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The Alphabet of Google A and Google B

For the last few years, I’ve been proposing that the way to conceptualize Google is as two separate entities: Google A and Google B.

Roughly speaking Google A was the R&D[1] organization and Google B was SG&A[2]. You can find the operating expenses of running each of these organizations in the company’s income statement.  In the last quarter R&D was about $2.8 billion and SG&A was about $3.5 billion[3]. The two entities are further distinguished as follows:

  • Google A was led by Eric Schmidt and Larry Page and Google B was led by persons unknown, but mostly represented by the “Chief Business Officer” Omid Kordestani.
  • Google A spends money. Google B collects money.
  • Google B sends a check to Google A while Google A sends data to Google B (which then sells it on to advertisers and collects money).
  • Google A communicates frequently with optimism and enthusiasm about the future. Google B remains quiet.
  • Google A solves problems of humanity, Google B solves problems for advertisers.
  • Google A has users, Google B has customers (to whom it sells users.)

In summary, Google A is altruistic, Google B is pragmatic. Google A engages in research, Google B engages in commerce. Google A operates in a structure similar to a Bell Labs for the good of humanity[4],  Google B operates in a structure similar to AT&T and collects monopoly rents but without any government oversight.

This was an effective construct for analysis which explained to me much of how Google operated and how it made decisions. So what do we make of Google’s new Alphabet? Is this a dissolution of the Google B/Google A dichotomy?

My initial answer is no. We don’t have a change in this core structure. What we have instead is a split of Google A into Google A and Google A+.

A+ is the crème de la crème of the altruistic Google A. It’s the stuff that really does not make money. It’s the laboratory of Bell laboratories. It’s the moonshot manufacturer. It’s the incubator where hobbies are hatched. It’s the funder of ventures.

After A+ is carved out, Google A and Google B remain exactly as they were, now under a new CEO. The previous CEO no longer has any day-to-day input in the running of Google A and is no longer soiled by association with Google B.

Alphabet is therefore the “holding company” of Google A+, Google A and Google B. I can only suppose that the separation of A+ from A (and the previous A from B) allows the founders to distance themselves even further from the purchase decisions which, through pricing signals, determine where value lies and how resources should be allocated. That must be a great relief.

Notes:
  1. Research and Development []
  2. Sales, General and Administrative []
  3. Sales and marketing was $2.1 billion and General and Administrative was $1.5 billion []
  4. Using a definition of Good as established by the founder []
  • blenheimorange

    So does it make the organisation more transparent? Is it easier to analyse from an investors’ perspective?

  • Cedric Coignard

    With your analysis the connection of Nest to Google A+ is much more surprising.

    • http://www.asymco.com Horace Dediu

      Nest is an oddball. Seems like an acquihire for the “Internet of Things” hypothesis.

      • http://codemgmt.blogspot.com Mike Gray

        From the SEC filing it appears Nest will be separate from Google A+: “Under the new operating structure, its main Google business will include search, ads, maps, apps, YouTube and Android and the related technical infrastructure (the “Google business”). Businesses such as Calico, Nest, and Fiber, as well as its investing arms, such as Google Ventures and Google Capital, and incubator projects, such as Google X, will be managed separately from the Google business.”

        http://www.sec.gov/Archives/edgar/data/1288776/000128877615000039/a20150810form8-k.htm

  • John R. Moran

    Last two sentences may be the most devastatingly dry critique in Asymco history.

  • http://www.roundrects.com Alex Santos

    I read the post but I must be ignorant. I fail to see what the point is, I would like to though. The reason I might be in the fog might be related to how a lot of companies operate, there are always divisions/departments, slices of a company as it were, that make up the whole and some of those parts make or spend more money than other parts. I don’t understand how Horace’s article lends to a clearer understanding of Google.

    If someone could summarize the key point(s) I would be grateful but I think I need a clear stroke of the brush on how the Google A (now A and A+) and Google B represents something unique unto itself or from the industry.

    I appreciate the article, maybe I just don’t know the background that triggered the article.

    Anyway, if someone could say more I would be grateful.

    • http://www.asymco.com Horace Dediu

      Most companies are divided into individual productive profit/loss sub-companies. Each “division” has allocation of income and cost which roll-up to a combined total. The close-coupling of costs and income allows the allocation of resources according to market signals (pricing and purchasing). What the A/B dichotomy proposes is that Google is separated into a pure cost and a pure income group which means that the cost is not coupled with the income in a way which it is informed by it. This, I believe, is by design. Management has stated that they don’t want to be vulnerable to market forces which can distract them from their vision.
      This could be a brilliant insight or it could be a catastrophic folly. Discuss.

      • Space Gorilla

        Just a thought… is this a first step in Google cutting ties with Android, spinning it off somehow?

      • http://www.roundrects.com Alex Santos

        I know little about Android so forgive me but do you mean Android in terms of OS or Hardware? Mobile is undoubtedly a significant force today. Whatever tangible (OS or HW) they abandon, they can not abandon mobile philosophically. No one can right now, it is too significant.

        I apologize if I misunderstood the question.

        Mike Gray, just below, left some related remarks which I believe are more effective at answering your question than I am.

      • Space Gorilla

        Yeah, I could also be very wrong. I have an inkling, just a gut feeling, that Google wants to spend less time on Android, the OS. Android is a mess, and I don’t think Google wants to be Microsoft, pouring resources into maintaining the OS, and getting little in return. Perhaps part of the long term thinking with this Google reorg is that it allows them to shift responsibility for Android somewhere else at some point in the future. Obviously this thought is not fully formed, as I said, it’s just an inkling.

      • Walt French

        Noting that Android remains part of Google. Think of it as the storefront where Google’s business (selling ad impressions) takes place; no company would shutter its stores.

        Unless it had something better. With the decreasing role of PCs and the not-there-yetness of cars as “ad vehicles”, Android is central to Old Google.

