It's not easy to lose $150 billion in two days, but Alphabet (GOOG 9.96%) (GOOGL 10.22%) did just that earlier this month after investors began to absorb the threat from ChatGPT.
The combination of Microsoft's (MSFT 1.82%) launch of its new ChatGPT-powered Bing search engine, and Alphbaet's own disappointing release of its competing product, BardAI, wiped 12% off of Alphabet's stock as the market reassessed the threat facing Google Search, the company's primary cash cow.
While ChatGPT does have the potential to turn the tables in search, there's another, more insidious risk facing Alphabet that shouldn't be ignored.
The tech giant's culture has become bloated, bureaucratic, and risk-averse, making it difficult for the company to move quickly, make big changes, or launch new products, and that, in turn, has made responding to the challenge from ChatGPT particularly difficult.
That charge against Alphabet has circulated around the internet for years, but the launch of OpenAI's chatbot seems to have crystallized the problems with Alphabet's culture for some critics. For example, a viral Medium post from Praveen Seshadri, whose company AppSheet was acquired by Alphabet, just laid out the case against his former employer's culture.
Image source: Getty Images.
A culture clash
Seshadri sums up his thoughts on the three years he spent at Alphabet, saying, "Yet, now at the expiry of my three-year mandatory retention period, I have left Google understanding how a once-great company has slowly ceased to function," adding, "Google has 175,000+ capable and well-compensated employees who get very little done quarter over quarter, year over year."
Among the problems he pinpoints are a lack of mission, a failure to serve its customers, and a bureaucratic organizational structure designed to avoid risk, rather than create anything new. He takes the company to task for wasting time and managing talent down, encouraging employees not to be "heroes" rather than trying to get the best out of its people.
As others have charged, he says the success of Google's ad machine has made the company big and lazy, and he concludes by saying Alphabet is likely to go the way of once-might tech titans like IBM and AT&T.
Seshadri isn't unique in making these claims. Waze Founder Noam Bardin, who also worked at Google after his company was acquired, described working there in a 2021 post, saying "An ever-increasing percent of our time went to non-user value creation tasks, and that changes the DNA of the company quickly, from customer-focused to corporate-guidelines-focused."
A New York Times profile in 2021 also portrayed the company and CEO Sundar Pichai in a similar light, citing a number of current and former executives who said that Pichai was slow to make decisions and his low-key manner was sometimes seen as weak. They describe, "A paralyzing bureaucracy, a bias toward inaction and a fixation on public perception."
More than a dozen VPs signed on to a 2018 email saying the company was too bureaucratic and made it too hard to get anything, among other complaints. The report also described a phenomenon that neatly encapsulates the challenge it now faces with ChatGPT: "One former executive said the company's risk aversion was embodied by a state of perpetual research and development known internally as 'pantry mode.' Teams will stash away products in case a rival creates something new and Google needs to respond quickly."
Is Alphabet a Day 2 company?
Amazon investors and Jeff Bezos fans may recognize the descriptions above. Alphabet, it seems, has all the trappings of a Day 2 company, according to Bezos's philosophy.
"Day 1" is a core motto at Amazon, and one of Bezos's best-known shareholder letters explains that it's essential to maintain the attitude of a start-up, including risk-taking, experimentation, and fast decision-making even as his company became one of the biggest in the world.
Day 2, he claimed "is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death."
Alphabet may only be in the stasis phase, but its resemblance to the decay Bezos describes is uncanny.
Look at the numbers
Overall, Alphabet's business has continued to grow and the stock has done well with the exception of the past year, but looking beyond the growth of its ad business, there's evidence of mismanagement.
Google Cloud, for example, is often heralded as the company's next great business, but 14 years after its founding, it's still losing money. Revenue at Google Cloud grew 37% last year to $26.3 billion but lost $3 billion, which was only a slight improvement from its bottom-line result in 2021.
By comparison, Google Cloud's chief competitors, Microsoft Azure and Amazon Web Services make mountains of cash each year. AWS brought in $22.8 billion in operating income on $80.1 billion in revenue. Microsoft doesn't break out the results for Azure its primary component in its intelligent cloud segment, which generated $32.7 billion in operating income on $75.3 billion in revenue in its last fiscal year.
There's no obvious explanation for the discrepancy between AWS and Azure's massive profits and Google Cloud's losses. It's not scale as both Azure and AWS have been profitable for years, and were profitable when they were the size of Google Cloud.
Instead, the losses at what should seem to be a high-margin business at Alphabet seem to be a result of poor management and execution, including many of the problems above like redundancies in the workforce, slow execution and decision-making, and a prioritization of risk aversion over business success and profitability.
Similarly, Google's 2015 rebranding as Alphabet has also been a failure. At the time, the move was expected to launch successful stand-alone businesses, but none of those projects have borne fruit. In 2022, "other bets," as those start-up projects are known, lost $6.1 billion, and have cost the company roughly $30 billion since it reorganized as Alphabet.
What it means for investors
Alphabet isn't a dinosaur by any means and the company has the financial fortitude and talent to own the next frontier in search, but it's also not an accident that a company with such a risk-averse culture is now playing catch-up in an area it should have led.
It's still early in the Generative AI race, but Alphabet's cultural drift seems to make it poorly equipped to compete with a freewheeling start-up like OpenAI, backed by $10 billion from Microsoft.
Something needs to change at the tech giant as resting on an aging search monopoly is no longer an option for Alphabet. Keep your eye on the executive suite at Alphabet as one of the earlier victims at the company could be Pichai himself.
For investors, the cultural weakness and sudden vulnerability to disruptive technology likely mean that there are better places in the tech sector to invest than Alphabet. If the company starts to crack under pressure from ChatGPT, it will show up in its search margins first, but the rest of the business isn't big enough to offset any significant impact on its advertising empire.
