Google to alphabet case study analysis

Corporate Strategy And Diversification

Case 19 Google Is Now Alphabet—But What’s the Corporate Strategy?

On August 10, 2015, Google’s CEO, Larry Page, announced that Google Inc. would become Alphabet Inc., a holding company of which Google (comprising the compa- ny’s search and Internet businesses) would be the biggest operating company. Extracts of the announcement are reproduced in Exhibit 1. The organizational structure of Alphabet is shown in Figure 1.

The creation of Alphabet was widely viewed as Google’s top management finally conceding to investors’ demands for greater transparency by separating Google’s pri- mary source of profits, its search business, from Google’s other businesses. It was also a confirmation by Google’s founders, Larry Page and Sergey Brin, that their company was no longer simply a search company. The announcement was a reaffirmation of the company’s commitment to developing and commercialization of revolutionary tech- nologies. This quest had already led Google beyond search, beyond the provision of information, and beyond software into mobile devices, home appliances, life sciences, self-driving cars, broadband services, digital eyewear, and a host of other ventures.

Soon after its founding, Google had proclaimed “Ten Things We Know To Be True”— a set of business principles that would guide the company’s development. Second on the list was, “It’s best to do one thing really, really well,” to which the response was: “We do search.”1

Google—now Alphabet—was no longer a search company. But what was it? Founders Brin and Page had consistently emphasized that the essence of their

company was applying technology to improving the lives of people. Page had declared, “The societal goal is our primary goal,” the challenge being to: “... use all these resources ... and have a much more positive impact on the world?”2

If Alphabet was to be described by technology—then which technologies? From the beginning Google/Alphabet has been about algorithms. Initially, its PageRank algorithm, but increasingly artificial intelligence algorithms that model the functioning of the human brain. By combining machine learning and artificial intelligence, Alphabet is identifying areas where machine intelligence can be superior to human intelligence. The scope of these applications—from autonomous driving to medical diagnosis, to facial recognition, to education—seems limitless.

The diversity of Alphabet’s business and technological initiatives also fueled suspi- cions about the motivations of the founders, Brin and Page. Despite their proclama- tions to pursue the good of society and to “do no evil,” it seemed to some that Google was locked in battle with Apple, Amazon, Facebook, and Microsoft for the control of cyberspace.

This case was prepared by Robert M. Grant. ©2019 Robert M. Grant.

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Alphabet Inc.

Google Waymo Calico VerilyAccess CapitalG GV XNest*

* Nest was transferred to become part of Google in February 2018

“OTHER BETS”

FIGURE 1 Alphabet Inc.: Organization structure, March 2018

Yet, in terms of its revenue model, Google is an advertising company. In 2017, adver- tising accounted for 86% of Alphabet’s revenues. Common to almost all Alphabet’s businesses is that they are either vehicles for carrying advertising or they are sources of information that could be utilized to better target advertising.

EXHIBIT 1

Google Announces Plans for New Operating Structure August 10, 2015

As Sergey and I wrote in the original founders’ letter 11

years ago, “Google is not a conventional company. We do

not intend to become one.” ... From the start, we’ve always

strived to do more, and to do important and meaningful

things with the resources we have.

We did a lot of things that seemed crazy at the time.

Many of those crazy things now have over a billion

users, like Google Maps, YouTube, Chrome, and Android.

And we haven’t stopped there. We are still trying to do

things other people think are crazy but we are super

excited about.

We’ve long believed that over time companies tend

to get comfortable doing the same thing, just making

incremental changes. But in the technology industry,

where revolutionary ideas drive the next big growth

areas, you need to be a bit uncomfortable to stay relevant.

Our company is operating well today, but we think

we can make it cleaner and more accountable. So we

are creating a new company, called Alphabet. I am really

excited to be running Alphabet as CEO with help from

my capable partner, Sergey, as President.

What is Alphabet? Alphabet is mostly a collection of

companies. The largest of which, of course, is Google.

