Until Google created Alphabet, the company was known for splashing out cash on new projects that were developed under a company that was then known as Google X. Since Alphabet’s takeover, the company, which has dropped the Google from its name and is now simply called X, is having to focus on ideas that have a much higher chance of success due to Alphabet’s much more money-conscious strategy.
Historically, X, often know as the moonshot factory, has had a number of high-profile projects, namely Google Glass. The famous project that amazed people around the world while also garnered its fair share of controversy, was ultimately a waste of money, at least that’s what X’s CEO Astro Teller appears to be insinuating. The company spent millions on marketing and even more on development but, ultimately, the product was only on sale for one year before it was scrapped. Aside from the extravagant spending on these projects, the company has also spent a considerable amount on their self-driving car as well as Project Loon, which, although they have huge potential, played a big part in X’s $3.6 billion loss in 2015. Due to this spending, it appears Alphabet has told X to keep spending under control, meaning resources should be spent on projects with huge potential, while other ones should be scrapped.
Now, what led to these budget-conscious orders by Alphabet has a long history behind it and saw months of planning. Initially, Sergey Brin set up a small team within Google – the owner of X and many other companies at the time – in order to work out a viable way of controlling budgets, spending and essentially anything related to what were then Google’s accounts. Eventually, the team opted to hire Ruth Porat, the person who envisioned the creation of Alphabet, a new holding company that would allow Google to concentrate on what it’s best at, while its subsidiaries could be spun off into separate companies, which would then allow Alphabet to better control their budgets and expenditures.
With the creation of Alphabet, Ruth Porat brought in strict budgeting for all companies, especially X, and also set a requirement that all projects with a roadmap of 10 or more years reach profitability in half the time. In addition to this, all projects must also have a working prototype and a credible business case in order to warrant further investment. X isn’t the only company facing tough budget restrictions, though, with both Nest Labs and Google Fiber seeing their expansion halted due to their stricter budgets, not to mention a number of other Alphabet subsidiaries that have also faced cuts.
It’s fair to say the new budget constraints have garnered their fair amount of criticism, with many saying that the execs have gone against their promise of not becoming a “conventional company.” But, as Alphabet grows, the fact is that measures like this are necessary, especially since 89% of the companies revenue comes solely from Google. With budgets becoming increasingly stricter, many are wondering if Alphabet will reach the point where innovation will be sacrificed in favor of tighter budgets and higher profits, without taking into consideration the long term aspect. In contrast to this, though, both Sergey Brin and Larry Page have confirmed that they have no plans to stop investments in areas that have little to do with its core Google business, the only change will be that they will spend their money more wisely. After all, their previous investments in YouTube and Android have allowed them to be the owners of the most popular video platform alongside the most popular mobile operating system.
Aside from tighter budgets, Alphabet’s creation also led to a job title shuffle, with many execs who previously handled a number of projects now being in charge of only one department in order to better execute each product, without overlapping, something that was quite frequent when everything was run by Google. The separation of each previous Google subsidiary into their own company has also allowed investors to learn exactly how profitable Google on its own is, whilst the finances of X and others have also been laid bare to investors.
Now, although the budget constraints may seem pretty strict to many and the huge reshuffle in the way companies are run may seem a bit confusing to some, the plan is working. Since Porat joined, shares are up 35% and efforts are fully focused on projects that, not only have huge potential but ones that the team, including Alphabet’s execs, are passionate about. In addition to this, the stricter budget at X also appears to have forced them to regain focus of their own goals, meaning development on the likes of Project Loon and their self-driving car are doing better than ever. So good, in fact, that it has been rumored that the self-driving car project may “graduate” soon from X and become a separate Alphabet-owned company. Development on Project Loon is also said to be going from strength to strength. Essentially, while budgets have been cut, the effect it has had on the company has been positive and, if anything, the future for X is looking brighter than ever thanks to their new structure and focus.