The internet giant has announced a new corporate structure
IT MIGHT sound like the name of an imaginary firm designed by the characters on “Sesame Street”, a popular children’s programme, but on August 10th Google’s founders announced that they have chosen to rename their firm “Alphabet Inc.” In recent years Google, the giant internet firm, has started to look like its own Alphabet soup of different businesses, as it has expanded beyond its core business in online-search advertising to invest in building self-driving cars, wearable devices, smart cities and other ambitious but unprofitable projects. The new corporate structure could help streamline Google’s businesses and make shareholders calmer about how much Google is spending on its “moonshot” projects. Alphabet will serve as a holding company for the new Google, which will comprise all its advertising and internet businesses, such as YouTube, while other business units will run separately under Alphabet.
Google, which has built an extremely profitable internet business by serving up instantaneous search results that people want and then selling advertising space alongside them, is not so forthcoming when it comes to details about its own business. For example, investors have to guess how much revenue YouTube, an online video site, makes. (The answer is probably around $5 billion in revenue last year, but analysts are not quite sure, nor are they in agreement on whether it is profitable.) Investors surely hope that this new corporate structure will lead to more detailed reporting of its various business units and how much the group as a whole is spending on far-flung ideas—like extending human life, say—which helps explain why the firm’s share price rose 5% after the announcement.
Larry Page and Sergey Brin, Google’s founders, will serve as Alphabet’s chief executive and president, respectively. They picked the name Alphabet because language is “one of humanity’s most important innovations”, according to Mr Page, and also because buying Google’s stock is an “alpha-bet”, or a bet that Google will outperform the market.
The new GE: Google, everywhere
Outperformance looks likely in the near-term. Few firms have such a lucrative core business: Google’s search-advertising business probably has profit margins of more than 60%, according to RBC Capital, a Canadian investment bank, and it controls more than 70% of the sector worldwide. Its advertising business accounted for 89% of its $66 billion in revenues in 2014.
In the long-term, however, Alphabet faces a few risks. European regulators are pushing back against Google for abusing its market power by favouring its own products in its search results; Google needs to respond to these charges by August 17th. And advertisements on the small screens of mobile phones, where people are spending more time, are not as lucrative as desktop advertisements.
The news may bring investors some satisfaction in the coming months, but over time Google is likely to face pressure to streamline further. Conglomerates that control diverse businesses with differing growth rates are out of favour with investors (with one or two exceptions, such as Warren Buffett's Berkshire Hathaway), and some older technology firms, such as Hewlett-Packard, or eBay with PayPal, have made moves to completely hive off their different business units into separate companies. With its hands in such varied industries, Google, along with Facebook and Amazon, have started to look like General Electric, an old-fashioned industrial conglomerate—which has been spinning off unrelated assets of its own for years. Investors will continue to accept the sprawling structures of internet giants so long as they continue to grow quickly and deliver handsome profits, but they do not like it. The announcement of Alphabet is a step towards streamlining, but it will not be the last one.