This newer Google is a bit slimmed down, with the com-

panies that are pretty far afield of our main internet prod-

ucts contained in Alphabet instead. What do we mean

by far afield? Good examples are our health efforts: Life

Sciences (that works on the glucose-sensing contact

lens), and Calico (focused on longevity). Fundamentally,

we believe this allows us more management scale, as we

can run things independently that aren’t very related.

Alphabet is about businesses prospering through

strong leaders and independence. In general, our model

is to have a strong CEO who runs each business, with

Sergey and me in service to them as needed. We will rig-

orously handle capital allocation and work to make sure

each business is executing well. We’ll also make sure we

have a great CEO for each business ...

Larry Page, CEO, Alphabet

Source: https://abc.xyz/investor/news/releases/2015/ 0810.html, accessed March 21, 2018.

CASE 19 GOOGLE IS NOW ALPhABET—BuT WhAT’S ThE CORPORATE STRATEGY? 589

The confusion over Alphabet’s corporate strategy was no recent phenomenon. In 2009, the Mercury News reported:

Google increasingly feels like a company running in a thousand different directions at once ... The problem is that in expanding into so many different areas, the iden- tity of Google itself has become muddled ... it’s getting harder every day to articulate what Google is. Is it a Web company? A software company? Something else entirely?3

Although comparisons have been made with other diversified giants—the Economist proclaimed Alphabet to be “the new General Electric” and Alphabet’s Chairman Eric Schmidt drew parallels with Berkshire Hathaway—ultimately, it seemed that Alphabet truly was “a different kind of company.”4 Hence, the creation of Alphabet had done little to answer the question that had tormented Google-watchers for years: What was the corporate strategy of the company formerly known as Google?

The History of Google, 1996–2018

The Google Search Engine

Larry Page and Sergey Brin met as PhD students at Stanford University. Their investi- gation of the linkage structure of the World Wide Web led them to develop a page- ranking algorithm that used backlink data (references by a Web page to other Web pages) to measure the importance of any Web page. They called their search engine “Google” and in September 1998 incorporated Google Inc. in Menlo Park, California. Google’s “PageRank” algorithm received a patent on September 4, 2001.

Search engines met the need of the growing number of people who were turning to the World Wide Web for information and commercial transactions. As the number of web- sites grew, locating relevant content became essential. Early Web search engines included WebCrawler, Lycos, Excite, Infoseek, Inktomi, Northern Light, and AltaVista. Several of them became portal sites—websites that offered users their first port of entry to the web. Other portals, such as Yahoo! and AOL, soon recognized the need to offer a search facility.

The Google search engine attracted a rapidly growing following because of its superior page ranking and simple design. In 2000, Google began selling advertise- ments—paid Web links associated with search keywords. Its Adwords placed “spon- sored links”—brief, plain text ads with a click-on URL—which appeared alongside Web search results for specific keywords. Advertisers bid for keywords; it was these “cost-per-click” bids weighted by an ad’s click-through rate (CTR) that determined the order in which the paid listings would appear. By 2004, Google became the US market leader in Web search; by 2009 its share had reached 65.6%.

Google became a public company on August 19, 2004: an IPO of about 7% of Google’s shares raised $1.67 bn., valuing Google at $23 bn.

Organizing the World’s Information

Google’s expansion beyond Web search was a reflection of its mission “to organize the world’s information and make it universally accessible and useful.” Google’s IPO pro- spectus elaborated this intent:

We serve our users by developing products that enable people to more quickly and easily find, create and organize information. We place a premium on products that

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TABLE 1 Alphabet’s revenue sources, 2008–2017 ($billion)

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Google advertising revenues (total) 21.1 22.9 28.2 36.5 46.0 51.1 59.6 67.4 79.4 95.4

—Google properties 14.4 15.7 19.4 26.1 31.2 37.4 45.1 52.4 63.8 77.8

—Google network members’ properties 6.7 7.2 8.8 10.4 12.5 13.1 14.0 15.0 15.6 17.6

