A year after it surprised the world by announcing it would turn itself into tech holding company Alphabet, the transformation of the company formerly known as Google is still a work in progress.
The job of reshuffling its portfolio of long-shot bets into a handful of more distinct, standalone divisions — and deciding which, if any, to shed — is incomplete. Nor have the financial foundations been put in place.
Founders Larry Page and Sergey Brin, along with chairman Eric Schmidt and chief financial officer Ruth Porat, are still trying to work out what the business models for some of the bets will be and to set financial targets, according to people familiar with the process.
It is also unclear if or when some of these activities, from driverless cars to a healthcare arm that is trying to cure ageing, will pay off, even though the oldest are nearly a decade old. And there is still no external indication of how Alphabet decides where to place its bets or how wide-ranging they will end up being.
Mr Page himself has been investing privately in start-ups outside the company, most conspicuously in trying to build flying cars — an idea that is too far-fetched even for the former Google, which always prided itself on taking on the biggest and riskiest ideas.
But none of that has damped the mood among Alphabet’s investors. Wall Street has been more than willing to indulge Mr Page and Mr Brin, pushing the company’s shares up by 45 per cent in the 13 months since they first showed signs of bringing tighter management disciplines to their sprawling set of “moonshot” projects.
“The history of the internet is littered with people who didn’t make bets like these and destroyed shareholder value,” said Mark Mahaney, an analyst at RBC Capital Markets.Yahoo, AOL and eBay are among the companies from the first wave of the internet that did not think enough about the long-term future and have seen their relevance fade, he said.
Wall Street has another reason to indulge Google’s founders. Its core internet business has surged in recent quarters, bringing an unexpected re-acceleration in revenues and rising profit margins.
Insiders say this is partly because of a new focus in the Google division under new head Sundar Pichai. Top Google executives are no longer distracted by Mr Page’s personal interests — bordering on obsessions — in long-range ventures that are far from the internet advertising business that still generates more than 99 per cent of the company’s revenues.
Whatever the reason, Alphabet’s money-machine has been re-energised. In the second quarter of this year, Google overtook old rival Microsoft in revenues for the first time, and Wall Street expects its revenues to surge past $100bn for the first time next year.
None of this, however, guarantees that its search for a long-term future beyond internet advertising will yield results — or that the roughly 3 per cent of revenues spent on what it calls its “other bets” will not be money poured down the drain.
“The history of these central R&D ventures is not good,” Michael Cusumano, a professor at Massachusetts Institute of Technology, says of the research labs some of the biggest tech companies have run in the past.
The lack of a precedent for the type of tech conglomerate Google’s founders are trying to create, and the vagueness of their aims for Alphabet, could add to the risks of failure.
Mr Page has held up Warren Buffett’s Berkshire Hathaway as a model, though Mr Cusumano says “comparisons to Berkshire Hathaway are totally inappropriate. It’s not an investment fund, that’s not what Google is.” To be worth Alphabet’s attention, its non-core activities must at some point have some relation to its original business, he adds.
A year into the experiment, there have been signs that the soaring costs at Alphabet’s non-core businesses have at least been brought under control, though Ms Porat has warned against reading too much into short-term variations in expenses.
Inside the businesses, Ms Porat’s more rigorous approach to making investment decisions has had an effect. A mid-ranking employee at one of the divisions credits her with bringing greater certainty to the internal investment process, even if part of her job is to limit some of the spending.
But while the new Alphabet structure has brought more financial control, it is still unclear how the group’s divisions will ultimately be managed as they become more freestanding. Though there are parallels between Alphabet’s investment approach and the Silicon Valley start-up ecosystem, it remains a corporate conglomerate.
The individual ventures do not have their own boards, and Alphabet has not introduced any equity arrangements to tie employees’ rewards to the success of their units — the kind of incentives that are a big attraction of joining start-up. The company has relied instead on big cash bonuses, paid out when the newer businesses hit significant milestones, though that may not keep talent in the long term. Thedriverless car division has shed some of its top engineers in recent months after making big payments like these, according to a person familiar with the business.
“This isn’t like being in a start-up — it’s like being in a family business, with mercurial venture capital backers,” says an employee at one of the businesses.
In some cases, the more rigorous analysis of Alphabet’s disparate operations has also exposed the need for different business approaches. The company’s high-speed broadband division, for instance, was set up to provide more competition to rival networking companies and prod them to invest faster in their own fibreoptic systems, something that would help the core Google internet business. Now, as a freestanding division, the broadband business is searching for ways to reduce its hunger for capital and find new, cheaper technologies than fibre that will make it a profitable business in its own right — a hunt highlighted by its acquisition in June of wireless internet access company WebPass.
With the search still going on for sustainable business models, Alphabet has held back from making any promises about when bets like this will pay off. That makes it very different from Facebook, which has been far clearer in outlining its long-range plans, says RBC’s Mr Mahaney. The social networking company has grouped its bets into ones it hopes will pay off on three, five and 10-year horizons.
Speaking recently at the first shareholder meeting since its formation, Mr Schmidt gave the first indication that Alphabet is also trying to come up with a more rigorous timetable. It should at least be clear within three years which of the portfolio it refers to as its “other bets” will be worth pursuing, he said.
But even if the long-term outlines and goals for Alphabet remain unclear, Wall St is more than happy to stay patient. And if shareholders ever start to feel restless, there is always the huge profitability of the old Google business to reassure them.
