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Actually reading the first few paragraphs of the form 8(K) was more illuminating than the blogpost.

"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”)"

"In connection with the new operating structure and upon completion of the Alphabet Merger (as defined below), Larry Page will become the Chief Executive Officer (CEO) of Alphabet, Sergey Brin will become the President of Alphabet, Eric E. Schmidt will become the Executive Chairman of Alphabet, Ruth Porat will become the Senior Vice President and Chief Financial Officer (CFO) of Alphabet and David C. Drummond will become the Senior Vice President, Corporate Development, Chief Legal Officer and Secretary of Alphabet. Larry, Sergey, Eric and David will transition to these roles from their respective roles at Google, whereas Ruth will also retain her role as the CFO of Google."


I find it also interesting the non - Google companies:

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.

Fiber is the most notable to me - seems they see this as more than an experiment and are looking to expand.

YouTube not separating is an interesting one to me, I expected that to be separate.

I interpret it as keeping the ad machine separate from everything else. If product decision impact ad revenue, they stay in (G)oogle. Everything else moves to different arms.

My guess is this serves 3 benefits:

1 - Less turf wars.

2 - Better visibility to investors on where the money is.

3 - Ability to spin off pieces as needed.

Many companies resist this type of visibility because they don't want a Carl Icahn to come in and demand a spinoff. The share structure of Google/Alphabet precludes this from happening.

Transparency is easier when you have control (Class A versus Class C shares). I'm surprised more largish tech companies haven't followed along to not be at the whim of WallStreet and other short-term outlook players.

Here's the thing... Many companies are actually poorly run. For most of them, Wall Street does the dirty work of forcing them to relinquish their money to more productive efforts. (Think of all the bloated monopolies who used to have fleets of corporate jets and crazy perks) No extreme is right or wrong.

Aren't the Class B shares the major voting shares, with 10x as many votes per share as Class A (10 vs 1)?


Class C - 0 Votes (GOOG)

Class A - 1 Vote (GOOGL ~4% higher cost per share)

Class B - 10 Votes (Not publicly traded)

I still can't believe that investors are willing to trust Larry and Sergey in perpetuity(same goes for Zuckerberg and there are many other corporate doing this gambit).

Sure, I like all the weird sideprojects, but what happens when they decide to build a 100B Monolith on a moon? If you happen to own Class C shares, you have no say.

If you own Class C and to some extent A shareholders get a raw deal.

The Class B holders have their cake and eat it too.

It just feels morally wrong that someone owning 20% or 15% of company controls 50+% of the votes.

Here's my take... It's not a moral decision, it's a financing decision. Larry and Sergey (and their initial backers) made a decision to put this structure in place. Everyone is free to decide to invest or not invest in it. Conventional theory suggests that investors don't like these types of arrangements, and these provisions weigh down the price of the stock. Therefore, the original owners had to accept a smaller valuation based on this.

This isn't a morality thing, it means that the Class A common stock holder are more like bondholders (who put in money without votes) with upside, rather than full owners. But all of them were well informed about this when they put the money in.

This is not to say that we should all invest in Class A shares, just that this structure is one way of many to invest in a company, and people who don't like it can put their money elsewhere.

> It just feels morally wrong that someone owning 20% or 15% of company controls 50+% of the votes.

Shareholders don't really "own" a company in the traditional sense. They own a specific package of claims against the company in the event of dissolution, voting rights, etc. In the simple case of a company with one class of shareholders, the analogy between owning X% of the shares and owning X% of the company is fairly close, when you have differentiated share classes that analogy is less close.

And shareholders own because they choose to acquire the stock under specific terms. If they don't like the terms, they can just not accept the deal that would give them the stock. I don't see how its morally wrong that someone that bought a set of claims that don't include voting rights, or include smaller voting rights than some other set of claims, has exactly what they bought.

Can Class B shares be traded privately between individuals? Or do they have conditions attached (right of first refusal back to founders/company, etc)?

Shares of class B can be converted 1:1 to class A and sold.

Ahh! Very interesting if they lose all of the voting rights in the process.

I think the idea was to keep anything related to ad revenue all together under Sundar, and Youtube is definitely a part of that.

Or "web services" in general.

It seems to me that Google is now the software arm and everything else is spun off into its individual niches.

Fiber is the hint about what this really means. Capital intense businesses like ISPs or car companies are expensive to operate and the financials would drag down Google.

