Bad news for Google parent Alphabet: The “G” will still foot the bill

August 10, 2015, 10:24 PM UTC
Google founders Sergey Brin (L) and Larr
Photograph by John MacDougall — AFP/Getty Images

Who says news is slow in August? On Monday afternoon Google (GOOG) announced a bizarre and surprising reorganization, in which the search engine company has renamed itself “Alphabet.”

As part of the reorganization, Google, the advertising business, will be one among many businesses owned and operated by Alphabet. The other businesses include Google’s broadband business, Fiber, Nest, Google X, Calico and Google’s investment arms, Google Ventures and Google Capital.

It’s Google’s way of telling the world that it has outgrown its initial, namesake product, the Google search engine, which in turn begat an advertising behemoth. Alphabet, with its portfolio of activities, lends equal weight to all of the company formerly known as Google’s most out-there moonshot activities. The self-driving cars, the diabetes contact lenses, the smart thermostats, the drone delivery, the robots. Google is more than just a search engine. Now, its name reflects that.

There’s just one problem with that. Advertising, Google’s original line of business is still paying for it all.

Search advertising is why Google is a Fortune 50 powerhouse to begin with. (It is number 40 on Fortune’s recently published list.) Google’s ad business practically prints money. Advertising, including display ads and mobile ads, made up 89% of Google’s $66 billion in revenue last year. Even while spending gobs of money on its beloved moonshots, the company enjoyed 24% profit margins.

Within Alphabet, the new “slimmed-down” (CEO Larry Page’s phrasing in a public blog post) Google will still retain all of its ad-supported products, including search, ads, maps, apps, Android, and the related technical infrastructure. Even video network YouTube, which is a very different business from banner ads or search ads, will stay under the Google segment.

But advertising is not very cool. Advertising, especially programmatic, algorithm-driven advertising, doesn’t exactly get engineers excited. There’s even a famous quote from a young engineer, deriding Google’s core business: “The best minds of my generation are thinking about how to make people click ads. That sucks.” Plenty of people have speculated that Google’s moonshots, while sincere and admirable, are also a cynical recruiting device for wide-eyed young engineers.

It’s likely that Page and Sergey Brin, his Google co-founder and Alphabet president, see their company as more than a massive advertising machine. They probably wanted Google’s corporate identity to reflect that. Too bad the numbers don’t.

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