Google Alphabet: Has Google confused investors' interests and innovation?

Google has overloaded us with news of its restructuring. From appointing a new CEO Sundar Pichai to restructuring into ‘Alphabet’, Google has expressed its serious intentions to be a 21st century innovator, a bold creator of new products, not simply a harvestor of profits from its lucrative search engine business.

But 20th-century business history offers three ways to think about what Google is up to here, embodied in three potential analogues: Berkshire Hathaway, the conglomerate run by Warren Buffett; General Electric, the industrial conglomerate; and AT&T, which operated the wildly innovative Bell Labs until 1996.

Google is to become but one subsidiary of a holding company called Alphabet. The other initiatives like driverless cars that Google has taken on will be separate subsidiaries, as will future shoot-the-moon ventures that the firm buys or builds.

If the new Alphabet can be remotely as successful - in terms of innovation or financial returns - as these companies, its shareholders and users of its products will be very happy. But the historical parallels suggest that there may be a trade-off in which what is best for shareholders and what is best for innovation aren't always the same thing.

Here's what each of the three pathways looks like and what they might mean for Alphabet, Google and innovation in the decades ahead.

Berkshire Hathaway

When Google announced its new structure, a rather uncommon word started appearing in business media: "conglomerateur." As in, that may just be what the Google founders Larry Page and Sergey Brin are becoming - builders of a corporate empire that will stretch across industries into whatever field they find interesting and lucrative.

That is the strategy that has made Buffett one of the world's wealthiest people and Berkshire Hathaway one of the world's most valuable companies. Its largest interests are in insurance, but those interests stretch far afield, from mobile homes and private jets to Heinz ketchup and Duracell batteries. This week's $37 billion deal for the aerospace parts maker Precision Castparts is Buffett's largest acquisition to date.
Already Page gave a nod to this strategy in his letter announcing the new structure. "Alphabet is about business prospering through strong leaders and independence," he said, with the subsidiaries each having a strong CEO. He and Brin "will rigorously handle capital allocation and work to make sure each business is executing well."

Buffett could say much the same; he gives his managers wide discretion to manage the operational details of their business; Berkshire's corporate office in Omaha, Nebraska, is minuscule - 24 employees overseeing a company with 340,000 employees.

But the differences may be more important. Berkshire is all about acquiring companies that are well established, with proven models for profitability, at favorable prices. Buffett has eschewed technology businesses or pretty much any company with a business model or prospects that are hard to project.

Page and Brin, by contrast, build things that have never existed before, or that are hard to imagine. A more Buffett-style approach might be welcome news for Google shareholders, but it would mean a pivot from the grand ambitions of their recent ventures.

General Electric

Maybe a different type of conglomerate is the model for Alphabet. Thomas Edison helped found General Electric, and a long-lasting light bulb and electric lights were some of the original products. It soon expanded into locomotives and then X-ray machines and electrical appliances. It made radios and then televisions, and the broadcast networks that produced content for them. Its researchers played key roles inventing fibre optic cables, MRI body scanners and countless other technologies.

But GE has prospered by combining a strong organizational culture in which the different arms of the company are operationally independent, but have linkages that benefit them all. The ability to take centralized research and development work and apply it to a wide range of usable products has been a boon; the laser, on which GE researchers did key work, found its way into both medical uses and telecommunications uses, for example.

The idea is that though the GE business lines might be different, each is stronger together than any one of them would be on its own. It's easy to see why Google's leadership might want to emulate General Electric - GE has created products over the last century that have revolutionized daily life and rewarded its shareholders handsomely in the process.

Alphabet may have the same grand ambitions that GE had a century ago to create groundbreaking products. An important question is whether it becomes a centralized innovation machine or a bunch of separate projects that happen to have the same corporate parent but not much else in common.


AT&T/Bell Labs

Google's leaders want to invest in ambitious science and great innovation. Perhaps no corporate entity has done more of that than Bell Labs, which was the research offshoot of the telecommunications firm AT&T from 1925 to 1996. (It was spun off as Lucent Technologies and is now part of Alcatel-Lucent.)

Just as GE's history dates to Edison, Bell Labs dates to telephone inventor Alexander Graham Bell. It played key roles inventing the transistor, the laser, communications satellites, solar cells and several important computer programming languages. It counts eight Nobel Prizes for work done at the labs.

AT&T, as the monopoly telephone service provider in the United States for decades, earned vast sums and funnelled some of the money into Bell Labs.

Some of those Bell Labs innovations paid off in the form of profits that benefited AT&T shareholders. But the connection between dollars spent on research and dollars earned from future products was a tenuous one, especially for work on basic research.

Alphabet could emulate this. In this example, Google's dominant position in search advertising plays the role of the old AT&T phone monopoly. It earns a lot of money, and its managers will siphon off a portion of the profits to fund all sorts of basic research.


(Image credits: Indiatimes)