As you can tell from my colleague Chris Preimesberger’s analysis article, Google’s rationale for creating the Alphabet holding company included providing greater transparency for investors.
Google, after all, has been taking an eclectic approach to technology research and development, from creating the world’s top search engine to testing driverless cars. It’s pretty clear that investors like Google’s decision to create Alphabet because Google’s stock jumped nearly $40 a share after Wall Street heard about the move.
And as important as it is to keep investors in mind when you’re a public company, the fact is that the move by Google to create a holding company has significant implications further down the road.
In fact, by making this change, Alphabet can go a long way toward driving technology development in a variety of areas, and the company that used to be Google can be a leader in a whole new range of technologies.
When you take a look at how Google has been organized (or perhaps a better word is disorganized), you’ll see a bunch of business ventures lumped together. Google was composed of a mega-search-engine company that has been busy accumulating all of the information that exists. But there’s so much more.
Google has also meant Android smartphones, self-driving cars, YouTube, home automation and local fiber networks. The most you can say about this collection of diverse business lines is that they all involve technology. But when you look at, for example, Google Ads and Google Fiber, there’s not much commonality.
From an investor’s point of view, creating space between the separate parts of Google by making each one a company within Alphabet makes a lot of sense. It makes it easier to spot how each part of Google is performing, which parts are making money and which parts are making groundbreaking discoveries.
But there’s another point of view that in the long run may matter more. In addition to making each of the parts of Google more visible, creating the divisions also makes each part easier to manage on its own.
This is why many of history’s great corporations, ranging from General Electric to Hewlett-Packard, have been organized so that major divisions have their own leadership, their own management teams, their own profit-and-loss responsibilities and their own reporting structure.
While these great corporations still required their divisions to adhere to some overall practices, they were allowed the freedom to create value within a larger corporate structure.
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This corporate structure also enabled these divisions to access corporate resources when they needed them and corporate support for really big projects or ventures that grew beyond the reach of a single division.
When I was young, I got to see just how such development worked. My grandfather was the general manager of General Electric’s Erie, Pa., locomotive plant, and shortly before he retired, he took me onto the shop floor to see what was then a very new idea in rail power. The idea was a railway locomotive that used a gas turbine to generate electric power, which then pulled a train.
Those massive engines were unlike anything seen on the railways until then and while they were ultimately unsuccessful, it’s important that GE gave that division the ability to invent something new in hopes it would succeed. But it also got permission to fail.
After my walk through the production floor at the locomotive plant, my grandfather took me to his office and showed me the plans for an even more powerful locomotive engine that would be the most powerful the world had ever seen.
My grandfather retired before that more powerful engine ever saw service, but what he explained to me at the time has always been one measure of success.
He said that when he first went to work for GE, the founder, Thomas Edison, impressed on him the need to allow people to be free to innovate. That freedom to innovate is what allowed GE to build that new type of locomotive, along with groundbreaking innovations in more industries than I can count.
What I see in the formation of Alphabet is the same kind of freedom. While Google has always been an innovative company, it’s sure to be hard for a manager who understands search engines to also understand how to run a company that develops transportation systems.
It’s just as hard for that manager to understand all the intricacies in the development of wearable computers. Each of those vastly different businesses needs people who understand how to apply the technology, but they also need the resources brought to them by the much-larger holding company.
Does this suggest that Alphabet is on its way to becoming the next General Electric or
Hewlett-Packard? Perhaps it is, although right now it’s too early to tell.
But if Google is to become such a company, then Larry Page and Sergey Brin are on the right track. And Alphabet is on its way to becoming a world-class competitor and a great corporation that will be around for a long time.