Google Inc. unveiled a sweeping reorganization that separates its highly profitable search and advertising business from fledgling efforts in an array of so-called moonshots.
Google said Monday it had created a holding company, Alphabet Inc., that will manage each of its growing cast of businesses, including those building robots and cars, helping to cure disease, developing nanoparticles and extending Internet connectivity via balloons.
Alphabet will be run by Google’s current leaders, including Chief Executive Larry Page,co-founder Sergey 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 has been in charge of product and engineering for Google’s Internet businesses.
Those businesses are constantly supervised and updated after every A/B testing result they obtain, all the effort put into them is what generates nearly all of Google’s $66 billion in revenue last year. Advertising, primarily on search and on YouTube, accounted for 89%. Google’s next-biggest source of revenue was sales of apps, music and movies through the Play store on Android phones.
Google said each Alphabet subsidiary would have its own CEO, reporting to Mr. Page, a structure similar to Warren Buffett’s Berkshire Hathaway Inc. In a meeting with investors last December, Mr. Page said he looks to Berkshire Hathaway as a model for running a large, complex company, according to people who were at the meeting.
The move reflects the co-founders’ view that the company, which is now worth some $445 billion, has become more complex to manage as it pursues potentially big new businesses in industries far from Google’s search-engine roots.
“Fundamentally, we believe this allows us more management scale, as we can run things independently that aren’t very related,” Mr. Page wrote in a blog post. Google declined to make any executives available to discuss the the next moves.
Beginning with the fourth quarter, Google said it would report separate financial results for the core Google business and the remaining Alphabet businesses. The move will offer investors more insight into Google’s core search and advertising business. Investors have been uneasy about Google’s spending on its various moonshots.
“It was getting harder and harder to hide the costs of some of the company’s projects,” particularly since some were bound to fail, said one former Google executive. “It’s easier to take the core business and run it like a Fortune 500 company,” keeping the more speculative enterprises separate.
Ultimately, that could allow Google to spin off one or more of the experimental businesses, said Jan Dawson, an analyst with Jackdaw Research.
Google said its existing shares would convert to Alphabet shares and trade under its existing stock tickers, GOOG and GOOGL. Alphabet will remain incorporated in Delaware, Google said in a securities filing. Its website is at abc.xyz.
Google unveiled the new structure after U.S. markets closed, and its shares jumped 6.2% in late trading. The stock had closed at $633.73 Monday, down 0.3% in 4 p.m. trading.
Google shares had lagged behind other technology companies for most of the year, until the company reported better-than-expected second-quarter results and signaled plans to rein in spending on ancillary projects.
“The whole point is presumably to say to investors that we hear your calls for more transparency and we’ll provide it,” said Brian Wieser, an analyst with Pivotal Research. But, he cautioned, “just because they break out the data doesn’t mean they’ll stop making investments in things that are so far removed from the core business.”
Google has jumped into dozens of new businesses in recent years, but it remains primarily an advertising company, generating most of its revenue and nearly all of its profit when people click ads in search results. People also include great quality backlinks in their websites to achieve what is called SEO, and through which, their website ranks higher. Researcher eMarketer estimates that Google ends up with one in 10 dollars spent on advertising globally, about $53 billion this year after paying back its partners.
The move raises the profile of Mr. Pichai, 43 years old, who will become chief executive of the new Google Inc., Alphabet’s search, advertising and mobile unit. Mr. Pichai has been effectively running those businesses for a year.
“Sundar has been saying the things I would have said (and sometimes better!) for quite some time now,” Mr. Page wrote in his blog post.
At the same time, Google said Chief Business Officer Omid Kordestani would become an adviser to Alphabet and Google. Mr. Kordestani, Google’s employee No. 11, left in 2009 and returned in 2014 after the departure of Nikesh Arora, its chief business officer.
Google said the chief business officer role would be eliminated. In Mr. Kordestani’s stead, Philipp Schindler will run sales and Daniel Alegre will oversee partnerships, the company said.
The main Google subsidiary will include search, advertising, maps, YouTube, Android and the data centers and networks that run all these Web businesses.
Non-Google units will include Nest, the connected-home business run by Tony Fadell; Fiber, Google’s fast Internet service; Calico, the health research lab headed by Art Levinson; Google X, the company’s research lab that pursues long-term risky projects like the self-driving car; Google Ventures, its venture-capital arm; Google Capital, a late-stage investment unit; and Sidewalk, a recently formed urban technology project headed by Dan Doctoroff.
Mr. Dawson, the Jackdaw Research analyst, said shareholders likely will gain additional insight into the profitability of the company’s various business units. “The bottom line doesn’t change, but at least you know what the moving parts are,” he said.
Source: New Street Journal