ALPHABET EYES NEW FRONTIERS

Google’s rise

In 1995 Goggle was funded, and in 2000 it became the largest search engine in the world; in 2015
it hade 64% of US market share of search; revenues in that year amounted for $75 billion.

Investor Relations

In 2004 Google became a publicly traded company through an unusual IPO (Dutch IPO: Google set
the IPO price based on the demand for its shares, by using an auction).

Also the election of a dual stock structure was unusual; the reason behind this choice was explained
by the funders: the standard structure of public ownership could have jeopardized the independence
and focused objectivity that have been important in Google’s past success; so, a corporate structure
was designed as to protect Google’s ability to innovate and retain its most distinctive characteristics.

Google’s relationship with the investors had 2 sore spots (punti dolenti):

1. approach to corporate governance à the dual class structure was said ‘problematic’ in that
it made it harder for outside parties to influence Google
2. large opaque research budget à in 2011 capital expenditures were increased and the
workforce expanded (the worry behind these investments was that they would have made
the shareholders impatient)
Innovation at Google

Google embraced unconventional HR practices in the interest of fueling innovation.

It encouraged its employees to spend 20% of their time working on what they think will most benefit
the company (many successful Google products have been invented during this 20% time –
AdSense, Gmail).

Many benefits were offered by the company to its employees: 5-month maternity leave, on-site
laundry, free meals and death benefits. Moreover, work spaces were designed to promote “casual
collisions” between coworkers à many open spaces to stimulate conversation (cafes, big round
tables).

To stimulate risk-taking, Google leadership embraced failure: the company actually rewarded teams
who failed: “the biggest lesson was that rewarding smart failure was vital to support a culture of risk-
taking”.
Loving the Googlepex Leaving the Googleplex

Many employees considered Google the best Despite the effort to create the happiest and
employer: about 89% of Googlers gave their most productive workplace in the world, many
employer a high satisfaction rating in 2015, Googlers left after short tenures; this seemed
according to PayScale. to be a function of Google0s exponential
growth. the majority of the executive who left
à Google works from the bottom-up:
Google have done it in order to start their own
employees with a big idea has the chance to
firms (many of which Google funded through
communicate it directly to their fellow
its venture capital department).
engineers and convince them that it’s good.

Investing outside the Core

Google’s founders have always had a long-term view, despite the rapidly changing business and
technology landscape. Even though online advertising accounted for the vast majority of Google’s
total revenues (95% in 2012), the company showed interest for the pursuit of new opportunities à
some argued that Google had no choice but to diversity to ensure future growth.

There are many organizations with big R&D divisions that have a de facto monopoly BUT despite
this they often fail to profit directly from new discoveries.

Early investments

In 2005 Google acquired Android (small software company), which by 2015 became the most
popular operating mobile operating system in the world.

In 2006 it acquired Youtube, and that was a perplexing investment with respect to whether user
generated content would attract top advertisers.

In 2007 it acquired DoubleClick, and also here there were perplexities; google did this investment in
order to keep Microsoft off its online and advertising turf, and it wanted to improve the user
experience.

Moonshots

In 2010, GoogleX became the home of Google’s riskiest projects (moonshots). These projects were
chosen if they had potential to affect millions of lives and employed existing technologies.

- Some of these will be better businesses than others (in terms of money)
- Others might make a huge impact on the world
Investors continued to voice concerns about the reporting of internal investments: pointing to a
decline in capital expenditure efficiency, analysts contrasted investments like Android, DoubleClick,
and Youtube à these were considered projects with less transparent monetization potential.

Google’s CFO emphasized a conservative approach to research spending: he compared

expectations for X to those of a venture capitalist who invests in a young company.
Other Moonshot Factories

Other tech companies had their own moonshot factories: Amazon with drone, data storage, video
streaming, publishing, and tablet units; Facebook with Oculus Rift, Instagram.

Ruth Porat

Ruth was hired as CFO in 2015; her hire was interpreted as a shift in priorities toward expense
reduction (during the second-quarter earning report she said “a key focus is on the levers within our
control to manage the pace of expenses while still ensuring and supporting our growth”) à investors
responded enthusiastic to the earning report.

à she gave a lot more qualitative and directional information than her predecessors and the seemed
to be more in-tune with the investor community.

Google announces restructuring

In 2015 Google announced that it would restructure and create a new holding company – Alphabet.

Under the restructuring:

- Existing shares would convert to Alphabet shares and trade under the same stock tickers as
before
- Google would introduce segment reporting so that Google earnings could be viewed
separately from the other business segments at Alphabet

Reorganization would allow the company more management scale (“we can run things
independently that aren’t very related”)

Google’s founders took inspiration from Warren Buffet (CEO of Berkshire Inc) with respect to
leadership aspects (above all, the long term value creation and ‘backing great leaders’).

Both companies (Google and Berkshire Inc) had diverse array of subsidiaries, all run independently;
moreover, both the holding companies had a dual share class structure (B shares trading at a lower
price) BUT while Berkshire’s subsidiaries were generally added to the portfolio via acquisition,
Alphabet’s ventures were commonly developed internally.
Investors cheered the new structureàthat day, Alphabet shares surged 2,3%.
Innovation

After the reorganization, the CEO indicated that the incubation period for a moonshot was longer
than a venture capitalist’s investment à “the restructuring wasn’t about cost cutting our way to
greatness, it was about ensuring that we have the same very detailed, disciplined approach to
looking at the growth and expenses making choices in order to optimize while still supporting revenue
growth”.

He outlined Alphabet’s 70:20:10: 70% of the company’s resources were spent on the core; 20% on
adjacent projects, 10% on research.

à restructuring would have enabled the company to be an accelerant for entrepreneurship: a lot of
autonomy is given to operate within this larger family of Alphabet, while the latter still represents the
engine of growth.

!! challenge: how much freedom, money, time to give to internal startups??

LOOKING AHEAD

In 2016 the future of Alphabet’s moonshots was uncertain: despite the effort to diversify, the search
engine and its advertising service remained the firm’s biggest revenue driver (90% of revenues).

Being liberated from Google, the moonshots were supposed to thrive under the Alphabet umbrella.

Google’s whole motivation for creating the Alphabet holding structure in the first place was to force
more financial discipline at its various moonshots and other businesses à that didn’t fit into Google’s
core focus.

As Alphabet was expanding, Page and Brin had critical decisions to make about the non-Google
subsidiaries:

- was it important to give the companies independence or would that strategy empower divisive
leadership?

- how long should Other bets be allowed to experiment before producing viable, profitable product?

- was Alphabet providing the resources startup ventured desperately needed to success, or would the
conglomerate structure stifle innovation?