      • Space Gorilla

        You’re right of course. I just have a nagging feeling that Google would like to spin Android off in some way. But somebody has to manage Android, advance it, support it. Android seems like a lot of headache for Google and is the ROI really that high? Could Google let a group of OEMs take it over? A year ago I thought Google had no option but to take more control of Android, but is that possible? Has Google lost control of Android? Maybe it doesn’t matter and Android is table stakes in mobile for Google and there’s no choice but to move forward with it, whether it’s a mess or not.

      • Space Gorilla

        Hmm, another thought, what if Google makes much more money selling ad impressions via other non-Google or non-Android storefronts and the value delivered through its own storefront (Android) is decreasing? At what point should Google then shutter its own store? Possibly never since somebody has to advance Android and Google probably has the strongest financial incentive to do that. But again, what if that financial incentive is decreasing? Does Google then go into maintenance mode re: Android?

      • http://www.roundrects.com Alex Santos

        In terms of distractions, all corporate research members shouldn’t be bothered by the larger whole, especially what the company is currently marketing etc. These teams are usually comprised of multi-disiplinary scientists whose main concern are ideas that might be staged 5 or 10 year into the future.

        They require funds as needed and shouldn’t be stifled economically as it can limit their effectiveness and scope of research. Research teams don’t typically have goals because if they had a goal, they would be at the development stage; specifically developing for a market.

        What I am trying to suggest is that there are special teams, like a corporate research team, with significant budget allocation, they are not there to serve immediate goals. Their work is purely concerned with research, they often don’t know where they will end up as their research develops, if they did, again, they would have a goal and would start the development phase.

        I find it interesting that ‘management’ doesn’t want distractions from their vision. What level of management and what are they managing, existing products, or something else? Whatever it is, it can be catastrophic if the company is running out of funds, it can be brilliant as long as they have good people that they are managing but again, I don’t know who this ‘management’ team is. Ah, and I suppose their management ‘style’, for lack of a better term, must preclude good practice and be communicative, honest and open. I am not sure what else to add but maybe this is of interest to the reader.

        Thanks

      • ptmmac

        This certainly is not a successful model that has worked in the past. Microsoft has thrown billions of investment down these hypothetical research holes. Look at the hugely sucessful ATT products from Bell Labs. These were always products that lacked an appropriate technology – not a random technology that “looked promising”. The transistor, the communications satellite, fiber optic cables, and microwave towers were all sucessful products that Bell Labs built. Often research money from the government was added to the Bell Labs Monopoly money stream to make these products possible. There is no way to properly run a research lab with out a problem to be solved. The Transistor lowered long distance communications costs by reducing maintenance, switching and amplification costs for electrical signals. The other examples reduced the demand on cables or expanded cable capacity.

        Google’s problem is they have the structure backwards. You look for solutions to real problems with your business. You do not look for problems to build products for. Google should be looking for a way to solve the privacy problem produced by their product. If they solved that they really would have a product people would pay for. Imagine being able to look at prices without the seller knowing how much you might spend, or being able to know how honest a seller is without knowing their name?

      • http://www.roundrects.com Alex Santos

        The research at Xerox Parc didn’t get anywhere — the top brass didn’t get it. Atari’s Corporate Research and their Advanced Research Lab both engaged and developed some pretty incredible technology for the time but as in the case of Xerox, top management had a cash cow that they were too busy milking.

        Both of these companies had brilliant people working in these research labs, both were too busy making money to understand. They could have disrupted themselves, they didn’t.

      • art hackett

        Possibly even delusional judging by the absence of results after all this time.

      • Fran_Kostella

        Having chewed on it for a few days, I’ve gone from feeling that it was an essentially meaningless move, to feeling that it will lead to nothing but endless wrangling. From here is looks like they are going to now show the public that they have invested in multiple Uber scale startups that have either no products or very few narrowly focused products, and which certainly aren’t likely to provide dramatic sources of income.

        They’ve opened themselves to more criticism, but have achieved little that I can see in return. Given the onslaught of bad publicity about to hit them about their illegal uses of their monopoly position, it just seems to be the wrong move at the wrong time. They’ve always had a bit of a tin ear and I don’t see how this helps anyone but the managers at the one major source of income. It is tempting to believe they are chess masters making a move ten steps ahead, but if the past is prolog then this is just a amateurish move that doesn’t gain the middle of the board, nor does it trade a low value piece for a high value piece. Meh.

  • Norton Chia

    Please Horace, just don’t involve Google+.

  • Fran_Kostella

    On hearing the news of this seemingly useless reorganization, it occurred to me that the main purpose was to assign blame to some subsidary, making it a scapegoat for some anticipated major problem. The biggest problem I see on the horizon are the many antitrust efforts starting up in earnest with Google as their focus. I wonder if the plan is to sacrfice a queen if needed to save the king and a convenient knight or rook cannot be put in place in time?

    • studuncan

      That ‘problem’ is usually Wall Street expectations.

    • airmanchairman

      That theory would put this operation on a par with Microsoft’s decision to retire its first CEO or at least relegate his title to “adviser”, in the wake of the plethora of antitrust allegations and actions against it, in years past.

    • art hackett

      Something along those lines no doubt.

  • pvr4me

    As an investor, I’d love to own “Google B”; the other bits, not so much!

    I suspect there will be a lot of pressure to offer Google shares separately from Alphabet. Of course, with the dual class structure, Page and Brin can thumb their noses at that.

    • Troy

      Apple’s version of ‘Alphabet’ took them from a $5B company to a $500B one, via the iPod and iPhone product lines.

      Granted, MSFT’s version gave the world the Kinect, but I think GOOG’s brain trust has the right idea here.

  • jwan584

    I enjoy Horace’s work, but I find this too much in the camp of theory building as opposed to viewing reality as it is.

    The A/B analogy is really a reflection of any ad business where content and advertising have separate motivations. It isn’t just true of Google, it’s true of Facebook, Yahoo, and old media too.

    My view is that this finally aligns the company to the founders’ vision. That Google has turned out to be a search company, successful as it is, has kind of been disappointing to Larry. Larry’s vision was always to change the world in multiple areas, not one. This organization finally reflects that.