Google other revenues 0.7 0.8 1.1 1.4 2.4 5.0 6.9 7.2 10.1 14.3

Google total revenues 21.8 23.7 29.3 37.9 46.0 55.5 66.0 74.5 89.5 109.7

Other Bets revenuesa – – – – – – – 0.4 0.8 1.2

Total revenues 21.8 23.7 29.3 37.9 46.0 55.5 66.0 75.0 90.3 110.9

Notes: a Revenues from Other Bets businesses were included in “Google total revenues” prior to 2015. Source: Google Inc. and Alphabet Inc 10-K reports.

matter to many people and have the potential to improve their lives, especially in areas in which our expertise enables us to excel.

Search is one such area. People use search frequently and the results are often of great importance to them. Delivering quality search results requires significant computing power, advanced software and complex processes—areas in which we have expertise and a high level of focus.

The result was a series of new products that allowed access to information from diverse sources. These sources of information included images (Google Image Search), maps (Google Maps), academic articles (Google Scholar), books (Google Book Search), satellite imagery (Google Earth), panoramic street photographs of most of the world’s cities (Google StreetView), news (Google News), patents (Google Patent Search), video (YouTube), finance (Google Finance), Web logs (Google Blog Search), and many more.

However, Google’s entrepreneurial and technological dynamism led it well beyond the accessing and organizing of information. Beginning with Gmail in 2004, Google introduced a widening array of software and services for communicating, creating and manipulating images, producing documents, creating Web pages, managing time, and social networking.

These new products expanded Google’s advertising revenues by providing addi- tional opportunities for carrying ads and improving Google’s targeting of ads. Google’s primary source of advertising revenue was AdWords, launched in 2000. Advertisers specify the keywords that should trigger their ads and the maximum amount they are willing to pay per click. When a user searches google.com, short text advertisements appear on the screen. The rank ordering of ads is determined by advertiser’s cost- per-click bid and the “ad quality” (its relevance to the user). The advertiser then pays Google according to the number of clicks on the advertisement.

AdSense uses an advertisement placement technology developed by Applied Seman- tics (acquired in 2003) that allows Google to place ads on third-party websites. Table 1 shows Alphabet’s revenues from advertising and other sources.

In 2007 and 2008, Google’s diversification efforts took a dramatic new turn with Google’s entry into mobile telephony and Web browsers.

CASE 19 GOOGLE IS NOW ALPhABET—BuT WhAT’S ThE CORPORATE STRATEGY? 591

Android and Mobile Telephony

Google acquired Android Inc. in 2005 and in November 2007 launched the development of its Android software platform, a Linux-based operating system for mobile devices. According to Google:

“Android is being developed ... with the goal of providing consumers a less expen- sive, richer and more powerful mobile experience.”5 Most observers thought that Google’s primary concern was the threat that the shift from desktop to mobile devices posed to Google’s advertising revenues.

Android was a spectacular success: in establishing market leadership (Table 2), it prevented Apple from dominating the smartphone and tablet market. By offering Android as a free, open-source, mobile operating system, it was able to attract a large number of handset manufacturers (the most important being Samsung) and an army of application developers—by 2018, there 1.76 million Android apps.

Chrome

Google’s Chrome Web browser announced on September 2, 2008 generated huge publicity, but little surprise. Google’s then head of product development (later CEO of Google within Alphabet), Sundar Pichai, explained: “Google’s entire business is people using a browser to access us and the web.” Google’s website added: “Google Chrome is a browser that combines a minimal design with sophisticated technology to make the web faster, safer, and easier.” By contrast, Microsoft’s Internet Explorer (IE) was constrained by the legacy of its 15-year history.

Google’s goal for Chrome was not simply a superior user experience. Version 8 of Microsoft’s IE launched in 2008 allowed an “InPrivate” protection mode that would delete cookies, making it more difficult to track users’ browsing habits. This would limit Google’s ability to use such information to target consumers with advertising.

