Most tech companies fear that growth could stifle innovation. At Google, founders Larry Page and Sergey Brin have historically suppressed that concern by using its billions of dollars in advertising and search engine revenues to invest in, build, and acquire creative technology.
Now the Silicon Valley search giant is separating what The New York Times characterized as its “moneymaking businesses from the moonshot ones.” The company is creating a new parent organization—called Alphabet—under which it will run a flock of other businesses separately. One of those is the moneymaking Google business that includes the company’s search, advertising, and Android mobile operating system businesses.
Other entities that will be run under Alphabet include investment arms Google Ventures and Google Capital; companies Google currently operates independently such as Calico, a biotech focused on aging, and Nest, the maker of devices like smart thermostats (which Google bought last year); and Google X, the company’s secretive technology development branch that is working on projects such as self-driving cars and drone services.
Separating the businesses alleviates a concern that multiple media outlets noted has been a thorn in Google’s side: the need to give the company’s stakeholders greater insight into both its money-making operations and its investments in innovation. That will allow Page and Brin, who will be CEO and president of Alphabet, respectively, to continue operating the part of the business focused on the “moonshot” projects more like a venture capital firm, as The Verge pointed out. Sundar Pichai, a top-ranking product and engineering executive, is taking over as the CEO of Google.
Back when Google acquired Nest, Xconomy’s Wade Roush wrote that “Google is getting too big.” He argued that the company’s size and acquisitive streak was a threat to both technological innovation and consumer privacy. The Alphabet news would seem to address the first concern (at least in part), but not the second.
At base, the restructuring move is meant to keep the business innovative, The New York Times wrote. Likening the new structure to Berkshire Hathaway’s empire of businesses in myriad sectors, The Times said it gives each of the individual operations more leeway in their decision-making.
Alphabet may be able to raise funding for an individual company without affecting the broader Alphabet investor base, The Verge wrote. It could also allow the CEOs of individual companies in Alphabet the opportunity to do something like raise money in the public markets.
And those companies will seemingly continue to create partnerships with outside businesses. The day after the restructuring, San Diego-based DexCom announced it signed an agreement with Google’s life sciences team to build smaller and less expensive continuous glucose monitoring devices for people with diabetes.
While Alphabet could still lose money on missed investment shots, the new structure allows the founders to find big opportunities that would have otherwise been missed if there was too much pressure to not spend on innovation by investors with shorter horizons, as Vox wrote.
Separating the various businesses also provides greater insight for investors into what parts of the business are performing well or not performing. The company plans to report each segment’s results separately starting in the fourth quarter of this year, Page wrote in a post Monday.
The decision to separate its entities will make further acquisitions especially attractive for Alphabet, especially if it continues to operate them as separate business entities, like it has with Nest, according to The Next Web. Purchasing a company that once may have slightly conflicted with Google’s legacy business is now possible because it could be run independently.
One question going forward will be whether Google gets in any trouble with other companies because of its new name—one that is used by multiple other entities, including BMW, which owns the domain www.alphabet.com, as The New York Times reported. Before revealing that BMW owns the domain, The Times quipped: “One can only assume that before Larry Page and Sergey Brin chose Alphabet as the name for their new holding company, they Googled it.”