Google has thrived under Alphabet for the last three years, but the other businesses have seen mixed results

Key Points
  • Three years ago, what we knew as "Google" transformed into "Alphabet."
  • The move has been great for Google, which has increased revenue under new CEO Sundar Pichai, and for Larry Page, who has been able to retreat from the spotlight to focus on other passions.
  • But the organization has not always created smooth sailing for the newer "Other Bets" businesses.
Larry Page, Google co-founder and CEO speaks during the opening keynote at the Google I/O developers conference.
Justin Sullivan | Getty Images

Happy birthday, Alphabet.

Three years ago Friday, Google co-founder and then-CEO Larry Page first announced the new corporate structure that separated Google's core businesses from its more experimental "Other Bets," including its health-care projects and venture capital arms.

Page wrote at the time that splitting the company into various subsidiaries would allow Google-proper to focus, while pushing its Other Bets to be both more ambitious and financially accountable. Google could keep pumping out advertising profit while one of the Other Bets would hopefully, eventually become the next multibillion-dollar business.

So far, the restructuring looks like a win financially. The stock price is up more than 85 percent and the Google side of the business has gone gangbusters, with quarterly revenues surging by more than $13 billion since the second quarter of 2015 under its new CEO, Sundar Pichai, while Page stays out of the public eye as the CEO of the larger Alphabet holding company.

What's less clear looking back, however, is whether the new model has increased Other Bets innovation or slowed it down. Since the Alphabet announcement, the company has introduced a handful of new subsidiaries, sucked one back into Google, and even spun off several projects into independent companies outside of Alphabet.

On this anniversary, here's a look at some of the challenges and benefits of Alphabet's soup:

To spin off or stay put?

Today, Alphabet has a grand total of 13 Other Bets. In its latest earnings, the company revealed that they posted $145 million in revenue, up 49 percent year over year, but still only a teeny tiny percentage of Alphabet's overall Q2 revenue of $32.66 billion. Because the company shifted its smart home unit Nest back into Google, segment revenues were actually down 12.5 percent since the first time the company broke out Other Bets quarterly earnings in 2016. Operating losses have fluctuated too, hitting $732 million in Q2, a 15.6 percent increase year over year, but a decrease since the segment lost $802 million in Q1 2016.

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The idea is for each Other Bet business to stand alone financially: They each have their own CEOs, with budgets and business goals allocated by Alphabet's executive team.

The Bet with the greatest potential so far is Waymo, Alphabet's self-driving car unit, which plans to launch a commercial ride-hailing service in Arizona by the end of the year. Wall Street analysts are extremely bullish on Waymo, with Morgan Stanley estimating a $175 billion valuation over the next several decades.

But other efforts don't stand alone as well as Waymo.

Earlier this year, Alphabet spun its smart home division Nest back into Google. It's now part of Google's hardware division, which makes phones, computers and the family of Google Home smart speakers. At the time, Nest's departed founder and other former employees told CNBC that separating Nest in the first place was a setback for both companies and hindered smart home innovation overall.

Meanwhile, there are several Other Bets that don't make sense as separate companies. Jigsaw, an incubator trying to solve global geopolitical challenges with tech, and DeepMind, an AI research lab that Google acquired in 2014, would be more productive inside of Google, critics say. After all, both work on Google projects alongside teams within Google. There's no indication that Jigsaw has any sort of business plan yet, and DeepMind is commercialized only through Google.

In DeepMind's case, the Alphabet separation has reportedly caused confusion and chafing: Google's Cloud business tried to use DeepMind's branding on its products, but had been barred from doing so by DeepMind's leaders, according to The Information.

This rejection feels particularly biting because Google Cloud generates actual revenue — the company said earlier this year that it books $1 billion per quarter — and will likely be the company's next big business.

Leadership challenges

At the time of the split, Page said that part of the Alphabet model is to have strong CEOs running each Other Bet. Then, about a year after Alphabet's formation, a string of key executives left the company.

As one former Other Bets executive described it to CNBC, the structure can be grating for leaders who are CEOs in title, but still dependent on the real CEO — Page — for financials and big-picture approvals.

For example, Access, the division which houses Alphabet's Fiber internet efforts, was once one of the company's most audacious projects, but it has been significantly scaled back under Alphabet in both ambition and budget. A former Access executive told CNBC that the tightening of the purse strings wasn't directed by Chief Financial Officer Ruth Porat, but due to decreased interest from the founders.

"Beware their changing whims," this person said.

Although Alphabet companies are separate, the powers of their CEOs aren't equal to what they'd be at truly independent companies.

The compromise clearly hasn't mattered to all of the Other Bets CEOs — several have retained the same leaders since the split. And there have been successes: Investments from Alphabet's venture arms are paying off, life sciences company Verily seems to be chugging along (it gets highlighted for reeling in revenue alongside Access during earnings calls), and the research lab X recently launched two new companies — Wing, which makes delivery drones, and Loon, which makes high-altitude balloons that deliver internet access to the ground. But, still, it's easy to argue that these days, working on a non-Google project at Alphabet isn't as sexy as it used to be.

Google CEO Sundar Pichai and Alphabet CEO Larry Page
Reuters | Getty Images

Freedom for Page

Whether or not innovation has stalled in the Other Bets, the clearest story about Alphabet's restructuring three years out is that is has allowed Page to remove himself from the spotlight that he always hated anyway, without hurting the company's growth one bit.

A perfect example came earlier this month, when reports surfaced that Google is planning to launch a censored search app in China. Instead of pinning the idea and approval on Page, all the negative blowback has been directed to Google CEO Pichai. He's the one who gets to deal with the controversies, conference appearances and earnings calls, while Page can keep himself busy with the wild projects cooking up in Alphabet's research lab X, or personal projects outside Alphabet like flying cars.

Page's favorite Other Bets may not be making money yet, but it doesn't really matter. Alphabet is still very much an advertising company and, as it's CFO Porat made clear last quarter, it's still spending its enormous amount of resources accordingly.

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