Google has made the move towards a conglomerate business model following years of pressure from Wall Street, analysts and investors. Cue the rise of Alphabet.
Under Alphabet will be Google’s core business plus its future bets including life sciences, home automation, driverless cars, drones, robotics, wearables and mobile computing.
But what does the move mean for Google and Wall Street?
Transparency – investors will now be able to identify the amount being spent on Google’s future bets. In the previous business model it was difficult to ascertain how much was being invested in new ideas and innovation.
Improved focus – Google’s founders will now be able to spend 100% of their time on future bets. Having handed over day-to-day control of Google core to Sundar Pichai they have more time to devote to their future-thinking and strategy.
Agility – Google will be able to enter new markets and industries. The move to Alphabet means the company’s market space is endless. Sea urchin farms anyone? With the move to conglomerate status Alphabet will be able to acquire new businesses without investors and analysts desperately searching for hidden meanings or links.
Are there any dangers?
Google has for years been the poster boy for America’s fundamental belief that failure isn’t all that bad. They’ve continued to learn despite failing at social media (Google +), wearables (Google Glass) and payments (Google wallet). The risk now for Google is that in answering investor and analyst demands for clarity they risk existing in a world where heavy investment in innovation is frowned upon. Stock markets are notoriously short-termist in their thinking and may not be content with Alphabet pouring billions of dollars into projects that might not bear fruit for 5 to 10 years. How the likes of Boston Dynamics might fare is anyone’s guess.
Arguably, conglomeration could mean Google losing focus or risking mission creep by entering ever more markets. With this comes two further major risks.
One is that political and regulatory bodies such as the European Union begin competition investigations into Google’s operations if they believe data is being used across various divisions to lock customers into a Google ecosystem.
The second risk comes from activist investors such as Carl Icahn who have shown determination to streamline companies and break up those that appear to be focusing in too many areas: whilst Ebay wasn’t a conglomerate it did have various interests, including its payment business PayPal. Icahn facilitated that company’s split and Google could face this challenge in the future.
As Alphabet grows so does the need for ever more rigorous corporate governance. With so many distinct business units, Alphabet’s management need to ensure that due diligence, compliance and governance are given proper attention. The risk for any major conglomerate is that a disaster or scandal in one part of the holding company brings down everything else.
In the months and years ahead it will be interesting to watch as Alphabet emerges into the world’s largest conglomerate. Only time will tell how the company will perform and whether Google will retain its essential DNA for exploring, innovating, failing and succeeding.
Paul Roberts, Strategy Activist