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Why Facebook should restructure like Google’s Alphabet

When Google (GOOG) dropped its bombshell restructuring announcement Monday evening, it was initially seen as a joke. Commenters on CEO Larry Page’s blog post suspected the site had been hacked.

But over the next day, the business world’s commentators, analysts and explainers banded together to create a consensus about the shake-up: Alphabet, the new holding company’s name, frees up Google to “dream big beyond search” the New York Times announced. Alphabet is like “a 21st century Berkshire Hathaway,” Bloomberg explained. The name change signals that Alphabet “is fundamentally a moonshot factory, and always will be,” according to Slate.

I joined the chorus, arguing that Larry Page doesn’t want to be the CEO of an advertising company, no matter how successful said advertising company is, because advertising is not a very cool, world-changing business to be in. Ergo, Google is now one part of a portfolio of innovative businesses.

Eight miles north of the Googleplex (will they change it to Alphaplex?), executives at another very successful advertising-based technology company are likely wondering whether they should be doing the same thing.

As the Times argued, Google has always exported its company culture to the rest of the corporate world. Now, the company’s new corporate structure is “a template for the next evolution of a modern tech firm.” Out of all the big, evolving tech firms in Silicon Valley, Facebook is best suited for this new template.

 

Like Google, Facebook (FB) started as a web service that makes money through ads. The majority of both companies’ revenues comes from advertising through their flagship products.

And like Page, Facebook CEO Mark Zuckerberg is more excited by world-changing innovations than the intricacies of ad retargeting optimization. Both Page and Zuckerberg see a future where all of their companies’ side projects contribute to the bottom line.

Facebook Inc. has already amassed a portfolio of somewhat disparate companies operating independently of one another. Beyond its namesake product, which has 1.5 billion monthly active users, Facebook owns photo sharing app Instagram, which has 300 million monthly active users, messaging app WhatsApp, which has 800 million monthly active users, and its own messaging app, Facebook Messenger, which has 700 million. Facebook acquired virtual reality headset maker Oculus Rift, which is set to release its product in the first quarter of next year. And Facebook is spending considerable resources developing solar-powered Internet drones and laser technology, in line with its efforts to increase Web access around the world through its project, Internet.org.

Beyond similarities in structure and outlook, restructuring works as a great recruiting tool. It’s not easy to get engineers excited about advertising. There’s a famous quote that sums up how Silicon Valley engineers feel about advertising (uttered by an early Facebook employee, no less): “The best minds of my generation are thinking about how to make people click ads. That sucks.” If they’re not starting their own company, the Valley’s top talent would rather work on cutting-edge, innovative products like virtual reality.

Beyond new recruits, investors are also likely to embrace the holding company structure. Wall Street applauded Google’s re-organization, adding $20 billion to Google’s market cap in after-hours trading. It was an unusual reaction, since, as my colleague Steve Gandel noted, investors usually dislike conglomerates. They’re seen as less efficient. Even Berkshire Hathaway is considered undervalued by many.

But Google has wooed investors on its image as a forward-thinking innovator focused on long-term investments. Beyond that, the company has the luxury of not having to worry about activist investors pressuring it to split up, because its dual-class share structure gives Page and President Sergey Brin majority voting power.

Facebook has similar protections in place. Mark Zuckerberg’s sizable ownership stake in Facebook is all “class B” stock, and that gives him ten votes for every class A vote.

Just three years into its life as a public company, it may be too early for Facebook to go full-Alphabet. But the company may eventually decide, like Google, that such a move makes sense. Facebook is already moving in that direction by adding more and more moonshot-style divisions. Restructuring would only highlight those innovations to new recruits, investors, and the world.