Google's Alphabet Experiment Misses Goal: Keeping Executives

When Google co-founder Larry Page created Alphabet Inc., he gave three primary reasons: free up the main internet business from its costly "moonshot" projects; turn those audacious experiments into real businesses; and keep entrepreneurial leaders from leaving.

Fifteen months later, that third pillar looks like it's crumbling.

On Tuesday, Craig Barratt, chief executive officer of Alphabet's Access unit, which runs Google Fiber, announced his departure along with a wave of staff cuts and significant retrenchment of the broadband service's strategy. Barratt is the third Alphabet CEO to leave since June, and other senior executives have gone too.

Google Fiber is the latest Alphabet new business - dubbed the "Other Bets" - to be overhauled. It comes as Page and Chief Financial Officer Ruth Porat try to control costs while putting nascent businesses in sectors such as biotech and robotics, on surer footing.

Google, the core digital ads juggernaut, is flourishing and turbulence at "Other Bets" may reflect the arrival of fiscal discipline under Porat, who has won praise on Wall Street for her work. Former employees have described how expense and revenue expectations, once rare at the experimental units, have become common since the Alphabet reorganization in August 2015.

The turbulence may also highlight deeper problems creating sustainable business models. Google Fiber was one of the two chief contributors to "Other Bets," according to the company. (Alphabet does not break out financial metrics for each Bet.) The second is Nest, manufacturer of Internet-connected home devices. It has had an even rougher year.

In June, Nest co-founder and CEO Tony Fadell left following internal disputes that partly focused on a spending crackdown. Soon after, some Nest employees moved to Google to work in its new hardware division. That included Ana Corrales, Nest's chief financial officer, who now runs supply chain operations for the hardware initiative. (A Nest spokeswoman said Corrales continues to be a "shared resource" between the two companies.)

The other Alphabet CEO departure was Bill Maris, who stepped down in August from GV, the company's venture capital arm.

Google Fiber's recast business plan - narrowing its markets to select cities and focusing on wireless technology to deliver broadband - is a retreat to the unit's strategy from two years ago, a former executive said. Analysts said mounting costs likely caused the retrenchment.

Capital expenditure for Alphabet's Other Bets hit $280 million in the second quarter, primarily reflecting ongoing investment in Google Fiber, Porat told analysts.

"It's billions of dollars a year just to maintain this stuff, and Google doesn't want to spend that kind of money on just being another player in that market," said Jan Dawson, an analyst with Jackdaw Research.

"The long-term viability of the project was always in question," said Chetan Sharma, an independent wireless industry analyst. "I think the new CFO put an end to the experiment that wasn't really going anywhere."

Alphabet's shares declined less than 1 percent to $822.78 at 11:59am in New York. The stock gained 6.5 percent this year through Tuesday's close.

With some of Alphabet's more experimental projects, it's unclear if there even is a market. Alphabet has drastically pulled back from once-ambitious robotics efforts - trying to sell Boston Dynamics and nixing other projects. Its autonomous car project, while a pioneer in the field, has lost key leaders while auto-makers and startups catch up.

In the past two months, Alphabet's X research lab, which incubates potential Alphabet companies, lost two other leaders on those nascent projects. The latest, Dave Vos, ran Project Wing, a drone delivery initiative that competes with a similar effort at Amazon.com Inc. Vos' departure was sudden, and X did not immediately name a replacement.

It was surprising to see Vos leave, said one drone legal expert, adding that such losses are rare at Amazon.

That said, Amazon has yet to tackle as many sprawling, ambitious projects as Google's founders are. Recent departures may indicate a sharper focus at Alphabet, which investors have demanded in recent years.

"Now, just as any competitive business must, we have to continue not only to grow, but also stay ahead of the curve," Barratt wrote in a blog Tuesday about Google Fiber.

He said this was the "right juncture" for him to step down as CEO. Alphabet did not name a replacement.

© 2016 Bloomberg L.P.