    I think the new structure improves the quality of pricing signals. Whereas the unprofitable groups were invisible before, the new org makes clear the cost of running them. The pressure from Wall Street feeds back into the exec team and back to Alphabet in a more direct way. It’s still more cushy than a startup backed by venture capital, but it’s more transparent than a org buried in a search company.

  • Mordechai

    It’s been postulated that one reason that Apple is so successful is that Apple has been able to run the business as one big functional organization, without divisions or businesses that work at cross-purposes. Now here’s Google explicitly layering on a multi-business organizational structure. What an interesting experiment – we now get to watch which organizational structure really works best at large scale in terms of ability to provide solutions for the “jobs to be done.”

    Although, as Horace has pointed out, neither Larry nor Sergey seem to be motivated by “jobs to be done”.

    • Troy

      Service provision is the ‘job being done’, and that’s what products do, both software and hard goods.

      I fully expect the “tech” world of 2045 will be more different from now than now is to 1985 . . . AAPL, GOOG, and even MSFT are still sitting in their respective catbird seats with the resources — financial and intellectual — to tackle any subdomain of future tech application they choose to.

      I still drive a MY 2000 car, and it’s not all that different from MY 2015 cars, but by 2030 I fully expect we’ll have e.g. smart signals at intersections that coordinate traffic (a la Minority Report).

      Monetary transactions will be a lot more frictionless too, something that’s only starting to get going now.

      There’s still plenty of new services to be R&D’d, and no reason GOOG won’t get there first.

  • Childermass

    Devastating final sentence. Bullseye.

    I am too old-fashioned, however, to be happy seeing the word ‘altruism’ dragged into the gutter along with Schmidt and Page. As my friend Inigo Montoya would say “This word ‘altruism’ it does not mean what you think it means.*” There is nothing selfless about Google A. There is nothing accidental or coincidental about its relationship to Google B. It may have appeared that way years ago, in the days when we all loved their cheery, innovative iconoclasm. But too many years of cynical exploitation allows that to stand. These two are at best amoral and at worst sociopathic. Calling them, through their vehicle, altruistic is neat but wrong. They are pimps.

    *Yes, I know you know what it means. Maybe using inverted commas would help. ‘Altruistic’.

    • art hackett

      Thank you. I still don’t understand how this is not obvious. I lean towards sociopathic as they seem to have disguised their true intent to so many.

  • Noah Rosenberg

    The interesting aspect here is this division reflects google’s value proposition—not to its customers—but to Larry and Sergey.

    From the viewpoint of the “explorer” personality type, a Google B structure is necessarily uninteresting because it benefits most from careful, steady stewardship. In fact, new ideas are on the short term harmful and in the long term catastrophic.

    In the model of Edwin Land / Walt Disney / Steve Jobs, the organization exists to derive value from creative output (the visionary discovers the “ore”, and the organization extracts, refines, and markets it).

    In the google model, Google B is a completely different construct. Google B doesn’t discover or create anything; instead it’s almost a militaristic operation, capturing moments of purchase intent so that it’s allies can extract value through advertising. Google B’s strategic interests are capturing and holding. Android itself isn’t a valuable asset; it’s more like a canal, ensuring access to customers.

    The key traits of a good manager for Google B are discipline, analysis, and control.

    So now you have two managers who are forced into a role for which they are incorrectly wired; they’re both “explorers” doing their best to pretend to be “sentinels” (MBTI references http://www.16personalities.com/personality-types).

    So maybe this shift to Alphabet exists solely to allow two individual, powerful men the opportunity to operate as suits them. The alternative being to leave altogether, an action which would cost hundreds of billions of dollars in market value.

    • http://twitter.com/matthewwanderer Matthew

      “So maybe this shift to Alphabet exists solely to allow two individual, powerful men the opportunity to operate as suits them.”

      Excellent comment, Noah.

      I’m _way_ out of my depth here, but I suspect there are two birds killed with Alphabet. The first you detail nicely.

      The other might be the weight of Google’s extravagances on GOOG’s quarterlies in an ad environment that is no longer as profoundly buoyant as it was in the past. Ballast is being flung off in a hurry, and that would seem to suit the Deciders ideally.

    • stefnagel

      A useful definition of a leader is someone who takes us places we would not go on our own. One of the best leaders I ever met was a sea kayaking guide on Lake Superior. Within hours, he built trust to the point where we would go anywhere he led.

      A useful definition of a manager is someone who creates great jobs and finds great people to do them. I like to think I did that for many years.

      Do Larry and Sergey fit either definition?

    • art hackett

      Which came first, the chicken or the egg, the Algorithm or the concept of data mining (direct(ed) advertising) via the Algorithm? Did they even “invent” the Algorithm, or find it? Does Google have anything of consequence, apart from The Algorithm and roid? Btw, only one makes money.
      Bell Labs and other research institutes on the other hand, made huge strides in knowledge and tech, without pinball machines, delightful cafeterias, colourful spaces and other child like distractions. Not that a good cafeteria can’t help, but the rest just demonstrate the lack of discipline and focus required to GTD.

  • Oletros

    Can the author explain which data is sold to advertisers and how consumers are sold to advertisers?

    • http://www.asymco.com Horace Dediu

      The data is in the form of user queries. Queries are sales leads which are bid on by advertisers though the AdWords system. A user is collection of online actions inside a Google set of services. That user’s online (and increasingly offline) behavior is therefore for sale to the highest bidder.

      • Oletros

        To my knowledge the only thing that is sold is ad space, nothing more .

        No data is sold to any company, no query is sold to any company.
        If an analyst writes that data is sold to its use companies implying that the real data about the user is sold it can be only to make a company look bad an evil and I’m sure you would never do that, isn’t? It was just an unfortunate mistake from your part, isn’t?

      • GlennC777

        The ownership of that data confers tremendous economic power, in this case allowing Google to own at least the traditional online advertising market. It is a serious question whether this is a beneficial arrangement of rights with regard to who owns what information. To an increasing degree, he who owns your information, owns you.

