Alphabet And The Rewriting Of Google's Business Model

18/08/2015 8:13 AM IST | Updated 15/07/2016 8:25 AM IST

For the last two months, the media has been carrying news about our dysfunctional Parliament, terrorist attacks in Gurdaspur and Udhampur and various scams. We yearned to hear some good news and it did indeed come, when on 10 August. Larry Page, founder of Google, announced the name of Sundar Pichai, as the company's new chief executive officer. As Indians, we are proud that another Indian, after Satya Nadella of Microsoft, has made the grade in one of the most respected companies of the world.

In a blog post called "G is for Google", Larry Page announced the formation of a new umbrella organisation called "Alphabet" of which Google will now be a wholly owned subsidiary. "Alphabet will replace Google as the publicly-traded entity and all shares of Google will automatically convert into the same number of shares of Alphabet, with all of the same rights," wrote Page.

The formation of an umbrella company has been necessitated due to the phenomenal growth of Google over the last 17 years. In the blog post, Page argues that the conglomerate will allow for "more management scale," letting him and co-founder Sergey Brin efficiently "run things independently that aren't much related."

"In view of the phenomenal growth across verticals, Google's credo of doing "one thing, really, really well" has lost its relevance."

The Stanford techies have asserted that every sector of modern life, including healthcare, transportation, media and education, will be improved by the liberal application of computing technology. According to Larry, the creation of the company will make it more fiscally accountable, apart from giving total freedom to all their chief executives across verticals to innovate and scale up operations. They have also decided to declare the financial results of each division separately to give a clear picture on how each division in Alphabet is performing and make its chief executives accountable for their performance.

As a result of the reorganisation, Sundar Pichai, who has been working with Google since 2004, will be responsible for internet products, search engine, YouTube, Android and online advertisements. Sundar is an alumnus of IIT, Kharagpur and did his MBA from Wharton. He is highly respected among thousands of employees in Google and is a darling of Wall Street. Google has posted $17.7 billion in sales, 90% of which is attributed to advertising, it sold through search, partner websites, YouTube and Android. Google recorded $4.3 billion in profit last quarter, and it has $61 billion in reserve. The revenue from online advertisers alone has crossed $10million. According to CNN Money, "Investors have rewarded the company for its financial success by sending the stock soaring 25% this year. Shares rose another 6% after Monday's announcement."

Further, Alphabet will now have seven verticals, each to be headed by a CEO. Nest will be led by Tony Fadell, Sidewalk Labs by Dan Doctoroff, and Calico by Arthur Levinson. The present YouTube CEO, Susan Wojcicki, will now report to Pichai. Brin will continue to head up Google X in addition to his role as president of Alphabet. Eric Schmidt will become Alphabet's executive chairman. The new stand-alone companies will have more freedom to innovate, take risks and scale up the operations. They can continue to invest in experimental projects like driverless cars without interference from other units in the company, or investors worrying about the company wasting too much time and energy. As Larry Page aptly put it, "We are not intending for this to be a big consumer brand with related products -- the whole point is that Alphabet companies should have independence and develop their own brands."

When Larry Page and Sergey Bin founded Google as students at Stanford University, both had dreams of making it a world-renowned technology company specialiZing in internet-related services and products. When Google was incorporated as a privately held company on 4 September, 1998, the founders had stressed the importance of doing "one thing really, really well" -- that one thing being their search engine. Yet, over 17 years, Google, has expanded in several areas of business like online advertising, cloud computing, android mobile systems, social networking, the office suite (Google Docs), to name a few. It also acquired Motorola mobility in 2012, which was ultimately sold last year to Lenovo. In 2012, a fibre-optic infrastructure was installed in Kansas City to facilitate Google Fibre broadband service. The Google search engine and other technology-related products had significantly increased the turnover, which is estimated at $64 billion. For six consecutive Google has been ranked as the number one company to work for.

"[W]ith an Indian at the helm, there are a lot of expectations that he will provide a platform for Indian companies to benefit by partnering with Google."

In view of the phenomenal growth across verticals, Google's credo of doing "one thing, really, really well" has lost its relevance. With the formation of Alphabet, the co-founders would expect the CEOs to strive to bring excellence in all their verticals.

It is said that Page and Brin modelled the business after the billionaire investor Warren Buffett's Berkshire Hathaway, which owns a complex portfolio of businesses including clothes manufacturer Fruit of the Loom and insurer Geico. Warren recently bought Precision Castparts, maker of aerospace and other industrial parts.

Google has come a long way since it started as a search engine. 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. 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 will be just one of the letters in its portfolio.

And, with an Indian at the helm, there are a lot of expectations that he will provide a platform for Indian companies to benefit by partnering with Google.

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