Inside Alphabet: Why Google Rebranded Itself And What Happens Next

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As Larry Page once told staff, technology is revolutionary, not evolutionary, and Google’s surprise move has experts speculating there are more changes to come

Every month a hundred billion searches run through Google – a repository of the world’s curiosity, hopes, dreams and fears. Google has been a verb in the Oxford English Dictionary since 2006, it is valued at $445bn and last year had revenues of $66bn. But as its billionaire founders have made clear, none of this is enough.

In a stunning move on Monday night, Google rebranded itself Alphabet. The new company will be a holding company whose largest asset will be Google the search firm. But founders Larry Page and Sergey Brin made clear that while G is for Google, it would be just one of the letters in its portfolio.

Alphabet will be run by Page, Brin and chief financial officer Ruth Porat. Alphabet’s new Google subsidiary – including the search business, YouTube and the Android and Chrome operating systems – will be led by Sundar Pichai, who had been running most of Google’s major businesses since last year. Wall Street loves Pichai and the businesses he now runs, which generated nearly all of Google’s revenue last year.

Outside of Google, Alphabet’s subsidiaries will each have their own chief executive, reporting to Page. The structure is reportedly modelled after billionaire investor Warren Buffett’s Berkshire Hathaway, which owns a complex portfolio of businesses including clothes manufacturer Fruit of the Loom, insurer Geico and this week bought Precision Castparts, maker of aerospace and other industrial parts.

Google has come a long way since it started as a search engine 16 years ago. Now a tech conglomerate with interests in everything from media to driverless cars, medical devices, longevity research, smart home appliances, fibre-optic cable and drone delivery, being seen as “just” a search company – no matter how successful – is a handicap, according to its founders.

“As Sergey and I wrote in the original founders’ letter 11 years ago, ‘Google is not a conventional company. We do not intend to become one’,” Page wrote in a blogpost. “As part of that, we also said that you could expect us to make ‘smaller bets in areas that might seem very speculative or even strange when compared to our current businesses.’ From the start, we’ve always strived to do more, and to do important and meaningful things with the resources we have.

“Fundamentally, we believe this allows us more management scale, as we can run things independently that aren’t very related,” wrote Page.

Wall Street liked Monday’s move, sending Google’s share price up over 5% initially. Investors have long been irritated by a lack of clarity on how much Google is spending on its “moonshot” projects. The new corporate structure, they hope, will give them greater clarity.

Scott Kessler, equity analyst at S&P Capital IQ, said the move would allow Alphabet to “run the Google operating unit in a way that gives people greater insight” while taking the pressure off Google’s early stage, money-losing ventures that – for now – Wall Street is less interested in. But, Kessler warned, investors would be watching closely to see that extra clarity was delivered.

Google’s move comes at a time when rivals like Facebook and Amazon are moving away from their core businesses. Amazon became the world’s most valuable retailer last month, beating out Walmart, but not because of its retail business: the company’s shares soared after particularly good results from Amazon Web Service, AWS, the company’s collection of remote cloud computing services. Facebook now counts WhatsApp and Instagram among its portfolio of businesses – two ventures that are growing faster than its core business.

Betting on your one core business, no matter how profitable, is risky. Just ask Microsoft, which has suffered as the internet has eaten into its Windows business.

Technology is revolutionary, not evolutionary, Google co-founder Page warned staff a few years ago as he stepped back from day-to-day running of the search engine business he had helped found. In a memo to staff he said the move was meant to make sure he could get the “next generation of big bets off the ground” and warned if Google didn’t pick up the pace it risked becoming irrelevant.

Not everything changes. Page and Brin’s control of Alphabet will be just as tight as their control of Google. They retain some 52% of all voting shares between them. But experts speculate their are bigger changes to come.

Peter Henning, professor of law at Wayne State University Law School, said: “It’s a very complex structure – they’re setting it up for something else down the road. It is form over substance, but you have to have the form in place before you can do the substance. It gives them a lot of flexibility for financing and for spin-offs.”

Henning suggested that Google could push its less-profitable businesses into silos that could be sold or issue their own stocks, eventually. “Once they have this new structure, this sort of upside-down merger where Alphabet is on top and Google is underneath it, I suspect they will create a new wholly owned subsidiary of Alphabet to put those other businesses in – self-driving cars, Google Glass, whatever other wastes of money or long-term investments they’ve been involved in.”

Is there a tax dodge in this shell game? Analysts don’t see one yet but the company (and its peers) has a long history of clever tax avoidance schemes, and critics will be watching closely. “We’re not commenting on the whys of the financial structure,” a Google spokesperson said via email.

Nor are critics of Google’s dominance likely to be put off by the move to Alphabet.

The European Commission accused the company in April of engaging in anti-competitive practices by privileging its own products and services over those of competitors in its search engine. There have been calls for a breakup.

The move “changes nothing about the company’s impact and challenges it poses for consumers”, the nonprofit public interest group Consumer Watchdog said.

“A rose by any other name is still a rose and Google by any other name is still the internet giant,” said John Simpson, Consumer Watchdog’s privacy project director.

“Alphabet through what will now be called its subsidiary will continue to track us around the web and build digital dossiers about us. It makes little difference to Google’s users.

“This structure allows Page and co-founder Sergey Brin to keep investors happy and continue to have their toys like Google Glass and robot cars,” said Simpson. “We don’t know where in the new corporate structure the robot car project will end up, but you can be sure Alphabet will push the vehicles at us before the cars are ready.”

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