwieldy to
manage them,” Mr. Larcker said.
The reorganization puts a rubber stamp on a move that Mr.
Page has been telegraphing for some time. In an interview with The Financial
Times last year, Mr. Page said there was no model for the kind of company that
Google wanted to become, but he said he admired Mr. Buffett for embodying some
of the qualities of the task that lay ahead.
Last October, he gave Mr. Pichai responsibility for most
of Google’s biggest products, making him, in effect, chief executive of most of
Google’s core products. Now he gets the title of chief executive of a new
company known as Google Inc. The logic, Mr. Page said in a memo to employees,
was to continue to build Google’s core business “while also getting the next
generation of big bets off the ground.”
“As you ‘age’ — even when you’re still a teenager like
Google — you have to work hard to stay innovative,” Mr. Page wrote in the memo,
which was obtained by The New York Times.
Mr. Pichai will add YouTube to his list of products. The
YouTube chief executive, Susan Wojcicki, will now report to him, whereas she
previously reported to Mr. Page. In addition, Mr. Pichai will oversee the
business operations for Google Inc.
Google’s current business chief, Omid Kordestani, will
end that role and become an adviser to Alphabet and Google. Ruth Porat, chief
financial officer of Google, will remain in that position and will also be
chief financial officer for Alphabet.
Other entities under Alphabet will include Google Fiber,
a provider of ultrafast Internet service. There will also be two financial
businesses, Google Ventures, the venture capital arm, and Capital, which does
private-equity-like deals.
Google X, which includes projects like self-driving cars,
a drone delivery service and an attempt to make Internet-connected balloons,
will be managed separately and run by Mr. Brin.
Katie Benner contributed reporting.
A version of this article appears in print on August 11,
2015, on page A1 of the New York edition with the headline: Google Mixes a New
Name and Big Ideas.
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