A Blog by Jonathan Low


Mar 27, 2016

The ABCs of Larry Page's Transition From Google To Alphabet

This is about the next battle: with Apple, Facebook, Amazon and startups we haven't even heard of. Yet. JL

Austin Carr and colleagues report in Fast Company:

Page needs his company to remain competitive in the face of the most significant threats it has ever faced—from Apple and Facebook but also the likes of Amazon and Pinterest. This  is why Alphabet is more than just a spectacular corporate reengineering. Page reset at the very moment that analysts were heralding Peak Google. He broke his business into smaller pieces to focus them more narrowly, while trying to maintain the advantages of scale and resources
"It’s kind of counterintuitive," Google cofounder Larry Page remarked a couple of years ago. "Normally in a business, you think about, ‘What’s the adjacent thing that I can do?’ But maybe you can actually do more projects that are less related to each other."
Back then, Page was explaining why his company—whose mission, officially, is to organize the world’s information and make it universally accessible and useful—had expanded to address everything from teaching automobiles to drive to researching ways to extend the human life span. At the time, the insight seemed classic Page, a heartfelt defense of unconventional thinking. Today it feels like something more: a premonition of perhaps the most radical, labyrinthine corporate restructuring of the digital era.
Page released a letter last August announcing the reconfiguring of Google into a conglomerate called Alphabet. It described Alphabet as a new holding company that would be composed of independent operating units. The Google search engine and related businesses—including Android, Gmail, and YouTube, to name a few—would be just one of them, and although it wasn’t initially clear, Alphabet would be home to nine other companies, including Calico (the health care company whose goal is to lengthen life expectancy), Verily (the home of the company’s "smart" contact lens), X (its R&D arm), DeepMind (artificial intelligence), and Access (all of the company’s high-speed Internet initiatives). In February, Alphabet added its 11th unit when it elevated the think tank/tech incubator formerly known as Google Ideas into its own entity called Jigsaw.
So what holds these far-flung enterprises together? And why have they been organized in this fashion? These are among the most critical questions facing Techland, investors, and anyone who competes with any piece of the company formerly known as Google—which includes almost everyone.
Page has been typically reclusive since announcing Alphabet. (He was not interviewed for this article.) But that does not mean we can’t make sense of this newly arranged company. Page has never been content to stand still, compelled by hyperambitious efforts that he calls moonshots. Alphabet is itself a moonshot, hoping to overcome a raft of technological, social, and financial challenges endemic to a world of increasing change. To understand this larger imperative, we’ve focused in on six areas, each epitomized by the experience of—or model established by—another leading company: Microsoft, Nike, GE, Apple, Facebook, and Google itself in its earlier days. In deconstructing Alphabet’s opportunities and risks this way, a nuanced understanding of what Page might be after emerges.
So far, Alphabet is off to a rousing start: Shortly after it announced its first quarterly results in February, it briefly displaced Apple as the world’s most valuable company by stock-market capitalization (a feat that the old Google never accomplished). As Page explained in his August letter, "We’ve long believed that over time companies tend to get comfortable doing the same thing, just making incremental changes. But in the technology industry, where revolutionary ideas drive the next big growth areas, you need to be a bit uncomfortable to stay relevant." Here are the revolutionary ABCs of Alphabet.

