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Google's Alphabet Will Be Like...

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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No, Alphabet isn’t really going to be like Berkshire Hathaway.

That was the parallel that first occurred to me and lots of others when Google Chief Executive Officer Larry Page announced Monday that he and co-founder Sergey Brin would henceforth be running a holding company called Alphabet. Page had encouraged this by saying that he looks to Warren Buffett’s conglomerate as -- this is the Wall Street Journal’s paraphrase of comments he made to some Google shareholders in December -- “a model for how to run a large, complex company.” His Alphabet announcement also promised that he and Brin would “rigorously handle capital allocation,” and rigorous capital allocation is one of Buffett’s main claims to fame.

Beyond that, as many people have pointed out this week, there isn’t much resemblance between Alphabet, with its amalgam of money-spewing Google and a bunch of potentially world-changing but money-losing startups, and Berkshire’s lovingly (if rigorously) curated collection of stodgy moneymakers. Buffett’s adept balancing of ruthlessness and coziness might be something Page and Brin want to emulate, and maybe they pine to be as widely and durably beloved as Uncle Warren. I really don’t see them copying his high-carb eating habits, though. Here’s another Page paraphrase, this one from an interview last October with the Financial Times:

There is no model for the kind of company Google wants to become, says Page. But if there’s a single person who represents many of the qualities he thinks will be needed for the task ahead, then it’s famed investor Warren Buffett.

But is there really “no model” for the kind of company Alphabet/Google wants to become? Observers have been throwing out different examples all week of what Alphabet is or should be like. Here’s a roundup (although I’m sure I’m missing a few):

Alphabet is like Virgin. That is, as Wall Street Journal tech columnist Christopher Mims put it on Twitter, it is (or should be) a “venture conglomerate” that creates and invests in new businesses. With the exception of Virgin Galactic, though, Sir Richard Branson’s companies tend to jump into established industries with a distinctive shared approach to marketing and service. They’re not trying to change the world with new technology, as Alphabet aims to. Also, as innovation consultant Paul Munkholm complained to Wired, “unlike Virgin, which is clearly a parent brand to businesses like Virgin Air and Virgin Mobile, Alphabet doesn’t have that same connection.” Still, there’s surely something to this parallel -- Page did get married on Branson’s private island, after all.

Alphabet is like Liberty Media. Harvard Business School professor Tom Eisenmann thinks media billionaire John Malone’s approach to conglomerate-building might work for Alphabet. As he wrote on the Harvard Business Review’s website:

Malone is a brilliant financial engineer, who creates separate capital structures -- each with a unique stock -- for his different lines of business. Liberty Media, Malone’s holding company, owns a portion of the stock in each business. This approach allows Malone to attract equity and debt investors whose preferences regarding risk and payoff horizon match those of the business in question.

A somewhat similar model that I remember from the 1990s was Thermo Electron, a Massachusetts maker of scientific equipment that would spin off new technologies as publicly traded companies to motivate employees and move research and development outlays off the parent company’s earnings statement.

For now, though, Page and Brin seem to be doing the exact opposite. Google’s new projects have been sheltered from financial markets, and Alphabet’s will be too -- presumably because Page and Brin think they’re better at allocating capital to such early-stage endeavors than Wall Street would be.

Alphabet is like General Electric. Thomas Edison invented the first durable electric lightbulb, and the company he founded to manufacture it grew into a conglomerate that made all sorts of different electricity-using machines -- from locomotives to X-ray machines to radios. There’s definitely a lot to like in this parallel, which has been suggested by the New York Times’ Farhad Manjoo and many others. Where electricity was the common element that united most of GE’s different endeavors, at Alphabet it’s the power of algorithms. Over the decades GE also developed a unique management culture, which could eventually become a thing for Alphabet too. One striking difference, though, is that Edison was already doing a zillion different things even at the very beginning. As John F. Wasik writes in the book “Merchant of Power”:

Imagine Microsoft…, in addition to writing computer operating systems, making every component of the computer and supplying the electricity to run them, wiring houses and owning and running power plants.

It was too much, it turned out, and after Edison ran into big financial trouble in the 1880s it was Wall Street financiers Henry Villard and J.P. Morgan who consolidated and streamlined Edison’s many businesses, creating the modern GE. Which surely isn’t the way Page and Brin want to see things play out.

Alphabet is like AT&T. Ma Bell was a money-gushing monopoly that used some of that monopoly money to finance the world-changing Bell Labs. Here’s Neil Irwin in the New York Times:

In this example, Google’s dominant position in search advertising plays the role of the old AT&T phone monopoly. It earns a lot of money, and its managers will siphon off a portion of the profits to fund all sorts of basic research.

Many Bell Labs inventions and innovations were put to work in AT&T’s core business, making it even more efficient and profitable. Some, such as the transistor, ended up transforming the world. But none of them actually became giant new AT&T businesses -- telephone service remained the core through AT&T’s court-ordered breakup in the 1980s and still is for the remnant company that bears the name today (if you define telephone service broadly enough). The much-diminished Bell Labs, meanwhile, is about to become part of Nokia.

Alphabet is like Xerox. This is similar to the AT&T story, but more fraught. Xerox’s Palo Alto Research Center developed all sorts of very practical things -- from laser printing to Ethernet to the personal computer to the graphical user interface that dominates modern computing and communication -- that made huge fortunes for other companies but not for Xerox, which is no longer nearly the high-tech power it once was.

Michael Hiltzik, author of a history of Xerox PARC, said in an interview with Vox.com this week that the company’s culture was so dominated by the copier business that it “was very hard for Xerox to get into anything that wasn’t really connected to the copier. They had 250,000 salesmen, and when they looked at the personal computer it wasn't even clear how they made their commission off of it.” Google, Hiltzik argues, has never been that one-dimensional. Also, PARC was (and is; it’s still around) a small outpost 3,000 miles from corporate headquarters in Rochester, New York. Alphabet’s new businesses, on the other hand, seem to be what Google founders Page and Brin are most interested in.

Still, the basic challenge they face, finding ways to encourage and invest in continued innovation within an organization that’s built around a single hugely successful innovation, is a daunting one. As HBS professor David Yoffie told Bloomberg News:

You have to be able to manage the innovation process and decide what investments are worth making and which ones are not. The history of this in the technology industry is littered with failure.

This was already an issue for Google before Alphabet, and while the reorganization is clearly an attempt to address it, that doesn’t guarantee it will work. There are, contrary to what F. Scott Fitzgerald wrote, many second acts in American lives. There just aren’t so many second acts in American technology companies.

Alphabet is like SPECTRE. That’s supervillain Ernst Stavro Blofeld’s corporation in multiple James Bond movies and books -- a globe-spanning conglomeration of dastardliness with the full name of Special Executive for Counter-intelligence, Terrorism, Revenge and Extortion. It was also the model for Dr. Evil’s Virtucon Industries in the Austin Powers movies.

Here’s News Corp. CEO Robert Thomson, speaking Thursday in Australia:

That Google’s newly conceived parent company is to be called Alphabet has itself created a range of delicious permutations: A is for Avarice, B is for Bowdlerize, through to K for Kleptocracy, P for Piracy and Z for Zealotry.

OK, so he wasn’t explicitly comparing it to SPECTRE. But that’s what jumped to my mind as I read his words. And you’ve got to admit, the prospect of “don’t be evil” Google evolving into an alphabetized crime syndicate is pretty cool, if also of course terrifying. When Larry Page starts bringing along a cat and stroking it during all his public appearances, we’ll know to watch out.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author on this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net