My Monday afternoon went to hell when Google announced it was splitting the firm up under a new company named Alphabet. This immediately proved one of the rules I’ve consistently shared: “The only thing everyone will agree with on a new name is that the person who came up with it is an idiot.” However, there is method behind this madness and three clear reasons why a firm would want to do this:
- Liability/government limitation
- Executive retention
Let’s take each in order.
Google is facing several serious problems. The EU appears to be setting up to fine it billions and we saw in the Microsoft years that even for a firm like Google, $6B+ would be hard to write off. By putting the Google entity into its own bucket, Google can potentially limit the liability to that entity’s assets, bankrupting it if needed in order to protect the rest of the company; this may force lower fines that will be paid over fines that should be paid but that won’t. Be aware that the entity doing these fines, the European Commission, is largely funded by them so actually getting the money is pretty important.
In addition, right now a broad warrant potentially covers all of Google and creates the impression that every service is being monitored. By creating separate entities, warrants can be contained on those entities. If the U.S. wants to go after Google search, it can’t as easily look at Gmail or Nest if those are in separate companies. This is particularly important with the corporate effort, which can now be better protected from what is happening with other divisions.
Google’s success outside the core search ad management business has been pretty poor. By creating separate entities, it can potentially better focus them on their products and customers. It won’t make up for a history of bad staffing decisions (like putting engineers everyplace), but it can allow now independent company leaders to better address this foolishness and actually fix some of the core problems and better assure success.
The larger issue is that in big complex companies, the company drama often takes precedence over everything else. By separating into smaller corporate entities, they should be better able to focus on markets and customers instead.
Google has kind of been a company where acquisitions go to die. This structure going forward (as Dell and EMC have showcased) can do wonders for the success of acquisitions and could go a long way to reverse Google’s dismal acquisition history.
When you are talking about top executives, it is virtually impossible to retain them in some kind of a support role indefinitely and even getting support from them after the acquisition is difficult because they go from having a lot of power to almost having none. With this structure, a lot more CEO, VP, CFO, COO and CTO jobs are available to help with retention, for top folks who want to move up and for those executives in new acquisitions. Now, rather than having many people seek top jobs outside of Google, Google will have more of these top jobs inside the firm.
One of the things customers should eventually see is better focus on them and a higher level of potential trust with the firm. With this structure, there is less likelihood that the persons they are talking to are out of the loop and more likelihood that what the firm says it will do and what it does will be the same thing.
On the downside, much of what is now common across working groups like accounting, finance, operations, IT and R&D will need to be duplicated in each new company. This is going to have a rather dramatic initial adverse impact on Google’s financial performance and it could have an adverse impact on Google’s valuation, though this could be offset if each individual firm goes public and Google simply becomes majority holder. HP, which is undergoing a far less complex split, calculated that its ongoing extra cost, something it called dis-synergy, would be around $.4B. This last could provide additional protection against fines and government intrusion.
Wrapping Up: If They Can Pull It Off
While I think it is likely that the impending fines and searches drove the initial considerations for this decision to split up Google, I also believe the other benefits likely drove this decision through the process to execution. Many executives couldn’t survive the likely cost risks, but Google is structured so its leaders avoid this risk and thus Google can do what most companies can’t and make dramatic and costly moves to become more strategically successful. Be aware that the lack of skills for pulling something like this off stand against the eventual success here, but if Google can execute, what results should be far more agile, far more successful, far more secure from government intervention and fines, and far better able to retain key people than Google is today. Granted, I think the person who came up with the name was an idiot, but then that just once again proves my naming rule, and I’m OK with that too.
Rob Enderle is President and Principal Analyst of the Enderle Group, a forward-looking emerging technology advisory firm. With over 30 years’ experience in emerging technologies, he has provided regional and global companies with guidance in how to better target customer needs; create new business opportunities; anticipate technology changes; select vendors and products; and present their products in the best possible light. Rob covers the technology industry broadly. Before founding the Enderle Group, Rob was the Senior Research Fellow for Forrester Research and the Giga Information Group, and held senior positions at IBM and ROLM. Follow Rob on Twitter @enderle, on Facebook and on Google+