A. Avoiding the Microsoft malaise

In the 1980s, the mantra of Microsoft founders Bill Gates and Paul Allen was "A computer on every desk and in every home, all running Microsoft software." At the time, that goal was a moonshot. When the company achieved it, Windows and Office—which eventually boasted 90%-plus shares of their respective markets—yielded landslide results. Microsoft became the most prolific profit machine in history, with margins on its core software products that no other company could approach.
Until Google came along. Since then, Google’s search engine has become the preeminent utility of the modern age, with an ad-revenue stream that continues to spout enviable profit margins. But within that success lies the seeds of trouble. And that is part of what Alphabet was created to combat.
As Microsoft learned the hard way, when you have a once-in-a-lifetime business model, any other market you pursue pales in comparison. After conquering the PC world, Microsoft widened the scope of its ambition. It created the Xbox gaming system, moved into mobile, spent billions on the Bing search engine. These efforts largely disappointed: Windows Phone’s market share is now a rounding error, and Bing has never spent a year in the black. Even a blockbuster like Xbox couldn’t match the enduring windfalls generated by Windows and Office. Every dollar that Microsoft reaped on new ventures had lower margins than its core operations. Investors began to put a lower value on each dollar of Microsoft’s earnings; the stock stalled.
Perhaps it’s not surprising that Microsoft developed tunnel vision, viewing every new technology wave as an opportunity to sell more Windows licenses. That, after all, was the crown jewel. Yet when Microsoft announced its first-ever dividend in January 2003, the move signaled to Wall Street that the company didn’t know what else to do with the $43 billion in cash that it had on hand. Microsoft’s status as a growth business began to crumble.
Page’s Alphabet currently has $73 billion in cash on hand—a signal of just how pertinent the Microsoft comparison is. In turning Google into Alphabet, Page has made a clear statement to investors (and employees) that he is still focused intently on growth: Unlike Microsoft, Alphabet has plenty of areas in which to invest its cash. Even the streamlined Google unit has its own portfolio of moonshots, from virtual reality to machine learning. As Page noted in his letter, his company has done many things that people thought odd over the years and "many of those crazy things now have over a billion users, like Google Maps, YouTube, Chrome, and Android."
What’s more, Page’s new structure has made it simple for investors to value the dollars coming from Google as distinct from the performance of the rest of Alphabet’s units. And Google looks stronger than ever. Revenue grew 18% year over year in the fourth quarter of 2015, with full-year revenue reaching $74.5 billion. Since more than $3 billion in costs have now been shifted to other Alphabet units, Google’s profitability looks better too.
Of course, to be a long-term success, Alphabet needs to prevent Google’s mammoth advertising business from becoming a crutch (or, worse, an albatross). That’s where the entirety of Page’s new structure comes in. By giving the Google operating unit more focus, the organization can adapt more swiftly and become a better version of itself. The same holds true for Alphabet’s other business units, which now have their own autonomy—and expectations.
Hoverboards. Jet packs. Internet balloons. Agile (and terrifying) humanoid robots. Teleportation technology. We revere Alphabet for toying with these sci-fi pursuits. What other company would consider developing space elevators? Page has profound ambitions for these projects. Perhaps one day they’ll better humanity or transform the company’s core business.
Lofty goals: Extending wireless Internet service to places cell towers can’t reach is among Alphabet’s many world-changing plans.Photo: Lincoln Else, courtesy of Alphabet
But for now, these "other bets" are splashing red ink on Alphabet’s income statement: $3.6 billion in losses in 2015, an 83% increase from the previous year. Many people view these gambits as Page and Alphabet’s president Sergey Brin’s folly, a collection of extravagant, imprudent distractions.
Here’s another way to view the company’s costly moonshot habit: as a marketing expense. If there’s anything the Mountain View, California–based tech company effectively manufactures, it’s the mythology around itself. These fantastical ideas create a glowing halo around the company, fostering the perception that Alphabet is a place where magic happens, where the most innovative minds, from iPod creator Tony Fadell to life sciences’ chief Andy Conrad, come to tinker. In spite of Alphabet’s intent to be a holding company and not a brand, with each headline-stealing rumor of unrealized futuristic inventions within one of its divisions—X kills more than 100 concepts per year but makes sure we know about some of those too (including most recently an "automated vertical farming" system and a "lighter-than-air, variable buoyancy cargo ship")—an army of new fans gets minted.
No one has used this R&D–as-marketing framework to better effect than Nike. Its sprawling headquarters in Beaverton, Oregon, contain several "not-so-secret" secret research labs, such as the Innovation Kitchen, where top scientists and athletes invent the future of performance wear. Hushed excitement for what takes place in these labs energizes employees and consumers alike. The labs create a fine mist that helps keep the swoosh dewy and fresh, reinforcing the fact that Nike is special, different, and synonymous with cutting-edge culture. Nike doesn’t enlist the graffiti artist Futura 2000 or graphic designer Geoff McFetridge to create limited-edition products because they will deliver huge earnings. Just as with those secret labs, the collaborations animate Nike’s dream factory. Nike employees aren’t just making shoes and apparel; they’re part of something bigger: a global cultural movement of empowerment and fitness. That framing helps Nike with everything from brand value to employee retention.
For Alphabet’s employees, the vast majority of whom work at Google, perhaps it’s not always so special to toil on search-engine algorithms and advertising optimization. Yet the big goals within Google, to connect more users and advance machine learning, are noble and inspiring, and, thanks to Alphabet’s moonshots, staffers are also engaged in a larger futuristic vision, a place full of "Peter Pans with PhDs," as X’s Astro Teller puts it, where "you’ll find an aerospace engineer working alongside a fashion designer and former military ops commanders brainstorming with laser experts." Connecting the quotidian digital advertising business to this culture yields immeasurable benefits.
Let’s reconsider that $3.6 billion Alphabet lost last year on its moonshots. Apple and Microsoft invested roughly the same amount combined on marketing, while Samsung spent nearly four times that. Many of Page’s bets, such as Nest, the smart-home-products company, have significant potential to benefit Alphabet’s business in the long term. And in the near term they reinforce a distinctive culture. Which, by the way, may be the best advertising of all.