      • http://www.asymco.com Horace Dediu

        Let’s say I have a piece of information. That information or datum is that I want to vacation in Fiji next year. In order to book my vacation I choose to search for vacation packages to Fiji and do so by transferring that datum through a search field to Google. Thus when I enter that query into a Google search field, Google comes to know that I want to vacation in Fiji. They have obtained my datum. Now, several individual tour operators have placed bids through AdWords to learn of any persons interested in vacationing in Fiji. They have essentially already priced what my datum is worth. Once Google offers me the top bidder’s link my datum has already been sold to the highest bidder. By placing the link in from of me, the buyer has paid and received the datum I and I alone used to have. If I click on the link and complete the transaction, Google may share in the deal or all the margin from my purchase (minus the ad cost) goes to the bidder.
        My intent to vacation in Fiji is the data that is so valuable. It is effectively sold to the highest bidder. Now multiply this by hundreds of billions of requests across multiple properties beside search and you’ll see how user data (and by defining a person as a set of data, the users themselves) are the commodity that Google sells.
        I thought this was obvious to any internet user.

      • Oletros

        Wrong, your datum has not being sold to anyone. What has being sold is an advertisement place.

        No data is ever shown or sold to the companies buying ad space. the bidder doesn’t know that datum.

        I thought that was obvious to any internet user, but it seems that even analyst can be confused about what is sold. Perhaps you can show just a link about your claims that datums are sold. if it is so obvious, you won’t have any problem in providing that info. Are you saying also that Apple is selling our data through iAds?

      • stefnagel

        So companies buy the use of the data, not the data itself? What conceivable difference does that make?

      • tmay

        Perhaps I’m clueless, but it seems to me that I as a advertiser control the granularity of my ad placement; make that tight enough, and the instance of data that Google AdWords algorithms outputs is if fact, an individual.

        Example. I want my ads to be placed only for physicians over 60 years old in a specific zip code making a Google search of travel offers to Fiji in January. Doesn’t seem like much, but there are rural counties where that would be relatively straightforward link to an individual.

        If I give money to Google AdWords, I’m expecting my purchase of ad placements to be a very specific instance of Google’s data, likely leading to actual interest in my ad by that individual.

        That looks certainly looks like the sale of data by Google.

      • http://www.asymco.com Horace Dediu

        Of course Apple sells data about users. That’s what is transacted in the business of advertising. This blog (meaning I) sell you to my advertisers. They know they get quality.

      • Troy

        It’s obvious now, but it wasn’t obvious to me when GOOG IPO’d at $85 . . .

      • http://www.roundrects.com Alex Santos

        I didn’t know it worked that way. Simple, yet effective. How sly.

        I know this might be an OT question, how anonymous does the user remain during the process, how much must be revealed. I am not a fan of a single force like Google search being the recipient of a large majority of my activity, even if no real person in the Google complex is interested in the datum other than for the purpose of linking me to a seller etc and profiting.

        I understand that this model benefits greatly by practicing data retention and profiling but it’s not something that I agree with, it makes me feel like little more than a number. Now, if I could access my datum (not the same datum you mentioned above but other more general datum) and edit, remove or rank higher or lower manually to benefit me then I could see value. I think Google search should share the instrument to some degree and provide more user control/intervention. It might actually be beneficial to them, they would get refined profiling and a better overall picture of the user and such.

      • stefnagel

        Yep. We are not clients; at best, we are client apps to Google. We present as data sets or code.

      • David Gonzales

        But oh Oletros it gets so much better. Because that Fiji datum Horace speaks of is collected and with the ITA company they own the ad words are just one thing to sell. You see, they serve me flight listings that bypass travel portals forcing them to make higher bids than well before Google owned ITA. That is not mere selling “adspace.” But I’m not done. Now I’m in Fiji using Google maps giving zagat data by starring restaurants. I’m a fine diner of course. And I uber around, etc, if on an android with Google now cards popping up.

        So here we have the collection of datum Horace speaks of. Oletros thinks this is normal not selling of data. But had Oletro worked say for a brand desiring to create an interactive marketing campaign targeting high HHI Fiji travelers who eat at 5 star restaurants and use uber, boy do we have something to sell you. We’re called Zoo. Look us up. Or maybe you work at the ad agency on some brand with our global treksetter segmentation target – do you take the incoming call or the meeting for that matter from that brand’s “in-house” Google account executive when she tells you she’s got target insights to share. Just come out for a workshop in mountain view.

        I joke. But serious, “ad space” as you define it sounds so cute and harmless. it was just an unfortunate mistake on your part, isn’t?

      • Ray

        Google does not sell people’s data.

        Many consumers hear this kind of erroneous statements and think that Google sells your personal data (name, email address, email content, files hosted on Drive, etc) to other companies. But no personal data leaves Google’s data centers. Apple’s CEO, and some journalists and bloggers aligned economically and/or ideologically with Apple’s interests, are happy to play with that misunderstanding as they believe it favors sales of Apple devices. This is a mischaracterization of how online advertisement works, which is quite similar to how offline advertisement works, except that there is more granularity in the selection of the audience, so an advertiser can target more efficiently relevant adds to its audience, instead of a broad group of people who are interested in let’s say “expensive vacations”.

        As New York Time’s Farhad Manjoo (who is typically supportive of Apple) puts it:
        “But it is also worth noting that Google and Facebook do not actually sell people’s data to advertisers, as Mr. Cook suggested they did in his EPIC speech. (As with Apple’s ad system, they allow marketers to target you based on your profile.) In many areas of security and transparency, Google has been ahead of Apple. For instance, Google offered two-factor authentication of cloud-bound data before Apple did.”
        http://www.nytimes.com/2015/06/11/technology/what-apples-tim-cook-overlooked-in-his-defense-of-privacy.html

        This is an important distinction, because there are actually many companies that do sell personal consumer data (Acxiom, Exelate, PrivateEye, etc.), typically referred as data brokers. The FTC has studied this and published a report about it:
        https://www.ftc.gov/news-events/press-releases/2012/03/ftc-issues-final-commission-report-protecting-consumer-privacy

      • diff

        Not much difference, in practice. You can quibble about the semantics of the word“selling” if you like, and make strange paranoid statements about the alignment of bloggers, but nobody will be much interested.

