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Alphabet to Require Subsidiaries to Pay for Services

November 24, 2015 - Written By Sumpter Carter

According to a recent article in the Wall Street Journal, Alphabet is changing regulations on spending for their subsidiaries. The new system will be far tighter on spending for the “bet” companies, which aren’t included in Google proper. The companies affected are called “bet” companies, and they include Google X, Google Fiber, and Google Life Sciences. With the new system in place, the companies are still able to use the services provided by Alphabet, however, they will have to pay for them. These services include marketing and recruitment services, along with others.

Alphabet is the parent company of Google and the related companies after a massive restructuring earlier this year into a conglomerate to prevent Google from being spread thin. Previously, companies like Google X were under Google, however with the founding of the new holding company Alphabet, they’re now separate subsidiaries. Each of these subsidiaries has the ability to provide their own hiring staff and marketing teams, however they forfeit benefits given by the Alphabet services.

There are many reasons for the new policies. Some of the major reasons include the fact that this new policy holds the company individually accountable for spending, and forces it to be more independent. This also encourages reduced spending overall, and ensures each company has a separate financial statement. As the Wall Street Journal notes, this will also make each company easier to be spun-off later, if needed. This isn’t the first news of cutting spending from Google-related companies. Earlier this year, Google made public their plan to reduce spending. Not that the new policy was from budget constraints, or financial issues, but rather out of a desire for greater financial responsibility within the company. It does have a potentially negative aspect, however. As each company is encouraged to provide for themselves, they create less consistency as an Alphabet company. Each company will potentially have different levels of quality in key areas which they provide for themselves.

Google now focuses on core businesses, such as YouTube, Search, and Android. It also isn’t subject to the new guidelines for Alphabet services. This isn’t particularly unusual, as Google remains in charge of the aforementioned core businesses, and reflects the myriad of strategies other businesses use in similar situations. General Electric Co., for example, shares services across most of the organization, while Berkshire Hathaway Inc. subsidiaries receive very limited services from the parent. Also important to consider is that this doesn’t have a grossly negative impact on all involved companies. Each company has made strides towards independence recently, so it appears the new policy is keeping in line with those moves. There are some services which the “bet” companies may choose to pay for, but for many, they’ll provide their own; each company becoming more like an independent organization.