Google’s decision to restructure is the strongest signal yet that it intends to be a 21st-century innovator, a bold creator of new products, not simply a harvester of profits from its lucrative search engine business.
But 20th-century business history offers three ways to think about what Google is up to here, embodied in three potential analogues: Berkshire Hathaway, the conglomerate run by Warren Buffett; General Electric, the industrial conglomerate; and AT&T, which operated the wildly innovative Bell Labs until 1996.
Google is to become but one (very large, very profitable) subsidiary of a holding company called Alphabet. The other (so far unprofitable) ambitious initiatives Google has taken on (driverless cars, life-extension technology and more) will be separate subsidiaries, as will future shoot-the-moon ventures that the firm buys or builds.
Here’s what each of the three pathways looks like and what they might mean for Alphabet, Google and innovation in the decades ahead.
When Google announced its new structure Monday, a rather uncommon word started appearing in business media: “conglomerateur.” As in, that may just be what the Google founders Larry Page and Sergey Brin are becoming – builders of a corporate empire that will stretch across industries into whatever field they find interesting and lucrative.
That is the strategy that has made Buffett one of the world’s wealthiest people and Berkshire Hathaway one of the world’s most valuable companies. Its largest interests are in insurance, but those interests stretch far afield, from mobile homes and private jets to Heinz ketchup and Duracell batteries. This week’s $37 billion deal for the aerospace parts maker Precision Castparts is Buffett’s largest acquisition to date.
Already Page gave a nod to this strategy in his letter announcing the new structure. “Alphabet is about business prospering through strong leaders and independence,” he said, with the subsidiaries each having a strong CEO. He and Brin “will rigorously handle capital allocation and work to make sure each business is executing well.”
Buffett could say much the same; he gives his managers wide discretion to manage the operational details of their business; Berkshire’s corporate office in Omaha, Nebraska, is minuscule – 24 employees overseeing a company with 340,000 employees.
But the differences may be more important. Berkshire is all about acquiring companies that are well established, with proven models for profitability, at favorable prices. Buffett has eschewed technology businesses or pretty much any company with a business model or prospects that are hard to project.
Page and Brin, by contrast, build things that have never existed before, or that are hard to imagine. It would be a major reversal if they changed their focus to trying to find steady, reliable assets that are undervalued by the marketplace. A more Buffett-style approach might be welcome news for Google shareholders, but it would mean a pivot from the grand ambitions of their recent ventures.
Maybe a different type of conglomerate is the model for Alphabet. Thomas Edison helped found General Electric, and a long-lasting light bulb and electric lights were some of the original products. It soon expanded into locomotives and then X-ray machines and electrical appliances. It made radios and then televisions, and the broadcast networks that produced content for them. Its researchers played key roles inventing fiber optic cables, MRI body scanners and countless other technologies.
The parallels with Alphabet are obvious. It may be that running a search engine has about as much in common with running a driverless car company as, say, a locomotive has in common with a television broadcaster.
But GE has prospered by combining a strong organizational culture in which the different arms of the company are operationally independent, but have linkages that benefit them all. The ability to take centralized research and development work and apply it to a wide range of usable products has been a boon; the laser, on which GE researchers did key work, found its way into both medical uses and telecommunications uses, for example.
The idea is that different though the GE business lines might be, each is stronger together than any one of them would be on its own. It’s easy to see why Google’s leadership might want to emulate General Electric – GE has created products over the last century that have revolutionized daily life and rewarded its shareholders handsomely in the process.
Less clear is whether the various arms of Alphabet will, over time, be as integrated into a coherent whole as GE is. Executives at GE make their way through the ranks, across industries and geographies, creating a strong corporate culture (nicely parodied by the fictional Jack Donaghy in “30 Rock,” who was “Vice President of East Coast Television and Microwave Oven Programming”).
Alphabet may have the same grand ambitions that GE had a century ago to create groundbreaking products. An important question is whether it becomes a centralized innovation machine or a bunch of separate projects that happen to have the same corporate parent but not much else in common. Can it make its various initiatives more than the sum of their parts?