      • Ray

        Very different.
        Many consumers (including myself) are ok with companies buying advertisement space to target them (as long as they get some service in exchange), not ok with companies selling their personal data. This is why there is no search engine that has a subscription or direct pay-per-use as their business model, the percentage of people who’d prefer this model is too small to make it a viable business. Most consumers are OK with the value exchange as it is.

        The alignment of bloggers is self-disclosed and self-evident, one just has to read what they tweet or write about, no paranoia required.

      • diff

        Unfortunately we’re starting to get data that contradicts several of the things you say, particularly “most consumers are OK with the value exchange as it is”. They may very well disagree with your semantic definition of “selling”, too.

        https://www.asc.upenn.edu/sites/default/files/TradeoffFallacy_1.pdf

      • Ray

        Consumers vote with their actions. Magazines with advertisement get many more readers than magazines without, because they are cheaper. A survey is not a good indicator of how people actually behave, especially when that behavior could be perceived negatively by themselves or society in general.

        I met a researcher at IDEO who had done a project about the value of data, and he arrived to the conclusion that consumers say generally that they care a lot about privacy, but when given some value in exchange they actually don’t care that much. Most people don’t have much to hide anyway I guess, so they implicitly price their data very low. And advertisement does not even rely on sensitive personal data (name, social security, birthdate, etc) but on tastes and intentions which are priced even lower by consumers.

      • diff

        Your comment seems nearly entirely unrelated to mine; are you sure you responded to the right post? You said things like “most consumers are OK with” and I refuted that, but your response seems to only contain some self-evident statements about behaviour that are obviously not related to feelings or the study I linked.

      • Ray

        You didn’t refute that most consumers are ok. That study does not refute that. Real market data and pricing signals, not surveys, tell us that most consumers are ok. Hence the success of Google, Facebook and in general advertisement-based media. This blog is another example, Horace makes money via advertisement too, even though he could make his blog a closed subscription or pay-per-article business.

      • diff

        Ah, another semantic quibble where you define things in strange ways. You now assert that people are okay with anything that happens to them, definitionally. You’re going to struggle to get most people to agree with that definition.

      • Ray

        No, consumers have a choice. It doesn’t “happen to them”. And the majority choose cheaper/free media and services subsidized partially/fully by advertisement.

        It’s all about priorities and cost of opportunity. A $ spent in avoiding that a company has some anonimized data about their preferences is a $ less that they could have spent on morgage payments or education for their kids. Consumers know their personal priorities.

        Some consumers even enjoy some of the ads. I personally find interesting some of the few ads in The Economist, they typically advertise companies or organizations I’m interested in. Some consumers buy fashion magazines because of the ads.

        And if you truly believe this is not true and a majority of consumers are not OK, then you should launch a search engine and get rich out of all those billions of consumers who are willing to pay $ for their queries.

      • diff

        Your definitions seem incredibly bizarre to me. Let me think this through.

        If I say that in order to collect your unemployment benefits you must consent to having cameras installed in your house, you must be definitionally okay with it. If I install malware on your computer, and you pay me to remove it, I guess you must be definitionally okay with it. If I “catcall” you, making sexually explicit comments to you, whenever you leave your house, then you must be definitionally okay with it. If I bully you at work and you don’t quit to find a new job, then you must be definitionally okay with it.

        Strange world you live in. I think you should read the linked study, and especially the part where people feel helpless because they feel like they have no alternative (and often don’t).

      • diff

        Bartenders must have been okay with secondhand smoke. You must be okay living next to a coal power plant because you didn’t make a higher counteroffer to purchase the land yourself. You and I must be okay with global warming.

      • Ray

        You’re going off-rails, comparing targeted advertisements with sexual harassment or global warming.

        There are alternatives to Google:
        https://duckduckgo.com/

        Just most consumers don’t seem to really care that much about it to switch. Some VCs are funding these alternatives with the hypothesis that you have, perhaps misguided by what people say in surveys vs. what they actually do in reality.

        These alternatives are getting little traction. People don’t ACTUALLY care that much in reality.

        Again, it’s not my opinion, is what consumers actually do.

        As I mentioned before, the researcher at IDEO arrived to the same conclusion: consumers are willing to give up privacy if they get useful services in exchange.

      • http://www.roundrects.com Alex Santos

        I wouldn’t trust the researchers, that’s me. Why? Well, I don’t believe that people even know what is being exchanged. They are not sure what privacy even is much less what ‘useful’ services they get in exchange; is it, gmail? Google docs? Google drive? Google pictures?, is that what they give the user in exchange? Let’s be frank, Google is indeed in the privacy laundering business. Without knowing more about the research at IDEO this is like throwing darts in the dark.

      • Ray

        But consumers have alternatives, and most show a preference in REALITY for advertisement-subsidized media and services. Price is much more important to most of them than some kind of vague privacy. Most consumers are not OK with sharing their Social Security number, but they’re ok with being exposed to ads that are more targeted and relevant to them in exchange for free services.

        Let’s asume they decide to pay for those services. Now they have less money to spend on things that are really important to them (housing, education, etc) and in exchange the services don’t have a banner on the side with some add. Is their life really better?

        Most consumers say no, it’s better to use their disposable income for other more relevant goals than removing a banner on a website.

      • http://www.roundrects.com Alex Santos

        Google is not a choice it’s the default. The other guys are the choice. People aren’t going for alternatives for a few reasons:
        1) Google is a knee jerk reaction, people just go there.
        2) People are lazy to change, they need a compelling reason to quit an old habit.
        3) People don’t really even care about the ads, it’s just part of the internet noise
        4) If people are tenacious about killing off ads there are browser ad-ons to do that.
        5) The competition to Google does not advertise, they are too small.

        DDG has garnered some attention despite this because they provide anonymity and privacy – kudos to them, I use them but often use DDG !bangs to jump to google or google images, translate etc. (Bangs are awesome by the way)

        Google today is like MS way back when, everyone used them, it was ubiquitous but not necessarily better. Macintosh was and remains way better, people have woken up. Switcher ads and word of mouth has played a serious role. Of course, Jobs return was pivotal.

