Alphabet Seeks to Optimze their Portfolio without Stifling Innovation

The Economist August 1st, 2020 Briefing Alphabet “Google grows up” “As the computing conglomerate has got bigger, so too have its problems”

Information Provided in BBW Article

Google has many users of its various platforms (Approximate in Billions): 2B YouTube, 1.7B Search, 1.5 Gmail, Android 1.5B, Chrome 1.3B, Maps 1.2B, Pay Store 1.1B, Drive 1.1B and Photos 1B.

Revenue by Segment in 2019 Billion $ (Approximate): Search $95B or 59% of total revenue, Advertising $20B or 12.4%, YouTube $17B or 10.6%, Cloud $10B or 6.2% and Other $30B or 18.6%. Revenue stems from USA $75B, Europe $50B, Asia-Pacific $25B and Other Americas $9B

Information not Provided (Source Apple Stocks 06AUG2020)

Market Capitalization: Google $1.023T Operating Margin 20%, Facebook $0.765T Operating Margin ~35%, Apple 1.937T ~25%, Amazon $1.619T Operating Margin ~5%, $1.628T Microsoft ~39%

Summary of Article

When Sundar Pichai took over Online Search and Advertising in August 2015 annual revenues were $66B with a net income of $14B or net margin of 21%. When he was given control of the Parent Company Alphabet in December 2019 the annual revenue for his division had grown to $161B with $34B. 83% of revenue and all profit stems from Search/Advertising/YouTube. (SAY). The “ ‘online ad stack’: services to sell, buy and serve ads, and measure their effectiveness all automatically …” is a dominant platform with market share that “exceeds 90%”.

The growth over the years has brought the total number of those using at least one product or service to 4B. Such success for the 21YO company is bringing on political and economic questions. “From the outside, lawmakers and trustbusters are pressing it for explanations over alleged abuses of its market dominance in online-search and -advertising technology.” Internally, the “company’s famously freewheeling culture is becoming harder to sustain.”

As with other conglomerates, executives analyze the individual business units and devise strategies to optimize the full enterprise while still resourcing emerging opportunities. In some cases, that means further investing in laggards or letting them go at a good price freeing up resources to focus on the firm's towering strengths. For Alphabet with so much success such an effort is not easy. As described above, nine of the businesses each have at least a billion users. Having said that only three, Search-Advertising-YouTube (SAY), are profitable. Alphabet also has 11 “other bets” or non-core businesses operating with their own finance and capital structure. Examples are Access (Fiber Optic Broadband), GV (invests in start-ups), Verily (health-care), Waymo (autonomous vehicles) and X (a skunkworks). “What links them to the main business is information processing-and specifically these days artificial intelligence (AI).

Given the scale and maturity of current day Google/Alphabet, the culture must and is moving away from bottoms-up “engineers linked by a common language and common goals”. Today there are middle-managers but they are restrained to achieve a light touch yet render some guidance and organization. Each manager is prescribed a minimum of seven direct reports. This limits too much meddling and keeps the manager busy enough to avoid much managing-up. Historically, Google has been an open book giving all access to everything but that too has changed. Today staff are urged to peruse only on a need-to-know basis. Weekly TGIF Town Halls, famous for wide-open dialog, are now monthly and strictly business-focused. These changes have evolved, in part, after staff got involved in internal debates and posted business content widely. Examples of these debates include “lack of leadership diversity” and “demanding the company stop selling its technology to police…”

In general, with so much going on at anytime “Alphabet executives often likened their firm’s structure to a ‘slime mold’-organisms that survive as single cells, but must aggregate to reproduce.” Now under Mr Pichai, each of the important businesses is “semi-independent” with powerful bosses: Thomas Kurian-Google Cloud, Susan Wojcicki-YouTube, Rick Osterloh-Google Hardware, Hiroshi Lockheimer-Android Operations and Prabhakar Raghavan-Google Ad and Search. To exert needed control, of the more mature and complex organization, Larry Page, Sergey Brin and Eric Schmidt hold about 13.1% of the stock but have 56.7% of voting rights. Mr. Pichai now manages the daily operation more traditionally along with Kent Walker (VP Global) and Ruth Porat (Finance). The approach is more top-down. With these changes some are starting “to grumble about getting tasks handed down, from above with a deadline.”

Actions taken under Mr. Pichai are more shareholder-friendly and include accelerated share buy-backs, looking to potentially divest some businesses while looking to realize the potential in others like Google Cloud. With all this change, insiders and others are wondering if “Mr. Pichai is the right person for the job.” Some insinuate, that so far, he’s not Jeff Bezos or Microsoft’s Satya Nadella.

So what are suggestions for Alphabet now?

Charge for some of its services.

Bigger idea become the company that is a single source that consumers/users employ to organize and manage their data.