When Google announced it was forming holding company called Alphabet and splitting off parts of its business into new entities, many asked: why?
Investors didn’t. Google’s stock opened up 4 percent to $690 on Tuesday as investors saw the potential of a management structure more aligned with its businesses and clearer direction and focus.
Here is what the restructuring means:
1. The market is happy
Google had become unwieldy, having gobbled up competitors and expanded into wide-ranging “moon-shot” projects — ideas so crazy they might just work.
By unbundling its most profit-driven elements, Google is making its finances more transparent. Investors will get a clearer look into Google’s finances starting in the fourth quarter.
“Our company is operating well today, but we think we can make it cleaner and more accountable,” Larry Page, Alphabet’s new CEO and Google’s old one, wrote in a blog post announcing the changes.
Analysts are on board.
Shareholders have been “wanting to have a bit more clarity in terms of how well some long-term investments are performing,” said Nitesh Patel, senior analyst at Strategy Analytics, specialized in wireless media strategies. “Nest, Fly Balloon — Google is such a broad and diverse company in terms of the activities it is involved in.”
2. Engineers rule at Google
Shifting top executives to Alphabet, Google has cleared the way for new blood. Sundar Pichai, previously head of product and engineering for Google’s Internet businesses, is now in charge of the giant division.
Sundar Pichai (Getty)
Pichai will take control of all of Google’s search-related elements, as well as advertising sales, YouTube, Gmail and Android. Insiders have long said engineers would be the top dogs and Pichai’s appointment has confirmed it.
The Indian-born exec has been a Google stalwart and loyal deputy. Last year, in a management reshuffle, he became Google’s second-highest ranked engineer after Page.
3. Visionaries are still on top
The real message Page and co-founder Sergey Brin are sending is this: while the realm of search is core, it’s not the endgame.
Both Brin and Page have supported moon-shot projects, and rumors have circulated that Page was bored of being held back by investors who didn’t always see the value in Google’s riskier bets.
Most moon shots never get off the ground. Of those that do, it may be years before they start paying off, if ever. Just look at Google’s various philanthropic products, such as free Internet balloons in developing countries, and gambles on high-tech medical gadgets.
By placing Alphabet on top, Brin and Page told investors that Google was just one part of the equation.
In his blog post, Page said, “We did a lot of things that seemed crazy at the time. Many of those crazy things now have over a billion users, like Google Maps, YouTube, Chrome, and Android.”
That’s why Alphabet will include the X lab, which incubates new efforts like the Wing drone-delivery effort, as well as Google Ventures and Capital.
4. Alphabet won’t make the antitrust case go away
Some in Brussels speculated that the creation of Alphabet could be, in part, a reaction to the European Commission’s antitrust case against Google.
Most of the European Commission’s formal concerns against Google relate to how it leverages its market strength over online search, where it enjoys a 90 percent share in Europe, and over phone operating systems onto connected services, like Google shopping or YouTube.
The restructuring “is a recognition that we were right in our denouncement and Google was not right in their arguments,” said Ramon Tremosa, a Liberal Member of Parliament for the European Union representing Catalonia.
However, a source close to Google said, “This has zero impact on the investigation.”
The Commission agrees.
EU Competition Commissioner, Margrethe Vestager (EPA)
“A company does not insulate itself from a competition investigation through a change in corporate structure,” said Ricardo Cardoso, a European Commission spokesperson.
Nor will this maneuver reduce Google’s exposure to potential antitrust fines, if it is found to have broken EU law. Any fine would be calculated based off the sales of the product in question.
Google is currently working on its rebuttal of the Commission charges, which is due August 17.
David Drummond, Google’s general counsel, will serve in that role at Alphabet, and it was unclear if he would shift the antitrust cases to his successor.
Google’s public affairs team in Brussels may also change. Alphabet subsidiaries may want specialists to lobby on transport, energy or aerospace issues, for example. Vivendi, for example, has its own lobbyists separate from its subsidiary Universal Music Group.
5. It may reduce Google’s exposure to future antitrust cases
On the face of it, the creation of Alphabet is a smart move to limit future exposure to antitrust allegations.
The major concern with Google is its dominance of certain gatekeeper markets. A second concern relates to the terabytes of data that Google collects.
At first glance, managing its smart home device maker Nest separately from its search engine could reduce the scope for such cross-pollination.
But Patel, of Strategy Analytics, has his doubts.
“If you look at assisted driving, you are looking five years out; if you look at automated home, it is also five years out,” he said. “As these markets develop into true consumer markets, maybe then that will be a driver for reintegrating them into the core.”