Recent High-Profile Executive Departures Won't Hurt Alphabet's Core Business

In the past few months, Alphabet (GOOGL -1.97%) (GOOG -1.96%) has lost three executives -- Chris Urmson, Bill Maris, and Tony Fadell.

In this clip from Industry Focus: Tech, Dylan Lewis and Daniel Sparks take a look at how Alphabet is structured, and how much the three departures could hurt the company's bottom line.

A full transcript follows the video.

This podcast was recorded on Aug. 12, 2016.

Daniel Sparks: Bill Maris. Some other executives, Tony Fadell leaving, the Nest hardware engineer, I think that that is particularly interesting. Because he's had a history at Apple before he switched over to Google, and that was a big deal, bringing Nest, because that was, I guess, their foray into the Internet of Things area. To see him leave, among these other executives, it makes you really think about, "Hey, what's going on here with these executives leaving?" Especially like we said, right after this Alphabet restructure.

Dylan Lewis: Yeah, and with Fadell, that was something that happened in early June, I believe.

Sparks: Mm-hmm.

Lewis: That followed what was a culture clash issue, might be the best way to describe it. There was, it seemed like quite an issue, there. There was a very public feud with Greg Duffy, who is the CEO of Dropcam, which is a company that Nest acquired. You talked about this a little bit before, but Fadell has this Apple background, and it's this obsessive, all about the product, micro-managed, Steve Jobs-type of approach to thing, and that is not really the Google way of doing things. I think it's a softer type of management style that most people expect at Google. I think that led to a lot of the problems that happened under Fadell's tenure.

You look at this, we have Urmson, we have Maris, and we have Fadell in a matter of a couple months. Those are big names in terms of leading these projects, but how do these projects fit into Google's financials overall? What does the other bets segment look like for them?

Sparks: This does bring us back to looking at Alphabet as a company. While they did restructure to emphasize these other areas that we're talking about right now so they could say, "Hey, we're an advertising business but we also do these other things. We're going to give these areas some more transparency," but at the end of the day, Google is an advertising company. You look at their other bets segment, and that's where these things fall into. That's where Nest falls into, that's where Google Ventures falls into, and this is a very tiny segment as a portion of the company's total revenue.

The revenue in the company's most recent quarter, coming from other bets, was 185 million, and Alphabet's total revenue is over $20 billion. This, this is a very small segment. Then you look at the operating profits coming from the segment, well it's not operating profits, it's actually a huge, giant loss, approaching $1 billion, actually, up from last year's loss in the segment. At the end of the day, these are really interesting segments, and they are part of Alphabet's strategy to focus on moonshots, but at the end of the day, these are segments that aren't material to investors to today, maybe as a whole they are, but individually, as each sub-segment within other bets, they're not materially impactful to the business.

Lewis: Yeah, and you touched on the transition from Google to the holding company, Alphabet, approach. I've seen some outlets try to tie some of these departures to that transition. I think it's worth touching on that as a topic. When we broke down Google restructuring, that was about a year ago, on Industry Focus, we hit on three major reasons for this move. One of them was autonomy, the idea of being with this new structure, Google can give operating division a little bit more leeway in making their own decisions, and that might allow some of those businesses to be a little bit more nimble. Another one was talent retention. The idea was that they can elevate high performers to executive level standing within these sub-companies.

The last one was transparency, and the idea that this holding company structure can give financial transparency. You break out the ad revenue side of their business from all these other bets, you get a little bit more insight on the investors' side as to what's going on, where money is going. Of course, with those benefits comes more focused financial scrutiny, and I think a little bit of an initiative to reining cost on some of these other bets. We've seen that come up a couple times in the conference calls lately. It's a tempting narrative to say that the structure change to this holding company might be causing some of these departures, but I think it's worth noting Google Ventures has been more or less operating independently for quite some time. They haven't really been tied into the ad side and the internet property side of the business operationally. They've been left to do their own thing.

I think the problems with Fadell and Nest are much more of a culture and management issue, and it was time for someone to leave there. The only one that I think that there might actually hold some water here for this argument is Urmson leaving. Really, that's because you look at the idea of giving these departments more autonomy, and then them bringing in an executive from the auto industry, and that possibly being disruptive in what that division wants to accomplish. I've seen some reports that Urmson was not particularly thrilled with the direction that they were going with things, and that he had let that be known to Larry Page. That might have bubbled up there, and that might have been causing issues, but I think, broad strokes, it is not a problem of the holding company structure. I think it's more individual issues with each executive.