C. Channeling GE

Go to Alphabet’s website, abc.xyz, and you’ll see a pile of wooden alphabet blocks.
Unlike Google’s home page, there is no blank white box and blinking cursor awaiting your command. You can’t click on the blocks to learn more about Alphabet’s companies; it’s just a photo! But in that picture is a wink: A single block is turned on its side, revealing a bright blue G. Alphabet is, in essence, a pile of blocks ready to build the Google of our physical world. Google itself is our essential digital infrastructure: Search, email, navigation, documents. One way to understand Alphabet, then, is as a vehicle to build essential, modern, tech-powered physical infrastructure in the real world.
The analogy here is to General Electric, the original technology conglomerate (before technology required software). It’s not that Alphabet plans to displace GE, rather that it seeks to develop GE–like businesses.
What if you were to build a next-generation GE today? Instead of wind turbines and aircraft engines, you might try clean-energy kites and self-driving cars. You’d develop contact lenses that measure blood sugar (Verily), create hacks to our genetic code (Calico), and devote initiatives to robots (Replicant) and drones (Project Wing). You’d design cities where the physical environment is smart and reactive to human presence (Sidewalk Labs). Nearly every department inside Alphabet is building real, physical things, like burly arms to Google’s omniscient hive mind.
As it happens, GE is moving more into the virtual world just as Alphabet moves toward the physical one. GE is using software to optimize the deployment of airplanes, locomotives, mining operations, oil rigs, wastewater treatment plants, wind turbines, and even city streetlights. Its Predix cloud platform serving these industries is a $5 billion business and growing; its energy-focused Industrial Internet of Things unit, Current, has another $1 billion–plus in annual revenue. (By comparison, all of the non-Google Alphabet companies combined generated just $448 million in revenue in 2015, with most of it coming from Nest.)

