Managing expectations

Earlier this week, Google announced that it will be creating a new holding company called Alphabet to serve as the parent organization which owns the current Google’s individual business lines. These business lines include Google (which includes what most people think of as Google, namely its search engine, maps, YouTube, Android, apps, and overarching ads unit), Nest, Fiber, Calico, Google Ventures, Google Capital, and companies which emerge from its moonshot projects division Google X.

I’ve been trying to wrap my head around the implications of the announcement for the last few days. The final conclusion I’ve reached is that it’s simply a great way for Google to manage expectations, and most notably the expectations of public market investors due to its status as a public company.

Business-wise, not much is changing. Google was already working on many other projects beyond its core business. Investors accepted these currently unprofitable non-core businesses as part of owning Google stock because of their option value. In line with Google’s “20% time” policy whereby Google lets its employees spend 20% of their time working on projects outside of their core job responsibilities, the message that Google was sending the markets was that its non-core businesses also take up roughly 20% of Google’s energy. Markets accepted this.

Together with the Alphabet restructuring, Google is clearly signaling that its priorities are shifting. In the future, Google’s core search and ads business will likely take up 20% of its energy, with those among the other businesses it pursues which are successful taking up 80%.

In the absence of the restructuring, public markets would have first expressed skepticism, and then likely punished Google’s stock as it began to dedicate more of its resources to new businesses. They would have continued to believe that Google stock, after all, should be giving them exposure to what Google is known for, that is search and ads.

Together with the restructuring, Google has effectively managed investor expectations to welcome, rather than criticize, the increasing focus on new projects as it unfolds. Owning the company’s stock is no longer just about having exposure to Google’s search and ads business, but clearly about owning all of the projects that the company stands for. Expectations have been correctly set.

As shown by the 7% jump in Google’s stock price following the announcement, it was a very smart move.