In this model, the big shareholders get to dilute risks in these ventures, while retaining the ability to exponentially increase their personal wealth.

This reorganization makes no difference on the financials. The release explicitly stated the company is trading at the conglomerate level.

Right, this is about power. Specifically, it makes clear that Larry and Sergei are now in the capital allocation business. When you buy a share of Alphabet, you are buying shares in Larry and Sergei's opinion about what should be done with money. If you think they're much better at spending money than you are, this is a great opportunity. If you don't, it isn't.

>> If you think they're much better at spending money than you are, this is a great opportunity. If you don't, it isn't.

It's not that one-dimensional . Their company does have resources that enable them to do things you and others cannot do.

Well you're still mostly investing in the growth potential of Google's existing businesses. Don't forget that Alphabet still completely owns all the money-making businesses of Google.

Wrong. You cannot have your profits and let someone reallocate them for you too.

You would be right if you owned a controlling interest, but you don't. Because you don't, all the profits of the money-making businesses go where Larry and Sergey want them to go. That's not (necessarily) going to be your pockets. If you owned a controlling interest, you could throw them out if you're unhappy with their performance as capital allocators, but you don't and you can't. So those profits are worth little or nothing to you, both now and in the future, because you aren't entitled to receive them.

> So those profits are worth little or nothing to you, both now and in the future, because you aren't entitled to receive them.

You invest in a company assuming it will increase its value over the time you hold your fraction of ownership. Parent isn't saying you're entitled to dividends, but was observing that the decision to buy Alphabet stock will likely mostly be made on the expectation of the money-making businesses continuing to grow, and only minor-ly on the hope that one or more of the ventures takes off and significantly increase company value.

Perhaps I'm reading it wrong but I didn't see an expectation of dividends in the parent's comment.

This is only true if:

a) Neither executive nor any member of the board has any concept of fiduciary duty.

b) They can keep any mismanagement out of audited financial statements.

Malice is not required. All they have to do is be wrong.

That was already clear.

Yes, I guess the ones that are getting affected are the Google (not Alphabet) employees, since now it must be much more complicated for an engineer working on a Google project to be transferred to something more sexy such as the Self Driving Car. Disclaimer: I don't work at Google and don't know anybody who does, so I might be totally off.

i guess the employees will now also get a clear feel who of them is "maker" and who is "taker" :)

By the way - who is inheriting the piles of money accumulated in the tax heavens? I think that is another elephant in the room. The GoogleX+Fiber+... is obviously a money hungry black hole, so would they be able now to redirect/invest this money from abroad straight into hat loss generating business without incurring the taxes?

Only if it is invested offshore. If it comes back to the US, it will be taxed. Same situation as before.

While you are right in your comment, in so far as what you have written, the implication that [this] "reorganization makes no difference on the financials" is not strictly speaking true.

Going forward, this re-organization may very well allow capital allocation to be done at various legal entities a-la project or structured finance. That way, the risk/return of the various projects can be traded on more efficiently to the benefit of both investors and google/alphabet shareholders.

This is relevant in the larger context for asset intensive, long-time maturity investment areas --like fiber, self driving cars, etc -- that have fundamentally different economics than the core business (search/ads/youtube etc).

This is a good point in an otherwise PR- and spin-heavy announcement. If Google plans to pursue capital-intensive projects a la Fiber, it'd be better to have those separated to allow use of (much cheaper) debt capital collateralized by very narrow slices of the business. Is this what you mean by "project finance"? I've heard that term before but not sure what it means.

> That way, the risk/return of the various projects can be traded on more efficiently to the benefit of both investors and google/alphabet shareholders.

How would this make any difference for the costing of projects (or businesses, now)? In terms of risks and returns. Its not like new businesses under Alphabet will be boostrapped, they'll still be the same drain/boon on resources that they always were.

Not if they allow sub-ventures to be financed semi-independently.

It will have an impact - they will break out the Google Financials in Q4 & overall be more transparent about the different projects.

It will when Google is manufacturing cars, or is joint venturing with a car company to manufacture them.

The Google guys are smart. You don't do something like this without a long term strategic aim.

What about this post from a month ago https://news.ycombinator.com/item?id=9889942

> There is no strategy. The thought of Google having a central product management strategy -- and successfully executing it across many teams -- is hilarious to people who work there. It's chaos that outsiders try to read into.

