Do You Trust Larry Page?

Given the fact that Alphabet née Google is the second most valuable enterprise in the world, it’s striking to consider Larry Page’s 2014 assessment of the company he co-founded with Sergey Brin:

I think we’ve not succeeded as much as we’d like.

As you might suspect there is more context in the original Financial Times interview:

Page, however, is not shrinking an inch from the altruistic principles or the outsized ambitions that he and co-founder Sergey Brin laid down in seemingly more innocent times. “The societal goal is our primary goal,” he says. “We’ve always tried to say that with Google. I think we’ve not succeeded as much as we’d like.”

Even Google’s famously far-reaching mission statement, to “organise the world’s information and make it universally accessible and useful”, is not big enough for what he now has in mind. The aim: to use the money that is spouting from its search advertising business to stake out positions in boom industries of the future, from biotech to robotics.

Asked whether this means Google needs a new mission statement, he says: “I think we do, probably.” As to what it should be: “We’re still trying to work that out.”

It was only a few weeks ago that I had pretty much the opposite reaction to Page: Google turned in fantastic quarterly results that drove the largest ever one-day market cap gain, and what impressed me was the way that Google had seemingly re-focused itself around its core competencies — and around its mission statement. I wrote in The Daily Update about universal app campaigns:

Google is making the same pitch to advertisers that they are investors: don’t look at our portfolio as a group of separate products that you invest in individually; instead, simply spend your money with “Google” and we will dynamically determine the best way to allocate it — and give you evidence that we’re right with our increased ability to track buyers from impression to (offline) purchase.

What is so exciting about this pitch for a strategy nerd such as myself is how aligned it is. Google at its core is a machine learning company that has a stated goal of “organizing the world’s information”…Instead of trying — and failing — to compete with Facebook on fuzziness, Google is going in the exact opposite direction: doubling down on what it does best and betting its algorithm and efficiency, this time applied to programmatic advertising, will make the advantages of Facebook and the other natural brand destinations insignificant.

After yesterday’s surprise announcement that a “slightly slimmed down” Google would become a wholly-owned subsidiary of the new Alphabet, which would also own the newly spun out Calico, Fiber, Nest, Google Ventures, Google Capital, and Google X, Google’s focus is tighter than ever, and just in time: the long awaited shift in advertising from legacy media, most notably TV, seems to have finally begun in earnest, and Google (along with Facebook) is primed to be a chief beneficiary. As I noted, I find this very exciting.

The problem for Page, though, is that he is not a strategy and business nerd. Page is, for lack of a better description, a change-the-world nerd, and it seems clear that he found the day-to-day business of managing a very profitable utility to be not only uninteresting but a distraction from what he truly wanted to do. Page declared in Google’s 2004 Founders IPO Letter that “We aspire to make Google an institution that makes the world a better place”, a rather large departure from aspiring to capture a greater share of global advertising, and I suspect the strongest driver behind this change was that in Page’s mind “making the world a better place” was increasingly in conflict with “Google the institution”. With the establishment of Alphabet Page has prioritized the former at the cost of abandoning the continued making and maintenance of the institution Google has become to the very capable hands of Sundar Pichai.1

To be sure, there are legitimate business reasons for Page’s move: when Google bought Nest I wrote at the time that the acquisition should be thought of as Google diversifying into a new business model based on selling software-differentiated hardware, not advertising, and from day one Nest has been operated independently from Google proper. The same logic applies to all of Alphabet’s non-Google companies: none are likely to be monetized through advertising, or benefit from Google’s shared infrastructure and sales and marketing organization, so why should they be a part of the same company? It makes a great deal of sense to have different companies with different business models — that result in different incentives — as separate entities with clear accountabilities. (Note that this logic does not apply to non-spun off divisions like Android or YouTube: the former is both a moat for Google’s business and a provider of data for advertising, while the latter is both a significant advertising vehicle and a major beneficiary of Google’s infrastructure and sales and marketing organization; I’m not surprised both remain a part of Google.)

That, though, leads to a bigger question: why should all of these disparate ventures be a part of the same company at all? While conglomerates were in vogue in the late 60s and early 70s,2 over the last thirty years the accepted wisdom has been it is better for companies to specialize and for investors to diversify on their own, a viewpoint I agree with: one need only look at Microsoft’s litany of failed acquisitions to appreciate how wasteful many companies can be, and how justified investors usually are in demanding a return of their money. What right does Alphabet have to buck this trend?

