26 reasons Google created Alphabet

By Felix Salmon | August 11, 2015 | 12:31am

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A is for Alphabet, which is about to become the biggest tech company most people have never heard of. It’s going to have a market capitalization of more than $400 billion. You might be more familiar with the company under its present moniker, Google. Why did Google create Alphabet? Here are 26 reasons:

A is for acquisitions. Alphabet is now going to be the main acquisition vehicle, at least for major companies. Android is part of Google for historical reasons, but if it were a separate company today and Google CEO Larry Page wanted to buy it, you can be sure that it would stay separate from Google under the Android umbrella. Google has a history of killing off non-core products, including Google Reader, under the rubric of “more wood behind fewer arrows.” But that makes outside companies that much more reluctant to sell to Google in the first place. If Larry promises you that you can remain CEO of your own company, as part of the holding company structure, you’ll be more likely to let him buy your company.
B is for boredom. Larry is the founder and CEO of one of the most successful companies on planet Earth, but the company more or less runs itself at this point, and Larry doesn’t want to be judged on margins and earnings and boring things like that. He wants to be “in the business of starting new things.” So he’s handing over Google, along with all of its management headaches, to Sundar Pichai. And he’s keeping the sexy entrepreneurial stuff for himself.
C is for CEOs all the way down! By setting up Alphabet as a holding company, a bit like Berkshire Hathaway, Larry can hand out many more CEO titles than he was ever able to before. Why do Silicon Valley senior management types keep on working when they already have more money than God? In many cases it’s because they want to be a tech-company CEO. Larry is now able to promise that job to lots of people, which is fantastic for talent retention. (It’s not just Alphabet’s constituent companies which will have CEOs. Evenwithin the Google subsidiary it’s clear that Susan Wojcicki will remain the CEO of YouTube, which means that she’ll be a CEO reporting to a CEO reporting to a CEO.)
D is for debt service. Google has a modest amount of debt – about $8 billion – which is incredibly low for a mature company of its size. At some point, much like Apple, it’s likely to start levering up, issuing more debt and buying back its own stock. But lenders don’t want to lend to a company in the business of crazy moon-shots like self-driving cars, because those businesses don’t make money, and also because they come with massive contingent liabilities. (Just imagine the possible class-action suits if the cars get hacked and start killing people.) So there’s now a borrowing vehicle – the Google subsidiary – which is effectively insulated from the other subsidiaries, and which will therefore be able to borrow at a lower rate than the parent company could.
E is for Earth. Google Earth never quite took off as some had hoped that it would, but by giving Alphabet a name freighted with meaning about “humanity” and what it is capable of, Larry is doubling down on his dream to turn Google into a company which can literally transform the planet. Larry believes, with good reason, that for-profit companies are the best way to achieve massive worldwide change. Google is big, but it’s not that big. Alphabet could, potentially, be that company.
F is for financial engineering. Google has always been weirdly idiosyncratic (with emphasis on the weird) in terms of how it conducts itself as a public company. Its IPO took place according to a bizarre auction system which almost nobody understood; it has three different classes of stock, one of which carries no voting power at all; and so on and so forth. The message is clear: ‘we’re different, don’t judge us as you judge everybody else.’ By restructuring and renaming itself Alphabet, Google is really just keeping things weird – which is a great way for the top brass to insulate themselves from criticism.
G is for Google, which is now a (slightly) more coherent company than it was. It’s still hard to understand what Android has in common with YouTube, but it’s a little bit easier than trying to understand what Chrome has in common with Calico.
H is for haters, including the 19 complainants who persuaded the European Union to bring a massive antitrust suit against Google. Anything which makes Google seem less monolithic is good for Google – even if the Google subsidiary still has the lion’s share of Alphabet’s revenues.
I is for impossible, and the dreaming thereof. Shareholders don’t like that kind of thing, but Larry is clear that he doesn’t answer to shareholders.
J is for Jump, Google’s rig designed to take the real world and turn it into virtual reality by sheer force of technology. Alphabet, as a company, is a place for anybody who see the artifacts of the world – even smoke and carbon monoxide – as something which can be reduced to a tractable string of 1s and 0s.
K is for knowledge. Google’s mission is “to organize the world’s information and make it universally accessible and useful;” Alphabet’s mission is going to be even bigger than that. If you were scared by what Google was, prepare to be terrified by what Alphabet aspires to.