        I don’t believe this is a monetary issue as per your income component. The preference is not by choice in my view, like I said, the Google destination is just a subconscious one.

      • Ray

        Essentially you’re saying that “people need a compelling reason to quit”. Privacy is not a compelling reason, which was my point and IDEO’s conclusion.

        Income is important because right now most search engines are two-sided platforms where one side, the companies who advertise, pay the costs of the platform, and consumers get the service for free. If you remove advertisement, then consumers have to pay for the costs of the search engine. DuckDuckGo might be burning VC money, but that’s not a business model.

    • Walt French

      I’d characterize it as information about YOUR preferences & interests used for Google’s benefit, as very distinct from your benefit.

      You could directly give this info to others. I have a profile at my bank, selected retailers where I do repeat business, at the Y, with Delta Airlines, with AirBNB. Or you can have Google build up your profile for you. If you let Google broker you, you’ll get less spam incoming. But only less. In my experience, perhaps 10% less, a far cry from “none” that would be great. Meanwhile, laughably or disturbingly close-but-no-cigar stuff showing up. Also, stuff you absolutely don’t want associated with you when partners or co-workers look over your shoulder or borrow your screen.

      Advertising is a cost of a future transaction between you and the advertiser, a friction that makes it hard for you to get what you want at the lowest cost because the advertiser has to work in the additional transaction costs into his profit calculations. Arguably, it’s a necessary cost but that’s an argument that recognizes Google is increasingly a monopolistic gatekeeper for transactions. They are becoming a monopoly thru legit, clever means of telling companies that you might be amenable to booking a hotel near Zion National Park, or buying Depends Diapers, so give Google some money to get people like me.

      • Oletros

        “I’d characterize it as information about YOUR preferences & interests used for Google’s benefit, as very distinct from your benefit.”

        Yes, for Google’s benefit, but it is not sold to third parties as the author claims

      • Walt French

        If you’ll allow a pivot by me:

        I’ve recently seen a raft of ads, all from *ONE* company, for first-class travel to Paris. Unsurprisingly, this is after I tried combinations for a trip to a more obscure location with a layover to visit a family member in Paris, and tried all sorts of options to get less-than-horrendous routes. (30+ hours CDG–SFO when paired with a non-stop to my destination; I eventually gave up on Paris and got direct tickets.)

        So far, so familiar. What is obvious is that the travel site I used sold my information to Google or perhaps another ad network. Maybe they got cash, maybe they got Google services in return, but they sold my info, complete with enough identifying info that Google (or the actual ad network) could spray it all over half the web sites I’ve visited this week.

        Google is quite smart to rent out, rather than sell the info, but it certainly is in the business of harvesting it, for its profit and my nuisance, in partnership with 3rd-party sites. And I never agreed with the travel site that my information would be sold, to Google or anybody else, and I never had a chance to negotiate the display of those ads on my PC or phone, for anybody looking over my shoulder.

        If past experience is prologue, I’ll keep seeing those ads for perhaps another year. There’s enough profit in selling those tickets, that a few fractions of a cent each time are money well spent. Unless I see the same ad literally dozens of times per day, which is happening.

        There’s a lot of ill-informed talk about privacy. Yes, I have the expectation that my face will not be put on a Page 1 picture of the newspaper without my permission, even if it was taken at a public event such as a ball game. That’s current law. Likewise, I have the expectation that my interest in Paris will not be sold to a company such as Google, which is as deaf about personal rights as any company on the planet.

  • http://valuingdisruption.com/ Bill Esbenshade

    Great post as always Horace! If ad blockers see continued adoption it will be interesting to see if Google A and B can continue generating the revenues/profits needed to fund unprofitable Google A+ ventures. And people are now going to see just how unprofitable those ventures are.

    Despite dual class stock in favor of Page and Brin, Alphabet’s board of directors still has a fiduciary obligation not to waste corporate resources (part of the business judgment rule/standard). Corporate waste is probably going to be easier to detect with Google’s reorganization, and activist investors (a la Icahn) may become more of an issue for Google/Alphabet. Publicly traded companies aren’t venture capital firms (although Google A+ seems a lot like one).

  • GlennC777

    Lots of cynicism here in the comments. While not a fan of the Google world view (information imperialism), this looks like a sensible realignment along what one might call ideological lines. The ideology, as Horace alludes, of the founders.

    The interesting question as far as I’m concerned is whether an organization of Google’s type makes sense as a force for the creation of social/economic value. A realignment of the organization along lines that reflect its ideology seems logical, among other things allowing that evaluation to be made more effectively.

  • Martin

    Count me in with the cynics.

    There is no positive news regarding the future of Google’s ad revenue. All winds are blowing against them, and I don’t see evidence that they are working to reenter markets such as China where they can continue to expand their addressable market. Apple is cutting Google off of search data and ad views in mobile. Google has no meaningful answer to the shift from web to apps, no meaningful answer to Facebooks ad model, and no meaningful answer to Buzzfeeds ad model – both of which are far more valuable on a per-impression basis than AdSense.

    This strikes me as a move to firewall Google and all of the other ad revenue businesses (see where Android landed) into a brand that they can in the very near term boost on the balance sheet by removing all of the money losing experiments, but later can wave away once that revenue/profit growth flattens or starts to decline.

    This also is a way to isolate the growing privacy/security implications from Google/Android from the trust needs of products like Nest. Those cannot successfully co-exist under the same brand. Google is making a needed pivot, but its one based on pessimism around the core business, rather than optimism. Near term this may be a winner through financial engineering, and very long term it may be as well if Google manages to learn how to make things (they do not now – it is inconceivable to me how Google Car becomes anything more substantive to the new company than Android is) but in that middle period – two to ten years, I just don’t see the upside.

    • http://www.roundrects.com Alex Santos

      Most people are not geeks, mostly walk through the turnstile without much consideration; Google is a main cardinal direction for most.

      In terms of their strategy and integration, there maybe weaknesses; being web based, they naturally have a lot of competition.

