Why Google Isn’t the New Berkshire Hathaway

By
Breakthrough Prize Awards Ceremony Hosted By Seth MacFarlane
Larry Page and Sergey Brin. Photo: Steve Jennings/2014 Getty Images

What are companies for?

That might be the most interesting question raised by Google’s surprise reorganization, announced yesterday. The reshuffling turns the company into an old-fashioned, 1960s-style conglomerate called Alphabet, with the search-and-advertising behemoth Google as its biggest component. (Other smaller, stranger parts include its better thermostat, self-driving car, and erasure-of-death units.) 

The company is becoming more like Berkshire Hathaway, the newborn conventional wisdom goes, an analogy prompted by Google executives themselves. The reorganization gives it room to build up and acquire new businesses without besmirching or complicating the core Google brand that, at least currently, makes all the money. And it signals to investors that they are not signing up to invest with an internet-search firm, but with a big, fearless, aggressive, diversified business.

Of course, there are real limits to the Berkshire analogy. Warren Buffett’s conglomerate is a true conglomerate, with a big insurance business, a big railroad business, a big airplane-parts business, a big underwear business, and a big candy business. A slowdown in one part of the company is often offset by a speedup in another part of the company, making the whole firm more appealing to investors. That’s what Berkshire Hathaway is for: producing value for shareholders over the long run by investing in a range of profitable businesses.

It would be hard to argue that Alphabet could brandish that same, simple mission statement at the moment. Right now, Alphabet is really Google plus businesses that Google subsidizes or provides the capital to invest in — including some “moonshots,” in Silicon Valley parlance — that will either turn into giant, world-changing businesses or never make a dime. Investing in Alphabet still largely means investing in Google.

That brings me back to that original question: What are companies for?

Berkshire Hathaway’s diversification is a fundamental part of its business model. Google’s diversification — now Alphabet’s diversification — is not. In the long run, Google might make a ton of money off of its balloon-powered internet initiative, et cetera. But it probably won’t. Or at least it won’t for a long time. And the company seems just fine with that.

That’s the thing: Berkshire Hathaway is a business profoundly committed to the medium-to-long-term maximization of profit and shareholder value. Alphabet is a company that seems … only loosely or secondarily committed to those goals. Indeed, that posture is explicit. “The societal goal is our primary goal,” Larry Page, one of Google’s founders, said in a recent interview. “We’ve always tried to say that with Google. I think we’ve not succeeded as much as we’d like.”

Is that a bad thing? Maybe for investors. But then again, companies are under no real obligation to maximize profits, despite what Wall Street has tried to convince the world. Thanks to a share structure that enables Larry Page and Sergey Brin to exercise near-complete control over Alphabet, the two have freedom to do something other than just make as much money as possible. If shareholders don’t like it, they can walk away. And maybe, just maybe, the world as a whole would be better off if some cash-rich executives focused less on short-term profits and more on long-term, intangible goals.

Why Google Isn’t the New Berkshire Hathaway