D. Dreaming of Apple

If Microsoft is the company Alphabet fears becoming, Apple, with its financial might and cultural heft, is the company it aspires to be—though you’ll be hard-pressed to find folks at the Googleplex who will admit it.
Apple has something that Alphabet doesn’t. From the beginning, when Apple introduced the Apple I, in 1976, it offered consumers a cohesive experience. That’s because cofounder Steve Wozniak personally engineered both the machine and its software from scratch. Four decades later, Apple is still building what Steve Jobs liked to call "the whole widget"—hardware, software, and services blended into a (mostly) seamless whole. It even custom-designs processors for the iPhone and iPad. This profoundly ambitious undertaking lets it create new experiences and control them, not only wringing as much juice as possible out of its batteries but as much profit as possible out of its products.
By contrast, there’s Android. When Google announced its smartphone operating system in 2007, it made its platform free to hardware makers, released the source code, and encouraged other companies to dig in and tweak it to their liking. "We hope thousands of different phones will be powered by Android," said Eric Schmidt, Google’s then–CEO.
If anything, Schmidt may have underestimated just how potent the Android proposition would be. Today, more than 8 out of 10 smartphones sold globally run the software, as well as tens of thousands of other devices, including tablets, watches, TVs, video-streaming boxes, cameras, and more, giving Google access to consumers on a scale that competitors can only fantasize about. Yet as dazzling as the Android story is, it doesn’t present a happy ending, because Google gave up two things to achieve this ubiquity. The first is profit potential. According to Oracle’s calculations in a lawsuit against Google, Android has lifetime revenue of $31 billion and profits of $22 billion. In contrast, in just the last three months of 2015, strong iPhone sales helped Apple score $75.9 billion in revenue and $18.4 billion in profit.
In fact, Apple captures a staggering 94% of the smartphone industry’s profits, according to research firm Canaccord Genuity. The Android market has become highly commoditized, with many companies selling basic, me-too phones at a razor-thin profit, if not a loss. The conventional wisdom that Android’s massive market share would reduce the iPhone to near irrelevancy—as Windows did to the Mac in the 1990s—hasn’t panned out.
Perhaps worse for Alphabet is its lack of control. Because Apple owns its environment, it can get new features into consumers’ hands with minimum friction. In September 2015, Apple and Google both updated their smartphone operating systems. Four months later, Apple’s iOS 9 was installed on 75% of iPhones. Conversely, phone makers and wireless carriers are notorious for holding up new releases of Android. Google’s new version, the excellent Marshmallow, had reached a measly 1.2% of Android users, leaving the remaining 98.8% running outmoded software.
Google can’t even depend on Android as a source of eyeballs to look at its ads. Manufacturers are free to de-Googlize the Android experience—and often do. Everyone from Amazon to Chinese phone giant Xiaomi sells devices that replace preinstalled Google services with their own offerings. "What have these manufacturers done?" technology industry analyst and former Apple executive Michael Gartenberg envisions Google asking itself. "They’ve taken our children and are dressing them funny. This just isn’t the way things should be."
Google has been trying to impose more of its authority on licensees to keep the full suite of Google apps. A report last November on the tech news site The Information stated that the company is toying with the idea of designing its own chips, just as Apple has been doing for years. Still, having offered up Android to the world as an open platform, Google can’t simply say "never mind!" and reclaim it as a proprietary operating system à la iOS.
If Alphabet and Google want to develop a "whole widget" strategy, their best option may lie in newer categories of consumer goods. That helps explain why Page spent $3 billion acquiring smart-home innovator Nest, now one of Alphabet’s autonomous operating units. And then there’s the white space of virtual reality. Cardboard, the minimalist system that lets consumers turn smartphones into bare-bones VR headsets using third-party gizmos that cost as little as $15, offers a fun, populist experience. Although Cardboard is likely too rinky-dink to pose a serious threat to technology platforms like Facebook’s Oculus Rift, in January, the Google unit signaled that it was ramping up its VR aspirations by naming a longtime company exec, Clay Bavor, as its first VP of virtual reality. A month later, sources told the Wall Street Journal that Google was at work on a much higher-end VR headset, with its own display, processor, sensors, and cameras. That’s what Steve Jobs would have called the whole widget—and a sharp break from Android’s let-a-thousand-gadgets-bloom approach.