      It occurred to me anyway, that perhaps — and I could be completely off-the-wall on this one, that Google does not want their main artery to influence all the other veins in their structure. In other words, they want to see eventual successes and failures that are not tied to what generates income. It could be that the restructure helps Google open up avenues of focus areas that are not there to immediately or eventually support, enhance or otherwise augment their main revenue stream. Perhaps they need projects to fail or succeed of their own merit.

      Again, I know too little about this company to make any bold statements, nor do I spend hours, days and weeks pondering this companies strategy. It’s not a company that I am intimately interested in but in the course of being digital, they are an undeniable force.

  • David W.

    Google A+ doesn’t produce revenue, so how can it be a separate independent company unless it depends upon the largess of Google B. However, that wouldn’t make Google A+ a separate independent company.

    Besides, it sounds like each venture will be a separate company. There isn’t one Google A+, but bunches. Maybe dozens. What does this really buy Google that couldn’t be done with everything under Google directly and using mere business divisions?

    I think this might have to do with being able to spin off ventures if they prove to be more troublesome than they’re worth. Google’s autonomous vehicles is a prime example. Google wants to develop them because it’ll be a great business model for them. You can really track your “customer’s” movements this way. You know where they’re going and when they get there.

    However, the car manufacturers are scared of this development. We see this from the sale of Here to a consortium lead by BMW. Google lost the ad revenue that these companies could have brought in.

    However, what if the autonomous car research was a separate corporate entity with its own balance sheet? Then, Google could develop autonomous vehicles, and once they figure them out, sell the division to another auto company. Google would be able to pick customers up without the threat of being a possible future competitor. Google merely wants the data and not the hardware.

    • Walt French

      Venture Capital in general is for projects which aren’t yet at the revenue-producing stage. The question is what makes Google the best home for such projects. It might be that Google is more patient; it might be that Google is more technologically savvy than say, a Marc Andreessen, or it might be that Page likes to play in the sandbox the same way my grandkid does.

      • handleym

        OR it may be that Page understands that businesses are more like ecosystems than like warfare, and that there’s more ultimate value created (both for shareholders and for the human race) if one takes the time to build the ecosystem rather than immediately start insisting on profitability.

        (cf Android, a business I believe Mr Page knows something about. The way that grew like crazy, barely supervised and massively competitive, generated some immediate windfalls for consumers and some businesses, but has not put in place a healthy ecosystem capable of diverse R&D efforts by a variety of different players; and the business is now degenerating into a cess-pit of who’s most willing to screw their customers over one way or another in order to generate enough money to survive for one more month.)

      • art hackett

        Android degenerated almost immediately into user sell out as the desperate deals with the telecoms show. It gave the Verizons much broader hooks into users than they even dreamt of in feature phone days, never mind the data mines it gave Google. Makes Faustian look almost benign.

      • http://etn.se Jan Tångring

        What would you recommend, sir? From Larrys perspective the question is not if Google/Alphabet is ”the best” but ”a good” home for such projects. You also write above ”we don’t need Google to do that R&D”. Should that acually be ”we shouldn’t need”?

      • Walt French

        Not to harp on Nest—I really don’t know, nobody knows, how well they’re doing. But I will harp on Nest.

        Accounts at the time G acquired it suggested Fadell’s company had overstayed its welcome on VC funding, and was unable, thanks to VCs’ evaluation of its prospects, to find new funding for its still rapid cash burn. Page apparently saw possible synergies, or possibly, re-purposing of talent.

        (The issue didn’t get a lot of airplay because G *ALSO* bought Motorola at about the same time at almost 3X the cost.)

        To date, it is my impression those synergies have not been realized; Nest’s customers are still ghettoized in Silicon Valley and there is little or nothing to suggest a breakout/disruption versus incumbents such as Honeywell, Johnson or even Insteon (my system vendor). Nest’s obvious engineering and design talent has not been paired with a similar level of business acumen. (Anecdotally, a LOT of their customers go online to complain about deep flaws in the products; maybe the product side is less robust than its lineage would suggest.)

        It is obvious that early-stage businesses are risky propositions and it’d be unfair to claim that a couple of huge, 2013-era failures should bar Page from being in the New Business business. But it’s ALSO obvious that he doesn’t shoot silver bullets, and that his famous lack of attention & focus — widely recognized at Google — hasn’t done his shareholders or his reputation any huge favors in this regard.

        Investment theory assumes that capital markets — VC, private investing, stock exchanges — are based on a range of investor views, and while VCs generally claim superior understanding of companies & certain emergent, fast-changing industries, their results have been found to be equivalent to ordinary investments, leveraged to recognize the much higher risks. I.e., investors have the opportunity to take high-risk, high-growth opportunities by buying index funds on margin or double-index ETFs, etc., and get equivalent results.

        (Without the cocktail-party or twitter bragging rights, however.)

        So, there are many alternatives to buying a Nest or a Calico from an investing, or capital allocation standpoint. Further, Google’s shareholders, if they were to get the dividends and reinvest them in those ways, might actually enjoy less uncertain returns, being based more on the views of *MANY* super-smart investors (surely, @PMarcA fits that bill) rather than just one whose technical chops are fine but who ends up being able to deal with far fewer opportunities than The Crowd.

        Those investors might fund a better Calico. A better Nest. A better Motorola. In fact, I think they have. The alphabet companies squander precious resources in the fog of secrecy.

        A disconnect causes the mismatch; there are 2 problems, not one. Page (Alphabet Inc) apparently wants to organize so as to best leverage his, and Google’s considerable talents. Fine. But outside investors (and society as a whole), want their investments placed where they will get the best portfolio of investments (highest value creation). They have no reason to double down on Page’s insights; they generally are more heavily invested in them than gives them the best risk/reward portfolio. (This is never more true than for employees, whose options are likeliest to go South at the same time they face a new job search.)

