Google to Reorganize in Move to Keep Its Lead as an Innovator

Google to Reorganize in Move to Keep Its Lead as an Innovator

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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