Technology And Money: What Google Plans With Alphabet

by August 12, 2015
A screenshot from Alphabet Inc.'s website.

A screenshot from Alphabet Inc.’s website.

Google surprised the tech and financial worlds on Monday when it announced plans to restructure under the new name Alphabet Inc.

The move brought a mixture of praise and criticism, and earned comparison to one of the country’s largest publicly traded companies: Warren Buffett’s Berkshire Hathaway.

Google co-founder Larry Page has praised Buffett in the past and says that the Berkshire Hathaway conglomerate serves as a model for running complex organizations, as Market Watch reported yesterday.

When put side by side, the two could look pretty similar in the future, which has led some in the industry to call Alphabet the “21st century Berkshire.”

It’s certainly a flattering comparison for Google, but it also gives some insight into why restructuring might be a good thing for the tech giant.

Berkshire Hathaway is a conglomerate that owns a number of profitable but drastically different subsidiary companies like Dairy Queen and Fruit of the Loom. Alphabet will have a similar look with its holding company structure, according to the New York Times.

This week, Berkshire Hathaway made its largest acquisition yet, the aerospace parts maker PrecisionCast Parts. Almost unknown in the everyday business world, PCC’s customers include every major aircraft company and engine maker, as our Micheline Maynard reported in Forbes.

Google is keeping its primary innovations, like its search engine, advertising, YouTube and Google Maps, under the Google name.

But its more adventurous companies like Calico, its anti-aging biotech company, Sidewalk, which is focused on building smart cities, and Fiber, a high-speed internet service popular in select cities across the country, will now be separate under Alphabet.

As the Times reports, this could help keep the large company innovative. With its new structure, other operating divisions within the company will have more freedom in making their own decisions and innovations, while its core business at Google will continue to serve as its main source of income.

It’s one of the main reasons the change make sense to Russell Brandom at The Verge. With its new structure, Google investors that have never been very happy with the cost of its experimental projects should see how well its core business is performing. As Brandom writes:

Under that model, Alphabet can be a collection of some profitable businesses and other not-so-profitable businesses expected to bear fruit in the future. The Google half can be considered individually, with the rest left to stand or fall on its own merit.

Each company under the Alphabet umbrella will have its own CEO who runs the business, with Page and fellow co-founder Sergey Brin allocating funds and selling off companies whenever they see fit. Problems could arise, however, with the company’s “moonshot” investments in technology.

Berkshire Hathaway, as Bloomberg Business points out, invests in well-established companies that bring in a steady amount of money. Alphabet’s angle, however, will be developing new technology products as well as experimental investments like self-driving cars that might take some time to become profitable.

Technology companies like Nokia Oyj and Hewlett-Packard Co. have used similar strategies and suffered failures in the past, selling off innovative businesses they invested in. Choosing to fund innovative products and produce new hit products can be tricky, which is why there have been a number of failures in the technology industry.

For story ideas, try and find some angles to localize the story and see if the restructuring will affect any investments Google has in your area.

Brandom reports that projects like Google Fiber, which are somewhat reliable but still very expensive and experimental, might end up being losers in the new structure because they will have to justify their “existence to a very different audience” after the reorganization. Find out what that could mean if your city currently has Google Fiber or if it’s a potential city for expansion in the future.

Google and Buffett have also generated discussion around the conglomerate structure as well. While it might not become a popular model again, it could be a good time to look into local holding companies and even subsidiary companies in your area. Find out how well they’re performing and how that affects other companies that are connected to it.

STORY IDEAS

Alphabet’s website