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Communications of the ACM

Technology strategy and management

Is Google's Alphabet a Good Bet?


Is Google’s Alphabet a Good Bet?, illustrative photo

Google Inc., founded in 1997 by Larry Page and Sergey Brin, went public in 2004 to a great deal of fanfare (see "Google: What It Is and What It is Not," Communications, February 2005). It reached another milestone in October 2015 when it reorganized as Alphabet Inc. The company was the second most valuable firm in the world as of November 2016, worth around $528 billion, not far behind Apple ($589 billion) and ahead of Microsoft ($468 billion). The Google Internet business still centers on a unique search technology based on page-rank algorithms and generates enormous revenues from targeted advertisements and sponsored ads. Scale economies and network effects (that is, the more users of Google search, the more accurate the searches and ads become) also have contributed to Google's success. But is Google's transformation into Alphabet Inc. a good bet—for Google investors and users, and society more broadly? That simple question raises big issues, such as how much should we expect large corporations to invest in research that might benefit society but not their bottom lines, and how might large corporations better use the money they do invest in research and new ventures?


Google has always experimented with new product and service ideas as well as acquisitions, some more successful than others.


It was never the case that Google's founders saw their future as limited to search. Google has always experimented with new product and service ideas as well as acquisitions, some more successful than others. Google+, introduced in 2011 to compete with Facebook, has struggled. But Gmail, introduced between 2004 and 2007, Google Maps, introduced in 2005, and YouTube, acquired in 2006 (for $1.65 billion), have greatly expanded Google's Internet platform. In 2005, Google really hit a homerun when it bought a small company called Android for an estimated $50 million.9 In 2007, it used the technology to launch a new mobile operating system to compete with Apple's iOS. Google Android now leads the industry with over 80% market share.a Largely on the strength of mobile searches from Android phones and tablets, Alphabet's revenues in 2015 were nearly $75 billion, with operating profits of over $19.3 billion—a profit rate of 26%, compared to 30% for Apple and 19% for Microsoft and IBM.


 

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