This is a consequence of bad internal economics and incentives. Google PMs and engineers are incentivized to create new products and ship them by quarterly deadlines (perf/promo cycles) rather than align their teams towards a cohesive user experience. Thinking this way would occasionally cause teams to, gasp, not build a product they wanted to build. Everyone needs to ship something, ideally something new. After all, you don't get promoted for deciding not to build something. I've seen awful products/implementations go out the door and get killed or reimplemented soon thereafter. And people still list these as "achievements" on promotion packets (and they get promoted despite the product failing!).

The company is kind of trying to address this by changing promotion criteria, but it's culturally ingrained and won't change for some time.

It's one anon's opinion based on their observation and may not be reflective of a larger reality.

There was speculation on the last Tesla call that they're going to do another equity round (to which Elon said he couldn't comment). Would be interesting if this was part of the strategy, as Tesla is extremely capital intensive at the moment with the gigafactory and other manufacturing spend. Google almost did acquire Tesla before it's successful Hail Mary in 2013, so the idea isn't without merit.

> This reorganization makes no difference on the financials.

In the short term, it doesn't. But it may be preparation for something in the longer term that does.

Google could go public though, right? (The new Google)

No they need the cash it produces to finance the rest of the businesses.

They could get that through dividends even if Google went public.

It wont as they dont need it to Google Fiber on the other hand need capital investments so probably will.

I don't think there would be a difference on financials. Alphabet is worth exactly as the old Google, and is currently operating exact same businesses.

Separating Fiber is important for other reasons, most notably, saving themselves from conflict of interest/anti-trust lawsuits.

No it isn't. Clearly Google's management believes the new structure is accretive to shareholder value otherwise they wouldn't have done it.

I really wonder about this though. Conglomerates have a mixed track record [1] and from where I sit, it's not clear Larry/Sergey are better capital allocators than the public markets.

[1] Brealey & Myers "Corporate Finance" has a good section on this topic, comparing big Asian conglomerates like Samsung, LG, Yahama, etc. to American public companies over time.

Regulatory costs can be an huge drain on long term profits, and I'd count anti-trust as a regulatory cost.

Nope. If there's an antitrust issue (I'm not saying there is), it's still all the same company to the DOJ. Google is too visible to play that particular shell game and get away with it.

If this was in preparation for spinning Fiber off, sure.

Which might make sense. Perhaps more broadly, they see the advertising entities as a whole that is complete, e.g. the value of these is strong, and not likely to be anything more than incremental (in the case of Youtube, that increment is still likely thousands of percents) nor to need any capital or debt for the foreseeable future.

Fiber, cars et al could be spun off, which would create share holder value without dividends, and allow these units to leverage debt rather than capital. Cars, Fiber, the WiFi balloons, could all be spun off at a point where they need capital and debt, and not drag down Alphabet.

Fiber with an IPO and access to debt as its own needs dictate might grow a lot faster than fiber waiting for capital from Google.

Maybe that is Google's plan: get them ready for IPO, then set them free and take an interest?


A clean line between Calico and the advertising business can only be a good thing. Hopefully this means they can get on with analyzing every genome they can get their hands on.

I wonder if that'll include Google Fi, and if that'll be separate or go into the same subsidiary as Fiber.

What they are really saying with all of this is..."We are moving all of our profitable businesses under one umbrella that will be reported separately, and putting all of our money-losing businesses under another, in hopes that investors will basically ignore the unprofitable stuff and only focus on our profitable businesses.". Apparently the moonshots are diluting results from the mainstays, and they want a higher stock price, so they are going to report them separately. I'm not sure why they have to form a whole new corporate structure for that though; they could just break out the numbers in their reports.

Or they're saying "so that the adults who supervise moneymaking won't bother the moonshot meetings at abc.xyz and spoil the fun with all their blather about next quarter's earnings".

Or they're saying "We're personally tired of the boring but profitable business of selling ads. Let's replace ourselves and focus on the cool stuff."

Or they're saying "Let's getrid of 'Don't be evil' thing and do something evil with different name"

Or so that once there's good news from a spinoff, they'll be able to announce it. A small profit there would get lost in the bigger revenue streams under the old model. Remember how the media kept running "How long can Google afford to subsidize Youtube?" stories well after Youtube turned profitable?

So if Larry Page is King Azaz of Dictionopolis, then who is his mortal enemy, the Mathemagician of Digitopolis?


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