Others saw Google’s primary intention as not so much to protect its search engine but more to attack Microsoft’s dominance of personal computing and to speed the

TABLE 2 Shipments of smartphones: Market share by operating system

2018a (%) 2015a (%) 2013a (%) 2011a (%)

Android (Google) 86.1 78.0 75.5 36.1

iOS (Apple) 13.7 18.3 15.9 18.3

Blackberry OS (RIM) – 0.3 2.9 13.6

Windows (Microsoft) – 2.7 3.2 2.6

Other 0.2b 0.7 1.5 29.4c

TOTAL 100.0 100.0 100.0 100.0

Notes: a The data are for the first quarter of each year. b Includes Blackberry and Windows. c In 2011, “Other” comprised Symbian with 26.0%, Linux with 3.1% and other systems 0.3%. Source: IDC.

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transition of computing to a new online environment. Wired magazine viewed it as: “an aggressive move destined to put the company even more squarely in the crosshairs of its rival Microsoft.6

The announcement ten months later that Google would add an operating system to its Chrome browser was seen as confirmation of Google’s aggressive intent toward Microsoft.

Google in Hardware

As Internet access transitioned toward mobile devices, Google sought to reinforce its proprietary technology in that sphere. Its acquisition of the struggling handset maker Motorola Mobility in 2012 for $12.5 bn., was primarily to acquire its rich portfolio of patents relating to wireless communication.

Owning Motorola would also permit Google closer integration of hardware and software development in smartphones and tablet computers, thereby enhancing the user experience.

However, becoming a handset maker put Google into competition with some of its major customers, notably Samsung, which was already developing its own operating system. In 2012, Google sold Motorola to Lenovo, but continued to develop and market mobile devices, including the Nexus brand of smartphones (build by HTC) and a range of notebook and tablet computers based upon its Chrome operating system. In January 2018, Google deepened its relationship with HTC when it paid HTC $1.1 bn. for patent licenses and an engineering unit.

Subsequent diversifications also increased Google’s involvement in hardware:

● Google Glass, an Internet-enabled, optical head-mounted display controlled by natural language voice commands, was marketed on an experimental basis bet- ween April 2013 and January 2015.

● With the acquisition of Nest in January 2014, Google became a supplier of home security and control devices—including thermostats and smoke detec- tors. The goal was to build Google’s position as a central player in the “smart home.” In May 2015, Google announced Project Brillo, an operating system to link home devices, such as door locks, light bulbs, and security cameras, while Project Weave would allow these devices to communicate with other products and web services.7

● Google Home, launched in October 2016, and the Home Mini, launched 12 months later, were Google’s entrants to the fast-growing market for voice- activated, smart speakers. Despite selling about 2 million smart speakers per month in the closing months of 2017, Google remained a distant second to Amazon in this market.

● Google’s involvement in smart TV has included its Google TV and Android TV software programs and its Chromecast plug-in devices, first launched in 2013, which allow video streaming on TV receivers.

Google+

Google’s foray into social networking began with Orkut in January 2004 and continued with Google Friend Connect and Google Buzz. However, all were eclipsed by Face- book. When, in March 2010, Facebook overtook Google as the most visited website

CASE 19 GOOGLE IS NOW ALPhABET—BuT WhAT’S ThE CORPORATE STRATEGY? 593

within the United States, Google became fully aware of the threat posed by Facebook to its online advertising revenue:

If you were an advertiser, who would you rather place your ads with? On the one hand, you have a company that will attempt to gear ads to things like the search his- tory of users. On the other hand, you have a company that knows where its users went to college, where they work, who they are friends with, what they’re reading and sharing, and their favorite bands, books, foods, and colors. Advertisers want to target their ads to the people most likely to be receptive to them, and information is the key to targeting. The more information available, the better the targeting.8

Launched in June 2011, Google+, the company’s fourth venture into online social networking, had 540 million users by October 2013. However, by the end of 2017, it was clear that, yet again, Google had failed to build a viable competitor to Facebook— although YouTube was widely viewed as a social media platform.