That is actually an easy one to answer: Page and Brin can do whatever they want because of Google’s dual-class structure. From Google’s IPO letter:

We believe a dual class voting structure will enable Google, as a public company, to retain many of the positive aspects of being private. We understand some investors do not favor dual class structures. Some may believe that our dual class structure will give us the ability to take actions that benefit us, but not Google’s shareholders as a whole. We have considered this point of view carefully, and we and the board have not made our decision lightly. We are convinced that everyone associated with Google — including new investors — will benefit from this structure. However, you should be aware that Google and its shareholders may not realize these intended benefits.

And so we’ve come full circle: Page may be abandoning day-to-day responsibilities at Google, but he has no intention of abandoning Google’s profits. Alphabet’s plan to report Google’s results on a standalone basis will likely reveal that the search-and-advertising company investors have bought stock in is, absent the financial blackhole of Google’s moonshots, doing even better than most suspected. Unfortunately for said investors the additional clarity will only serve to illuminate just how much money is not being returned to shareholders and is instead being spent by Page and Brin on what they think matters. Will investors trust Page to spend it wisely?

Page is certainly convinced of his righteousness; from that Financial Times interview:

As Page sees it, it all comes down to ambition – a commodity of which the world simply doesn’t have a large enough supply. In the midst of one of its periodic booms, Silicon Valley, still the epicentre of the tech business world, has become short-sighted, he says…

Page estimates that only about 50 investors are chasing the real breakthrough technologies that have the potential to make a material difference to the lives of most people on earth. If there is something holding these big ideas back, it is not a shortage of money or even the barrier of insurmountable technical hurdles. When breakthroughs of the type he has in mind are pursued, it is “not really being driven by any fundamental technical advance. It’s just being driven by people working on it and being ambitious,” he says. Not enough institutions – particularly governments – are thinking expansively enough about these issues: “We’re probably underinvested as a world in that.”

To the question of whether a private company, rather than governments, should be throwing its weight behind some of the world’s most long-range and ambitious science projects, he retorts: “Well, somebody’s got to do it.”

That right there gets exactly to my mixed feelings about Alphabet and the formalization of Page and Brin’s role as sole investors of Google’s profits. I care about changing the world too, but I tend to think that said change is more often wrought through market mechanisms that reward the productization of audacious R&D. Google’s moonshot efforts are often compared to the legendary Bell Labs, but while the latter created the transistor, it was Intel specifically and early Silicon Valley3 broadly that actually made transistors and the computers that were built from them widely available; similarly, Bell Labs invented Unix, but it was Apple and Google, via Android, that put the operating system in the hands of nearly every person on earth.

On the other hand, there are times when the market doesn’t work: broadband, for example, tends towards a natural monopoly which ideally is regulated in a way that benefits society broadly. In reality, though, it is Fiber, an Alphabet company, that has consistently improved the situation in every market it enters or threatens to enter.

Self-driving cars are another example: the technology is in the long run threatening to existing car makers (because it facilitates sharing vehicles instead of individual ownership), but the technological and regulatory issues are such that it would be unlikely that a startup would take on the challenge. Surely it’s a good thing that Alphabet is pushing the envelope here. Then again Uber is investing in exactly the same thing, with the added bonus of having the sort of aligned business model incentives that are often critical to ultimate success. Would some of Google’s profits be better off being directed via the market to similarly impactful startups instead of being spent by Page and Brin?

Credit Page with this: he may not be a strategy or business nerd, but in the process of ensuring his freedom to pursue his vision for how the world should be, he is challenging in a very profound way many of the assumptions about how business should be conducted, and the means through which progress is achieved. It’s now up to investors to decide just how much they trust him, while the rest of us go along for the ride.

  1. I don’t buy the rumor that Google made this move to keep Pichai from going to Twitter. You don’t transform your company’s structure in just a couple of weeks, nor to simply keep one employee; moreover, why would Pichai even want the Twitter CEO job? The fact of the matter is that Pichai has performed fantastically and deserved this promotion fair-and-square 

  2. Marginal Revolution has a useful rundown of studies examining their efficiency  

  3. Thus the name!