Now led by Sundar Pichai, what will Alphabet do with its unprofitable subsidiaries?

by bold-lichterman

The historic founders of Google, Sergey Brin and Larry Page, bequeathed the management of the Alphabet holding company, launched in 2015 to include on the one hand Google and on the other hand all the non-central activities of the group, to Sundar Pichai, until ‘here Google CEO. But these non-central activities, the “other bets”, make the holding company lose money. What will Sundar Pichai, known for his pragmatic approach, decide?

When Sergey Brin and Larry Page founded Google in 1998, they knew that the search engine would not be their only activity. They intend to launch various projects, whether or not they are far from the heart of their business and likely to have a significant impact. In 2004, when Google went public, Sergey Brin and Larry Page even describe a management vision that will be fundamental for the Mountain View company: the “20% rule”, through which they encourage their employees. spend 20% of their working time on other projects that could benefit Google. This is, for example, how Niantic, the company behind Pokémon Go, originally a subsidiary of Google, was born.

Over the years, Google has thus diversified with the creation or acquisition of activities such as Nest (home automation), Verily (health), Waymo (autonomous cars), Calico (BioTech), Sidewalk (smart cities)… But in August 2015, Google wants to enter a new financial era and Sergey Brin and Larry Page, accompanied by Eric Schmidt, want to continue ” to do things that others think are crazy ” and develop ideas that drive the growth of many sectors. Thus in August 2015 Alphabet was born, a holding company which will now include Google on the one hand, and all the group’s non-core activities on the other.

Alphabet mapping. Credit: CB Insights.

Alphabet wanted to give the autonomy necessary to all of its activities for their development.

Sergey Brin and Larry Page’s objective is therefore to consolidate all of their activities in the same group, but also to give them the autonomy necessary for their development. Their organizational model is to put a large-scale CEO at the head of each entity who can call on them on demand. Google will now be CEO Sundar Pichai, who joined the company in 2004 to work on the Google Toolbar. Alphabet will be led by Sergey Brin as CEO and Larry Page as chairman. All Google shares are converted into Alphabet shares with the same attribution of rights. Google then realizes $ 66 billion in turnover for a profit of $ 16 billion.

In early 2016, the holding said it wanted to convince Wall Street with Alphabet’s results. ” We expect the new Alphabet structure to increase focus, accountability and transparency on each of our efforts ”, announces the group. Concretely, the group will segment these results into two categories. On the one hand, Google’s revenues, historical activity in the advertising sector, and on the other, “other bets”. The revenues from the first set will bring together activities such as Search Ads, Google Commerce, Maps, YouTube, Apps, Cloud, Android, Chrome, Google Play, and hardware (Chromecast, Nexus). However, no distinction should be expected to know the results of these subsidiaries in detail. They will therefore remain relatively opaque.

The “other bets” make Alphabet lose money

Days later, with the first-ever publication of results under the new organization, it can be seen that Alphabet is well exceeding analysts’ expectations, thanks mainly to Google and advertising. But we also discover that the activities of the category “other bets” recorded a loss of 3.5 billion dollars. As expected, the details of the combined entities were not communicated, which does not allow us to know the contribution of each to these results. However, it should be remembered that several of the projects financed by Alphabet are then in the experimental or development phase, and have therefore not yet been launched on the market, such as its autonomous car for example.

Today, Sundar Pichai, at the head of Google since the restructuring of the group, takes the reins, alone, of Alphabet following the departure of Sergey Brin and Larry Page. Wall Street seems to have appreciated the change: Alphabet shares jumped almost 2% yesterday following the announcement (adding $ 2.3 billion to the fortunes of Sergey Brin and Larry Page). And some investors would hope to see him – he who is often described as pragmatic – take a very careful look at these other activities, also known as “moonshots”, which still cost the group money, but which continue to receive billions of dollars in money. investment.

The question arises of the very existence of Alphabet

Sundar Pichai may decide to focus only, if not more, on activities that contribute to the group’s growth, such as Google and YouTube. The “other bets” division, whose detailed results are still not known, recorded an operating loss of $ 3.4 billion in 2018, while Google posted operating income of $ 36.5 billion. Over the past two years, Alphabet had already reduced its investments in these activities to better focus on growing activities such as the cloud.

According to various observers, the new CEO of Alphabet will not have the mission to play the role of visionary at the head of the holding company, but more to embody a professional and concrete CEO. His mission could thus be, in addition to dealing with regulators on various issues, to “stabilize” Google culture within Alphabet. Does this mean putting an end to the original philosophy of Sergey Brin and Larry Page and to the “20% rule”? If Alphabet no longer relies on its “moonshots” hatched within “X”, the semi-secret group laboratory headed until now by Sergey Brin, then the question of the very existence of the holding arises.