E. Entering the Facebook zone

During Google’s annual stockholder meeting last June—the last it would have as "Google"—the company’s top executives sat on stage as audience members lobbed questions at them that ranged from fantastical to inane. One attendee pestered chairman Eric Schmidt and Page about avoiding a Matrix-like dystopian future. Finally, near the end, a pressing query: "How do you see ad blockers affecting your revenue source?"
The question tapped into a prevailing concern about Google’s business: While dominant on desktop, it risked being eclipsed on mobile, particularly by Facebook and its growing hold on both consumers and advertisers. According to the research group ComScore, 87% of mobile usage is within apps, where ad blocking isn’t yet an issue and where Facebook rules. Page, becoming animated, answered, "The industry needs to get better at producing ads that are less annoying and that are quicker to load. We’ve been kind of trying to pioneer that."
Page’s response signaled two things: that mobile could be vitally important for Google and, more subtly, that Alphabet was not about to cede the app universe to rivals like Facebook.
Since that meeting, Google has reported that mobile searches have surpassed desktop ones worldwide and that it has developed several initiatives to tailor its results and ads. "We are seeing a major shift in consumer behavior toward micro moments," recently elevated Google CEO Sundar Pichai stated during Alphabet’s first earnings call three months later. "These are moments of high intent when consumers are looking to find, buy, or do something." Google introduced a new product that helps marketers reach existing customers via search. And as an example of the types of things Google can now do for advertisers, last fall Dunkin’ Donuts ran a mobile search campaign so that when people searched for "coffee near me," it assessed both walking distance and wait times to steer people to the fastest cup of java.
In terms of the app-scape, Google has now indexed more than 100 billion links within third-party apps so that 40% of searches return results from within an app in the top five. It also launched a clever feature that lets users download or "stream" mobile apps directly from search, providing that in-app info more quickly. Google credits all these advancements with being the primary driver of its revenue growth in the last six months of 2015 (although the company, unlike Facebook, does not break out financials for its mobile business).
Overlooked in the sometimes simplistic analysis of Facebook being the present and the future (mobile) and Google owning the past (browser) is that Google, unlike Facebook, has strength in both areas. Notably, Google has five of the seven most popular apps in the United States, with YouTube at No. 2 and Google Search, Play, Maps, and Gmail in slots 4 through 7. (Facebook and Facebook Messenger take positions 1 and 3.) Meanwhile, Google has continued to deepen its dominance on the open web. In February, Google launched what it calls Accelerated Mobile Pages (AMP), an open-source initiative that enables publishers to build clean, lightweight versions of web pages, stripping out the glut of data-intensive back-end technologies so that pages load almost instantaneously. Several ad formats are restricted from AMP, and publishers are incentivized to comply: Faster-loading sites can lead to a higher ranking in Google’s search index.
If this sounds somewhat like Facebook Instant Articles, you’re right, except it’s for the whole Internet. Facebook wants to provide users with a big, blue sanctuary from the awful mobile web lurking outside, while Google is seeking to renovate the mobile web by blurring the lines between it and an app-like experience
This is a classic Google gambit—refusing to accept an "either-or" when it can transform it into an "and." The same inclusive thinking is evident in Google’s approach to attracting the next several billion users to adopt its services. "We believe that someone in Indonesia should get the same quality email service or search results as someone in New York," Pichai told investors, taking a light jab at Facebook and its controversial "Free Basics" service that provides only limited access to the web. "From providing Internet access in India’s railway stations to making Chromebooks available throughout the region, it reinforced what a huge opportunity we have to help the next billion users come online and to have great experiences with the whole Internet once they are there."
Facebook and Google will continue to spar in their efforts to get more than 5 billion people online and in their use of artificial intelligence and machine learning to be more useful to those billions. Although Google may no longer deliver Facebook’s current growth rates of more than 40%, its steady stream of significant enhancements keeps the company poised to deliver double-digit growth for the next several years. And as the analyst Colin Sebastian with Robert W. Baird said, "Growth in the teens is still very profitable, and that is what helps fund these other projects."

F. Feeling Googly, all over again

One of the most renowned stories in Google’s history occurred on a Friday in 2002, when Page grabbed a printout of the ads that accompanied search results, wrote "these ads suck" on it, and then posted it in the company kitchen. He wasn’t trying to belittle anyone. He wanted someone to fix a problem he’d discovered. By the following Monday, as then–CEO Eric Schmidt recounts in his book How Google Works, engineers had a solution that dramatically improved Google’s AdWords product.
Larry PagePhoto: David Black
Page, like most techno-futurists, would seem to be immune to bouts of nostalgia. But recapturing that Friday-to-Monday problem solving of Google’s halcyon days, when it was first turning on what would become the greatest business model of all time, may be an exception. In the most basic ways, Alphabet is an effort to re-create that lost weekend, at the scale of Page’s ambitions today.
The new conglomerate is theoretically designed to make change happen faster. In his letter announcing Alphabet, Page delineated several things that he is excited about in the transformation. One is "getting more ambitious things done." Another is "empowering great entrepreneurs and companies to flourish." His hope for the Google unit specifically is to get "even better through greater focus."
Page needs his company to remain competitive in the face of the most significant threats it has ever faced—from Apple and Facebook but also the likes of Amazon and Pinterest. And to do so, he needs tens of thousands of employees to embrace the speed that epitomizes Google’s search engine itself.
This is why Alphabet is more than just a spectacular corporate reengineering. Page picked the perfect time to reset his company—at the very moment that analysts were heralding Peak Google. He knew that traditional corporate structure limits innovation at the pace he wants and needs. He broke his business into smaller pieces to make them simpler and focused them more narrowly to discourage drift and distraction, while trying to maintain the advantages of scale and resources and a compelling culture to recruit talent. Page isn’t ready to settle for status quo. He wants to make the world a better place—with electric cars and smart cities and universal Internet access and no more disease—and also find lucrative new businesses that keep the company part of the present and future. He wants everything, from A to Z.


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