Waymo

Google began developing autonomous driving systems in 2009 with applications both to existing production cars and its own prototype cars, which lacked all driver con- trols. By 2017, Waymo had a fleet of self-driving vehicles in Phoenix, AZ, being driven without a person behind the wheel. However, it was competing with at least 12 other companies in developing self-driving systems and any commercial revenues within the next five years seemed unlikely. In February 2018, Alphabet received $244 million in Uber equity, settling a legal suit over Uber’s alleged theft of Waymo’s technology.

Life Sciences

Alphabet’s research activities in life sciences were organized into two businesses. Calico’s mission is “to harness advanced technologies to increase our understanding of the biology that controls lifespan.” In 2014, Calico formed an R&D alliance with AbbVie to develop new therapies for age-related diseases, including neurodegeneration and cancer. Verily’s mission to make the world’s health data useful so that people enjoy healthier lives. It makes a smart contact lens that measures blood sugar. In January 2017, Temasek, a Singapore-based investment company, paid $800 million for a non- controlling equity stake in Verily.

Broadband

Alphabet’s Access subsidiary combines several broadband projects whose goal is to expand access to the Internet. The major component of Access is Google Fiber, which offers broadband and TV service in several locations with in the United States. It also includes Webpass, a gigabit Internet provider acquired in 2016.

Venture Capital

Google Capital was established in 2013 to make late-stage venture capital investments in technology companies. In 2016, it was renamed CapitalG. In addition to finance, CapitalG provides companies within its portfolio access to technological and strategic

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advice from Google’s executives. Its investments include Survey Monkey, Lending Club, Airbnb, Snap Inc., Stripe, Looker, and Lyft.

GV, formerly Google Ventures, is Alphabet’s other venture capital subsidiary. It invests in life sciences, artificial intelligence, robotics, and cybersecurity companies, mainly in the early stages of their development.

X

X, formerly Google X, is a corporate lab for developing experimental technologies known as “moonshots.” According to The Atlantic magazine: “X is perhaps the only enterprise on the planet where regular investigation into the absurd is not just permitted but encouraged, and even required.”10 Because of the secrecy surrounding X, only a few of the projects being undertaken are known. During early 2018, these included:

● Project Loon—high altitude balloons providing internet connectivity in areas lacking broadband infrastructure;

● Project Wing—package delivery via airborne drones;

● Makani Power—generating electrical power through wind turbines mounted on tethered kites;

● development of a revolutionary, miniature battery for powering mobile devices;

● various robotics projects.

Alphabet’s Management and Capabilities

Google—now Alphabet—had created a management system that was unique, even by the unorthodox standards of Silicon Valley. Some of the key features of this system included:

● Hiring policy: From its earliest days, Google committed itself to hiring only the “brightest of the bright.” Google’s targets were not simply the highly intelli- gent. They were “smart creatives”—people who were “not confined to specific tasks ... not adverse to taking risks ... not hemmed in by role definitions ... don’t keep quiet when they disagree ... get bored easily and shift jobs a lot ... com- bine technical depth with business savvy and creative flair.”9 As founders Page and Brin explained: “Our employees, who have named themselves Googlers, are everything. Google is organized around the ability to attract and leverage the talent of exceptional technologists and business people ... Because of our employee talent, Google is doing exciting work in nearly every area of com- puter science ... Talented people are attracted to Google because we empower them to change the world.”11

● A “dramatically flat, radically decentralized” organization: Google structure and systems were designed around the simple notion of “What do smart cre- atives need in order to be productive?” The answer was primarily about the aspects of traditionally managed organizations that should be avoided: authority, rules, formality, defined job roles, and hierarchical privileges. Google was a flat organization because its smart creatives needed easy access to key decisions in order to get things done. To minimize hierarchy, Google used a “rule of seven”: each manager must have at least seven direct reports.

