Harvard Business School professor David B. Yoffie explains Google's 2015 restructuring into Alphabet, a holding company for moonshot bets like self-driving cars and longevity research. The move lets smaller units operate independently while Sundar Pichai runs the core search business, which still generates 90% of profits. For users, nothing changes.
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Business icon. Google announced late yesterday it is restructuring the core Internet search business with which it's most closely identified now becomes the largest subsidiary of a newly created holding company named Alphabet. Other enterprises under the Google umbrella, like the home automation division Nest, become part of Alphabet. Google co founders Larry Page and Sergey Brin will oversee the new conglomerate and current Vice president Sundar Pichai will become Google's new CEO. But what difference will that make for consumers? By way of background and explanation, we turn to David Yaffe, a professor of Business Administration at the Harvard Business School who writes about the technology industry. So Professor Yaffe, why the reorganization? What's the purpose of this?
I think that Larry had a couple of ideas in mind. Probably first and foremost he wanted to streamline the company, potentially make it much more entrepreneurial and give people in the various small businesses an opportunity to be their own CEOs so that they could run the companies in a more entrepreneurial way. They also wanted to make the business respond faster to the market, streamline the bureaucracy at the top of the organization. And I think he also was hoping that it would be a great way to retain some of the really good people who otherwise might be looking for other opportunities in Silicon Valley.
What are these other non search businesses? I think you call them Moonshot Enterprises.
Yeah, well I don't call them that. That's what Larry calls them. And they are things like Google X which is robots and self driving cars. Coleco which is looking at how do you expand life expectancy. Nas, which you already mentioned, as well as Drop Cam which is a Internet based video that you can put in your home or in a business. Then there are also businesses like Google Capital and Google Ventures which are traditional venture capital like firms or late stage venture firms that are looking at long term investments in technology trends.
Tell us about Sundar Pichai. What does he have to do with this and what difference does it make that he's taking over any.
I think in that case, Sundar is known to be a great manager, a great personality and extremely well liked inside the company. And he's largely going to continue doing exactly what he was doing before, except he goes from being a senior vice president to a CEO, at least in the context of the Google Umbrella, which is now going to be called the Alphabet Umbrella.
How does Google or Alphabet, but in general the company make its money, makes a lot of money. But is it really from all of these other enterprises or is it from what we know, what we recognize?
Well, there's two answers to the question. One is we don't actually know. Google doesn't tell us. So they keep all of the information about their segment reporting what each individual business makes a secret. But we know that they make about 90% of their profits from advertising, which is the business where Sundar is going to be the CEO.
Okay, so when you get your Google screen up for your search with your Google doodle or whatever else you find there, what difference will it make for the average consumer that the company is structuring itself differently?
Now for the average consumer, they're not going to see any difference whatsoever. The Google website will be the Google Website, the Chrome browser will be the Chrome browser, and Android on your smartphone will be exactly the same, run by the same people in the same organization. So for a consumer, it shouldn't be meaningful. The real question is, will it be different for investors? Will they get more information and. And will it be different for these other businesses where they will potentially be unlocked and able to move more quickly?
Well, also, will it be different for the public perception of Google, which has a reputation for being kind of different, a little quirky, and now it seems like it's headed more in the direction of Berkshire Hathaway or ge?
And that's the open question. Is Alphabet really trying to become a conglomerate like a Berkshire Hathaway or is it just a reorganization? That part. The verdict is still out. It's very hard to be a conglomerate in the tech world. It's a lot easier at Berkshire Hathaway where you're dealing with companies like Fruit of the Loom and netjets or Insurance. But in a company such as Alphabet or Google, you're dealing with very high tech, very capital intensive, in some cases, certainly R and D intensive businesses where innovation is the key and not simply running the business for cash flow.
And finally, does this protect Google in any way from the challenges to its products, especially in Europe, regulatory challenges, by reorganizing itself, does it become less vulnerable?
No, I don't think so. Google's core business, what's going to still be called the Google Inc. Is the primary business where they're being challenged by antitrust authorities in Europe. And that will be equally vulnerable under this structure as well as the old structure. So Google still has to deal with potential antitrust issues, whether they're trying to put other competitors in their business out of business. And this structure really doesn't help them at all.
Professor David Yaffe of the Harvard Business School, thanks for helping us out.
