All the way back in 2011, Netflix (NFLX) made crazy changes to their products, pricing, operations and management structure capstoned by splitting out Qwikster (the DVD-by-mail business) from Netflix (the streaming business). It was a temporary disaster because they made the change so abruptly and on the heels of big product and pricing changes. Netflix's stock tanked. Back then I wrote a blog post about it outlining what they could have done differently. Netflix eventually backtracked and abandoned the Qwikster plan.
Google's latest move to re-brand its corporate parent as Alphabet has some similarities to Netflix's changes in 2011. While Mashable's article is great clickbait, Google's change won't be disastrous. It may even be brilliant.
While the name change feels strange, if executed well there's a lot to like about it. Transparency. Focus. Accountability. Autonomy for leaders. Could they have achieved those without a name change or big re-org fanfare? Perhaps. But now they are committed.
Two of the main criticisms of Google the conglomerate has been:
These criticisms have been largely debunked with the success of Android, Google Apps and Chrome. Sure, Google-Plus is a debacle but for the most part when Google launches a new product it quickly passes good and pushes past great on its way to world domination. Nonetheless, you will notice Google's stock shoots up every time there's a "renewed" focus on costs or a pruning of products. The reason the argument still has currency is a lot of these side projects don't print money like search ads. While that misses the point of the ones designed to strengthen their core dominance, the bigger issue is that Google's search and advertising symbiosis is one of nature's nearly perfect business models. In other words, a tough act to follow.
So, what does a rocket ship like Google, Apple (AAPL) or Amazon (AMZN) do for an encore? Wall Street might have them do share buybacks and dividends. Luckily that's not Larry's and Sergey's style. They seem hell bent on finding the NEXT Google-sized market. That means big bets, lots of them. I applaud it. America and the world need entrepreneurs to invest like Larry and Sergey, Elon Musk and Jeff Bezos. These leaders bet and bet big.
Which brings us back to Alphabet. A friend described it as the perfect overlord-style corporate name - it means nothing but encompasses everything. But that's the point right? In Alphabet's case - all BETs are ON. Create an environment where management teams feel empowered by the strength of Google but unencumbered by the politics. Provide a way to orbit the Google sun but not get burned by the flares of "strategic alignment." (See Microsoft under Steve Ballmer.)
One of my favorite business axioms is Peter Drucker's "what gets measured, gets managed." For investors, this is where it gets interesting: Will the breaking out of Google (the printing press) from the rest of the businesses (the cash drains) be beneficial or detrimental to the new businesses? Will they become hungrier and more capital aware? Will there be pressure to get revenue growth or profitability? Will it stifle innovation or create just enough tension to push the creativity of each team? Will Alphabet let promising innovations be spun off in shareholder friendly ways?
Positive answers to these questions may determine Alphabet's stock returns. Larry even tipped his hat to Wall Street in his letter: "We also like that it means alpha‑bet (Alpha is investment return above benchmark), which we strive for!"
My hope is that Alphabet will provide the right structure, focus and financial discipline that will allow one or more of these emerging businesses to become the next Google. Personally, I want the self-driving car.
Keep innovating Google... I mean, Alphabet. Keep investing. Keep betting on the future.
This article was written by
Disclosure: I am/we are long GOOG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.