● Small, self-managing teams: The majority of Google’s employees, including all those involved in product development, worked in small teams. Most engineers

CASE 19 GOOGLE IS NOW ALPhABET—BuT WhAT’S ThE CORPORATE STRATEGY? 595

were in teams of three or four. Team size was limited by the “two-pizza rule”— teams should be small enough to be fed by two pizzas. Teams appointed their own leaders, and engineers could switch teams without the need for permission from the HR department.

● An environment that fosters creativity: For employees to be productive required a working environment that stimulated and fostered their interac- tion. Google’s workplaces were designed to minimize separation among col- leagues. Google’s opulent eating and sports facilities were similarly designed to increase human interaction. Creativity and innovation were institutionalized through Google’s “70–20–10” rule, which stipulated that Google would devote 70% of its engineering resources to developing the core business, 20% to extend that core into related areas, and 10% allocated to fringe ideas. As a result, Google employees were able to spend time working on pet projects of their own choosing.

● Rapid, low-cost experimentation: According to Gary Hamel: “Evolutionary adaptation isn’t the product of a grand plan, but of relentless experimenta- tion ... Google’s ‘just-try-it’ philosophy is applied to even the company’s most daunting projects, like digitizing the world’s libraries ... That kind of step-wise, learn-as-you-go approach has repeatedly helped Google to test critical assump- tions and avoid making bet-the-farm mistakes.”12

Underlying Alphabet’s capacity for innovation and the effective implementation of new initiatives was a set of resources that few other technology-based companies could match. With an operating cash flow of $37 bn. in 2017 and a cash pile of $103 bn., Alphabet was a financial powerhouse that could buy its way into almost any market or area of technology. (Table 3 shows financial data for Alphabet.) However, most of

TABLE 3 Alphabet Inc.: Selected financial data, 2008–2017 ($ bn.)

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Revenues 21.8 23.7 29.3 37.9 43.7 50.5 59.1 75.0 90.3 110.9

Cost of revenues 8.6 8.8 10.4 13.2 17.2 22 25.7 28.2 35.1 45.6

R & D 2.8 2.8 3.8 5.2 6.1 7.1 9.8 12.3 13.9 16.6

Sales and marketing expense 1.9 2.0 2.8 4.6 5.5 6.6 8.1 9.0 10.5 12.9

General and admin. expense 1.8 1.7 2.0 2.7 3.5 4.4 5.9 6.1 7.0 6.9

Income from operations 6.6 8.3 10.4 11.7 13.8 15.4 16.5 19.4 23.7 26.1a

Other income 0.3 0.1 0.4 0.6 0.6 0.5 0.8 0.3 0.4 1.0

Income before income taxes 5.9 7.1 10.8 12.3 14.5 15.9 17.3 19.7 24.2 27.2

Net income 4.2 6.5 8.5 9.7 10.7 12.9 14.4 16.3 19.5 12.7

Cash and marketable securities 28.4 24.5 35.0 44.6 48.1 58.7 64.4 73.1 86.3 101.9

Long-term liabilities 1.2 1.7 1.6 5.5 7.7 7.7 9.8 7.8 11.7 20.6

Total stockholders’ equity 28.2 36.0 46.2 58.1 71.7 87.3 104.5 120.3 139.0 152.5

Notes: a Operating income was reduced in 2017 by a European Union fine of $2.7 bn. Source: Alphabet Inc. and Google Inc. 10K reports.

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the time it was content to make small acquisitions. Owning one of the world’s most valuable brands (Google) and the world’s two most visited websites (google.com and youtube.com), Alphabet commanded attention in any market it chose to enter.

The holding company structure of Alphabet would allow greater autonomy and flex- ibility for the individual subsidiaries, but would the loss of integration undermine the organizational capabilities that had made the company so successful?