L is for liabilities. Not just Google’s bonds, but all of the unquantifiable liabilities that Alphabet might become responsible for as it delves deep into the human brain, the genome, and generally the way the world is structured. It’s conceivable that the Alphabet structure might help insulate the core Google product from any such downside. After all, Google can now get spun out at a moment’s notice, right? Right?
M is for management. Larry doesn’t know how to manage Google. Google – the entity which is being taken over by Pichai – is already a hydra-headed beast, encompassing not only search but also other multi-billion-dollar businesses including Maps, Chrome, YouTube, and (oh, yeah) the world’s biggest mobile operating system, Android. Keeping all those moving parts working in some vague sync is very, very hard work, and it’s not clear that Larry Page is the person to do it. Giving Pichai the job could mean that Google becomes more successful than it would otherwise have been.
N is for no chance that people stop calling Google “Google.” When Larry says that Alphabet is not going to “be a big consumer brand” he’s admitting that the Google brand is far too big and far too strong to be replaced. Even the ticker symbol remains GOOG.
O is for optics. There are two ways of looking at Google right now. The first is that it’s a hugely successful search company which is frittering away its money on crazy projects like self-driving cars and next-generation contact lenses. The second is that it’s a hugely successful search company which is making smart, high-risk, long-term bets which, if they pay off, could be worth trillions of dollars. Either way, it’s a search company. And Google wants to be more than that.
P is for Plus, the social network that fizzled. It died, in part, because there was too much pressure on it to serve the search business. In future, if Alphabet buys a social network having failed to build one itself, you can be sure that it will be kept separate from Google.
Q is for quixotic. Larry can change Google’s name, but he can’t change its business. Google will continue to drive Alphabet’s business, and its reputation, for the foreseeable future, and for most purposes it will continue to make sense to consider the two to be identical. Everything else – Alphabet minus Google, essentially – is a “Larry tax”. At least unless and until it starts paying off.
R is for roll-ups. The weirdest part of Larry’s blog post is where he talks about how he and Sergei will “rigorously handle capital allocation.” That’s certainly a valuable skill, but there’s no particular reason to believe that this particular duo, who were very good at building a search engine, will also make first-rate conglomerateurs.
S is for spin-offs. Sometimes it makes sense to buy companies; other times, it might well make sense to sell them. This structure makes spin-offs much, much easier.
T is for traffic. Largely lost in the Alphabet announcement is the fact that Alphabet, for all its fancy new branding, is still at heart a media company selling eyeballs to advertisers. Larry might feel that he can now rise above such matters. But his CFO can’t.
U is for unbundling, the idea that by giving different companies space and effective independence from each other, it is possible to unlock value which would otherwise have been stifled inside the Google media company. Then again, no one ever thought that Google’s internal moonshot projects were being particularly stifled. So the upside here is probably smaller than it might be at a different company.
V is for Valleythink. A company as large, vague, and ambitious as Alphabet could only exist in Silicon Valley. The financial idea is that the enormous profits flowing out of Google will then get reinvested into thousands of other businesses – partly through Google Capital and Google Ventures, which are separate Alphabet subsidiaries. No one whose name isn’t Warren Buffett has managed to sustain this model. And Warren Buffett isn’t investing in an attempt to change the world and make trillions of dollars, he’s investing for predictable returns.
W is for Wall Street, which will greet the Alphabet announcement with a richly-deserved yawn. As far as the spreadsheet monkeys are concerned, Google’s cashflows come from known places, and they will continue to come from exactly the same places. Wall Street has never really cared much about Google’s moonshots, and the new name isn’t going to change that.
X is for Google[x], the Alphabet subsidiary in charge of things like self-driving cars and Glass. It’s run by a man named Astro Teller, whose title is Captain of Moonshots. In many ways Google[x] is the tail wagging the Google dog; it more or less epitomizes the thinking behind the entire Alphabet project.
Y is for you. You are the center of Alphabet’s world. For Google, you’re still mostly a pair of eyeballs to be sold to advertisers. But Alphabet as a whole, with all of its life-sciences arms and its ability to anticipate exactly what you’re going to want before you even want it, aspires to compete hard with Facebook for the title of the most personalized tech behemoth in the world.
Z is for Zagat. You forgot that Google bought Zagat, didn’t you? It spent $125 million, and wasted all of it. Remember that the next time someone tries to persuade you that Alphabet’s executives are going to be masters of capital allocation.