Autonomy seen as goal of new Google

It will probably take years before anyone, Googlers included, fully understands how Alphabet will work, but Wall Street already loves the move

For a glimpse of how Larry Page might envision the way a newly restructured Google will work, take a look at Nest Labs, the company’s Internet-connected thermostat business.

Nest, which Google acquired in 2014, is in Palo Alto, California, a few miles up the freeway from Google’s headquarters in Mountain View. Nest employees call themselves Nesters, not Googlers. They have Nest email addresses rather than the Google ones. Nest hosts its customers’ data on Amazon’s Web Services platform, the biggest competitor to Google’s cloud computing efforts.

All of Nest’s functions – including legal and marketing – report to Tony Fadell, chief executive of the business. And since Fadell does not share the Google founders’ enthusiasm for napping pods and discount massages, Nest does not offer them.

That autonomous structure is a sign of things to come now that Page, co-founder and chief executive of Google, has said that he is reorganising the giant Internet company under a new framework. Page announced on Monday that he was creating Alphabet, a parent entity, under which there will be half a dozen businesses – including Google and Nest – as a means to stoke entrepreneurialism and keep innovation going.

The company has been short on details about how the new structure will work. In a note to employees on Monday, Page said that he and Google’s co-founder, Sergey Brin, would make sure to have “a great CEO for each business,” and added that the new configuration would give them wider latitude to do things like acquire companies or determine how to pay their workers.

Yet Google representatives declined to comment on specifics, such as whether Alphabet would take money from its hugely profitable company, Google, and dole it out to the money-losing entities that are making big, speculative bets in areas like self-driving cars and health care. The details are to be hashed out in the next several months and could take years to fully come to fruition.

Restructuring Google more along the lines laid out by Nest is important, given how sprawling the company – which now plays in areas as varied as operating systems, search, drones and pills – has become.

For years, Google was caught up in internal infighting and conflicting missions. Since going public in 2004 with 3,000 employees and about $3 billion in annual revenue, Google has mushroomed into a company with 57,000 employees and $66 billion in annual revenue.

“There can be a lot of cross-company confusion when companies get too big, and this will allow people to build the right set of products for the right users without worrying about interference from other groups inside the company,” said Wesley Chan, a veteran Googler who is now a partner at venture capital firm Felicis Ventures. “If you’re an executive, you can now be focused on delivering numbers for your line of business rather than how someone who is completely irrelevant to you might react.”

Inside core Google, which is the Internet search and services company that will soon be Alphabet’s biggest subsidiary, many employees were excited by the prospect of a new, more independent structure.

There is a long-held feeling that despite Google’s having some of the best engineers in the world, they work on so many disparate things – many of which never see the light of day – that the company’s products have suffered as a result.

Their belief is that Sundar Pichai, newly appointed chief executive of the core Google operation and who began his Google career leading the team that created the popular Chrome browser, has a strong mind for products and will bring a renewed discipline to the organisation. The new structure also lets core Google shed product flops – Google Glass gets brought up a lot – that have little to do with the main company but have weighed on the Google brand.

Ad growth

It will probably take years before anyone, Googlers included, fully understands how Alphabet will work, but Wall Street already loves the move. While Google’s advertising business grows predictably each year and accounts for a majority of revenue, there is a diverse collection of other businesses – including research projects like an attempt to make Internet-connected balloons – that are difficult to evaluate because they are in varying stages of completion and in many cases aim to create completely new industries.

In some cases, this has made investors overly pessimistic because Google’s opaque financials might have led them to assume that advertising is less profitable than it actually is by lumping costs for things like self-driving cars into the core business, said Josh Spencer, portfolio manager of T Rowe Price’s Global Technology Fund, which owns Google shares.

By separating the hard-to-understand stuff from easier-to-understand ads, Alphabet will make it easier for investors to see how the core is doing – and, investors hope, get a stock increase in return. On Tuesday, Google shares, which will continue to trade under the same ticker symbols once the company becomes Alphabet, rose more than 4 per cent.

Of course, this does not mean that investors are done asking for information. “Everybody who sits in a chair like mine will say, ‘Thanks, but now can we have more disclosures of core Google?’” Spencer said.

“We’re going to shift from one debate to the next. We’ll never be happy until we have full segment reporting, but Google will never give us that.”

As for Nest, life is unlikely to change drastically, given how independently the business has already been operating. On Monday, Fadell, Nest’s chief executive, simply reposted a Twitter congratulating Pichai on his promotion to Google chief executive.