The reasons for Alphabet are as easy as A, B, C

Ian Betteridge August 11, 2015

When my iPhone started making frantic pinging sounds last night, I knew something big was up – and it didn’t take long to see what it was. The news of Alphabet, the reorganised Google, lit up Twitter and our Slack like a Christmas tree, and within minutes virtually everyone I know had mentioned it.

It’s a mark of Google’s impact and influence on the world that even friends with little interest in technology mentioned it. After thinking that Windows 10 would be the biggest story of the year, it’s obvious to me that this is bigger. But why is what amounts to a corporate reorganisation – not usually very interesting – getting so much attention?

Google, the boring ad-tech company

Obviously, Google is a company that gets a lot of attention at the best of times. But among many people, there’s long been a feeling that it has something of a split personality.

On one side, there is the Google of rainbow-coloured beanie hats, precocious engineering, moonshots, driverless cars and skydiving product introductions. The Google that wants to give you instant access to all the world’s information, not only when you query it but also – through incredibly clever artificial intelligence – before you even think to ask. That’s the Google that gets people excited.

The other Google is that most prosaic of businesses, an advertising technology company. This is the one that gathers data about you from as many sources as possible to deliver “more relevant” ads, in a way that many find more than a little creepy.

One of these “personalities” is a ferocious money-making machine – and this isn’t the one that gets people excited. It’s also not the one with massive potential growth, and that’s a big problem for Google’s share price. A company’s share price is largely based on its perceived prospects for the future, rather than its current financial health. In the case of Google, because its position in advertising is already huge, its future growth prospects are inevitably more limited than something like driverless cars.

Advertising is to Google what Windows was to Microsoft

In the past, most commentators about Google – including me – have fallen into the trap of thinking about the company in the context of how dominant tech corporations have behaved in the past. In particular, people assumed that Google would take the approach Microsoft did from the 1990s onwards – tying all its services together, to build a single “Google ecosystem” that it was hard to escape from.

The reasons for Alphabet are as easy as A, B, C

But I think it’s obvious that Google’s senior management – in particular Larry Page – has looked at the history of Microsoft and seen where this leads. Prior to the appointment of CEO Satya Nadella, Microsoft’s approach was based on products effectively paying a “strategy tax”, with every product contributing towards supporting the cash cow, Windows. Products such as the radically different Courier tablet were killed because they didn’t do enough to support Windows.

Fast-forward to now, and Microsoft has a cash cow – Windows (and to a lesser extent Office) – that has very little in terms of potential future growth, and it’s playing catch-up everywhere else. By producing a bunch of other products whose main aim was to support its cash cow, Microsoft handicapped the potential of these products, and so missed out on growth opportunities that didn’t depend on Windows.

By splitting out its other products, Google has the opportunity to lift them away from the need to support the data-hungry ad-tech business. The likes of Nest will no longer be expected to pay a “Google tax”, and can do whatever it needs to do in order to maximise its own growth potential. If that means, for example, making closer partnership ties with Apple, Nest can plausibly do it – as long as it contributes to its own growth, working with Google’s competitors shouldn’t be a problem.

A big, smart move – if it’s done right

I say “should”, rather than “will”, because all this depends on each of the Alphabet companies truly being able to forge their own path. This will require not only strong management within the individual companies, but also strong leadership from Larry Page. As wholly owned subsidiaries of Alphabet, companies could still be expected to work closely together when they can.

However, Page has already shown some strong leadership by choosing to create Alphabet, so the signs are good that he understands the dangers of focusing solely on today’s breadwinner without looking to the future. And the potential for Alphabet, rather than Google, is limitless: it can create (or buy) companies for anything Page and his team believe will be a potential growth area.

Alphabet is a big, smart move – a bet on the future which I wouldn’t go against.