Larry Page's re-org of Google has the potential to be a real disaster
There's two reasons to be worried about the new Google:
- Page has effectively undermined the most important part of his business.
- Page has set up an environment that could lead to political infighting among his CEOs.
We'll tackle each, but as a quick recap: Google renamed and reorganized itself in shock move on Monday afternoon.
The new company is called "Alphabet" and Google is one of six subdivisions within Alphabet. Sell-side analysts are cheering the move. Investors agree with those cheers and the stock is up 4%.
If you look beyond the initial shock of the news, not much really changes. When Alphabet reports earnings we'll get Google's results and then we'll get next to nothing from the rest of the company. This is how things have been going for a while now.
1. Google's core business has been demoted
It's easy to dismiss the changes as being largely superficial, but they're actually drastic. The renaming is a statement to the entire company that things are changing, but the message probably isn't coming across the way Page intended.
By relegating Google to a subsidiary of Alphabet, Page has demoted the most important businesses at Alphabet. YouTube, Android, Gmail, and Google Maps are all businesses that are still a part of Google.
The CEO and founder just told the entire company that he's no longer excited by those businesses.
So, if you work for Google, sorry! The boss is more excited by bigger projects. If you're an engineer working at Alphabet, and you have an opportunity to move to another division, do you stay at Google, or do you try to work on one of the new, sexy projects that the boss is focused on?
2. Ego battles are inevitable
In the letter announcing Alphabet, Page said, "In general, our model is to have a strong CEO who runs each business, with Sergey and me in service to them as needed."
There's a big difference between Alphabet and Berkshire, though. At Berkshire, the businesses are truly independent, running on their own. Buffett uses the money he earns from his insurance business to fund mergers and acquisitions. The companies he buys are boring, dependable, profitable businesses that can last "100 years" in his words. For instance, on Monday Berkshire Hathaway spent $37 billion on a nuts and bolts supplier focused on the aerospace industry.
Alphabet, meanwhile, is going to take the money Google throws off and then plow it into a variety of unprofitable experiments like self-driving cars, delivery drones, and internet balloons. Google will be important to many of the companies in other ways also: Google's self driving cars, for instance, are useless without Google Maps.
The risk for Alphabet is that Sundar Pichai, who is running Google, says at some point, "Why am I funding all these idiotic misadventures?"
In Page's letter explaining Alphabet, he says, "We will rigorously handle capital allocation and work to make sure each business is executing well."
That means Page and Brin will decide who gets what. Well, what if Tony Fadell, who is running Nest, wants more of Google's money to expand? And what if Pichai thinks Fadell shouldn't get it? Then what? Page wants these people to be strong willed independent CEOs. But, ultimately, they're all serving Page, asking him for money to fund their projects.
He's going to have to deal with their egos. If he's not careful, they could blow up.
Page was reportedly sick of going to meetings and doing the nitty-gritty management. He may have dropped some of that, but now he's dealing with at least 6 really big egos that's he's empowered.