Alphabet to spell out Google’s future
YouTube, Apps, Maps and Ads.
Other buckets include Calico (fighting ageing), Google Ventures (startups), Google X (big breakthroughs) and Google Capital (investing long term).
In other words, all the cool new stuff has been given its own legs to stand on and relative autonomy, rather than being constrained by the big core operations.
Inspiration for the new name comes from two things, according to the chief Googler.
First, it means a collection of letters that represent language (which is at the core of Google’s search indexing). Second, it’s a cute play on the idea of betting on Alpha, which in investment parlance means delivering better than benchmark returns.
This move to a conglomerate structure has many people, including Stifel Equity Research and the Wall Street Journal, suggesting that Google is becoming the Berkshire of the internet.
There’s a good argument to say it’s true. Both companies have strong partnerships at the top – Larry Page and Sergey Bryn at Google; Warren Buffett and Charlie Munger at Berkshire.
Second, Berkshire is run in a very decentralised way. Buffett and Munger select the chief executive, fix his or her remuneration and let them go for it in the knowledge that the two top dogs are on tap if they need them. That’s exactly what Page has done in selecting shooting star Sundar Pichai as his new chief executive.
Likewise, in terms of capital management, there seem to be similarities. In the Googleblog, Page makes clear that he and Brin will rigorously handle capital allocation. Similarly, Buffett devotes his time to rational capital allocation.
However, in one area, the two conglomerates are very different. Less than 10 per cent of Google’s 150 businesses are profitable – though the biggest, Google adwords, is outrageously profitable.
On the other hand, virtually every one of Buffett’s businesses are profitable and he has little patience for those that aren’t.
This brings us to the subject of performance. Over the last year, Google shares have risen about 4 per cent, while Facebook and Apple jumped more than 30 per cent.
The battle with Facebook for advertising dollars is particularly fierce, with Google winding out new advertising formats here in New Zealand across its core websites to combat Facebook’s assertion that its logged-in data is better than Google’s cookie-based data.
If you have viewed YouTube lately, you’ll know the old skipable ads have disappeared in favour of force-fed 10, 14 and even 28-second jobbies.
Likewise, sponsored results in Google search have grown dramatically. Historically, sponsored (paid) results used to make up less than 25 per cent of returns, whereas today often 75 per cent of the content above the ‘‘fold line’’ is paid ads.
While commercially this seems smart, it’s quite some distance from where Google started.
Back in 1998, Page and Brin were two PhD candidates at Stanford University who had a blueprint for a new type of search engine they named Google.
In a crisp monograph entitled ‘‘The anatomy of a large-scale hypertextual web search engine’’, the two future billionaires outlined a new type of search engine that would crawl and index the web better than existing options.
The blueprint contains a stinging criticism of advertisingfunded search engines, which Page and Brin felt were biased towards advertisers and against consumers.
Their treatise goes on to suggest that the better the search engine is, the fewer advertisements that will be needed for the consumer to find what they want.
One of my favourite Buffett quotes is: ‘‘Someone is sitting in the shade today because someone planted an apple tree a long time ago.’’
I can’t help but wonder if in Google’s case, the apple is starting to fall some distance from the tree. Hopefully, the company’s new structure will give Page enough space to ask the same question.
Mike ‘‘MOD’’ O’Donnell is a growth manager and professional director. His Twitter handle is @modsta and he wouldd love to go to a Berkshire AGM. Disclosure: He has shares in Google.