Google is now many Googles.
Company co-founder Larry Page said in a blog post Monday that Google is reorganizing into multiple companies that will sit under a new umbrella operation called Alphabet. Core businesses---Search, YouTube, and Android---will operate semi-separately from Google's myriad "moonshots," including the X lab and Page's various life science projects.
This unexpected transformation shows just how diverse the company has grown since its founding 17 years ago. Though Google began as a search company, it now dabbles in everything from smartphone operating systems to product-delivery drones to cancer-detecting wristbands. But the move also underscores that Page and his top lieutenants, including new chief financial officer Ruth Porat, are keen to prevent the moonshots from dragging down the company's stock price and limiting its ability to attract top talent.
With Alphabet, Page can show investors that the company's bread-and-butter businesses remain highly profitable, even if the moonshots fail to turn a profit for years on end. The upshot of Alphabet is that, beginning early next year, the company will report Google's core earnings separately from moonshot earnings---or lack thereof, as the case may be.
"There's the core Google business, which is very very profitable and largely funds everything else, and there's all the new stuff, most of which won't be profitable for years," says tech market analyst and consultant Jack Dawson, who has no direct relationship with Google. "By splitting off all the experimental stuff, they can show how profitable the core business really is."
In an interview with The Financial Times in October, Page said there's no precedent for the company he wants to build. But it seems he's taking a page or two from the most successful investor in Wall Street history: Warren Buffett, who runs the vast conglomerate Berkshire Hathaway.
Indeed, Page pointed to Buffet as someone who knows how to lead the kind of company he and Google co-founder Sergey Brin have in mind. And according to The Wall Street Journal, Page went even further in December during a meeting with top shareholders, saying Berkshire Hathaway---which spans everything from insurance to underwear to aerospace supplies---exemplifies how a large, complex company should be run. "Mr. Buffett has a cadre of CEOs running operating companies and doles out capital from the holding company to these businesses based on their performance each year," the Journal wrote.
That essentially lays out the blueprint for Alphabet. "Our model is to have a strong CEO who runs each business, with Sergey and me in service to them as needed," Page wrote in his post. "We will rigorously handle capital allocation and work to make sure each business is executing well."
The added result is that, as time goes on, Google can more easily spin its moonshots into separate companies. With the creation of Alphabet, each operation will operate largely on its own, with its own CEO. "They will already be somewhat independent companies," Dawson says. But for now, the idea is to fund these companies as Berkshire funds its railroads and real estate companies.
It's likely no coincidence that this restructuring is happening so soon after the arrival of Porat, who came to Google from Morgan Stanley and will serve as chief financial officer for all of Alphabet. Still, Buffet is perhaps the bigger influence. As he said in that Financial Times interview, Page aims to provide that "longterm, patient capital"---but without letting Wall Street's thirst for instant results drag things down. The logic is sound, though there are reasons to be skeptical. Many have sought to emulate Buffet. Few succeed.