        IIRC, Horace has noted on this blog that R&D hasn’t especially resulted in high investor returns (although it marks high-growth/high-risk businesses where you’d think returns higher). And the CW on conglomerates still seems—a recent Georgetown paper notwithstanding—to be that conglomerates are worse than capital markets at choosing what businesses to fund and which to milk. The last time I took a close look, the problems of sycophancy, politics and public image were large, and exacerbated when a single cost-of-capital budgeting process was erroneously applied to very disparate projects.

        There are many more pro’s and cons. This may be a prelude to some spectacular success; Google is full of very bright people in the right place at the right time. But investors’ experience with the hermetic company, and the public information about this re-org is much more supportive of Horace’s view. In my opinion.

  • Walt French

    “the separation…allows the founders to distance themselves even further from the purchase decisions”

    I confess to being a little slow to appreciate the post, but now that several commenters have underscored the logic, I am quite impressed with the insights.

    I’ll recommend Ben Thompson’s excellent Stratechery•Com post, “Do You Trust Larry Page?” for a similar—more direct but yet less acerbic—take.

    This change highlights what I have started calling a “post-capitalist” set of issues. Nominally in charge of the companies that they raise money for, capitalists are increasingly contract money teats, while Management leads them by a ring thru the nose. Occasionally an Icahn or Ackerly will kick up enough dust to show that capitalism still matters in corporate direction, but Google’s voting structure — see also Malone’s companies — pretty well makes them as insulated from shareholder “outside interference” as the Samsung chaebol is.

    I think mostly the Kommentariat overstates the problem of Wall Street quarterlyism and other short-sightedness, and like Horace’s observation especially because it should be understood as juxtaposed to the meme of excess stupidity on Wall Street: how to slam Google-as-a-Page-Fantasy-RPG, and ALSO slam mindless calls for high dividends & buybacks? If the difference is that Cook & Co are responsible business managers, while Page is a starry-eyed dreamer, then we have reduced business analysis to armchair psychology.

    I’m not an avid enthusiast for naked capitalism but think the big problem here is explicit dilution of accountability. The “purchase decisions” in the quote are important parts of value creation, and pretending they should be immune from criticism by people who want to see Google/Alphabet create value, is a stunning secession from the underpinnings of today’s business.

    • http://www.roundrects.com Alex Santos

      explicit dilution of accountability…

      There appears to be an element, not in your answer, but in general, that prescribes to the concept that the top brass at Google want to shield themselves from criticism. I mean, Google is more or less controversial, especially for privacy advocates and perhaps others, but controversy aside, what might they be trying to buffer themselves from? Or have I simply misinterpreted something? I haven’t read much on the matter but there appears to be a cast drawn in this direction.

      • Fran_Kostella

        My experience in the tech business is that there are a significant number of tech people who desire to lock themselves in a tower and do deep, serious technical work. Others are more drawn to what can be done for solving problems in the marketplace. Looking at the founders and all of the people I know who have gone to work for Google, and their historic disregard for partners, I think they are definitely in the first group.

        I read this move as another in a long series of moves to let the founders play and please leave them alone, and please would the stupid parts of society, like markets and customers and trade rules leave them alone? Can’t everyone see that what they are doing is for the benefit of humanity? Why do people think “Don’t be evil” means anything other than what it says? Isn’t is clear what it means?

        Google has always had elements of expression like that of a super bright teenager: introverted, unable to communicate well, misunderstood, sure that their brilliance is the ultimate flowering of human potential, and yet still holding on to childish aesthetics. I note that the Alphabet name caries this aesthetic forward, as does the new home page and logo. I can’t see how this move shows any maturity or growing up.

      • http://www.roundrects.com Alex Santos

        Great comments Fran … you might dig this wired article which is mostly focused on the logo, their growing up etc etc http://www.wired.com/2015/08/alphabet-logo/?ref=webdesignernews.com

  • Walt French

    Let’s note also here that AT&T’s Bell Labs received ALL sorts of research support from the US Government; that Fairchild, Intel & others brought transistors to market was necessary, but it’s not clear how corporate R&D alone would have done it.

    Also, Page’s work at Stanford was under NSF sponsorship. As was so much else that is a part of today’s technology. Government-sponsored R&D, that is open to any and all, is perhaps the fastest way of bringing basic technologies to fastest adoption.

    That means we don’t need Google to do that R&D; that we have other ways than depending on penny-ante R&D efforts at other corporations.

    “Google A solves problems of humanity.”
    Google is obviously doing good work, but its selection of targets seems very quixotic and nowhere close to what a calm enumeration of society’s needs might prioritize. The fact that its priorities diverge from what might be good for the business shows the “magnificence” of the change.

    • twilightmoon

      I’m not of the “loving Google” camp, and see their “solving humanity’s problems” as a way to shovel more personal data into their giant black hole of personal data that allows them to cash in on our privacy.

      I see it as a marketing ruse to make us believe that Google is on our side meanwhile they profit off of us, sort of like the boys in Pinocchio who are going to be transformed into Donkeys but do not know it.

  • stefnagel

    As Horace notes, this compartmentalization frees the founders to become even more the bomber pilots, sitting pretty at 50K feet, dropping who knows what on an unsuspecting civilian population. We must all look like ants to these guys.

    Meanwhile the founders can leave the dirty data collecting to subordinates, proceeding to “do no evil,” which sets the ethical bar about as low as it can go.

    We are not clients to Google; we are all client apps.

  • Jake Day Williams

    All dollars on Calico (Alphabet Letter: C) Every meaningful can be created if we have enough time.

    From the site: Calico is a research and development company whose mission is to harness advanced technologies to increase our understanding of the biology that controls lifespan. We will use that knowledge to devise interventions that enable people to lead longer and healthier lives. Executing on this mission will require an unprecedented level of interdisciplinary effort and a long-term focus for which funding is already in place.

  • neutrino23

    “That must be a great relief.”

    Horace, you really have a great sense of humor. This made my morning.

  • Hosni

    The operators of A+ own the voting shares that control A&B. The other owners of A&B have their profits “taxed” to support A+, and the amount of the tax can be altered unilaterally, at the discretion of A+. Past A and A+ projects have not often been profitable, and claims of their profitability are said to appear on B’s income statement.

    Makes perfect sense. Googlogical.