News that co-founders Larry Page and Sergey Brin are stepping down from active management at Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) will have muted impact on the company but could have a huge impact on Silicon Valley.
It’s not big news because CFO Ruth Porat has been running Alphabet since she joined the team from Morgan Stanley (NYSE:MS) in 2015. Sunder Pichai has been running Google itself over the same tenure.
The news should put Alphabet stock under the control of investors. This would give Porat the freedom to deliver the kinds of returns, in the form of stock splits and dividend payouts, Tim Cook has made Apple (NASDAQ:AAPL) policy since succeeding Steve Jobs in 2011.
But it won’t do that. That’s because Page and Brin still control Google’s voting shares. Investors should ask why.
The Curse of the Founders
Founder control has been quite the phenomenon in Silicon Valley since Jobs was cast out of Apple, which he had co-founded, in 1985. Apple’s subsequent struggles, and its rise after he re-joined in 1997, seemed to justify founders maintaining control of their public companies through a dual-share structure.
The structure has a long history. Arthur Ochs Sulzberger is the sixth in his line to run The New York Times (NYSE:NYT). Family control was made a condition of sale when the company went public in 1967. The same structure holds at News Corporation (NASDAQ:NWS), despite occasional revolts.
But recently the dual-share structure has become a plague. Dropbox (NASDAQ:DBX), Eventbrite (NYSE:EB), Blue Apron (NYSE:APRN), Roku (NASDAQ:ROKU) and Twilio (NYSE:TWLO) all went public in recent years with dual-share structures. Voting shares in Snap (NYSE:SNAP) are privately held, mostly by the co-founders. China’s Alibaba (NYSE:BABA) listed first in New York because it has a dual-share structure, and listed in Hong Kong only after such structures were allowed.
Founder control, however, can cost money. It took $1.7 billion to get Adam Neumann out at WeWork because of its dual-share structure.
The issue has long-term implications. Between them, Page and Brin have five minor children. Should they inherit voting control of Google stock? How would that serve the interests of shareholders?
Google at War
Porat and Pichai need all the authority they can get because Google is under unprecedented government attack around the world. Alphabet spent $21.7 million lobbying Washington last year and about $1 million per year on political contributions, equally split between the parties.
As a global company, Alphabet is under attack over its taxes, its search results and its advertising policies in nearly every world capital. A company that Page and Brin launched with the mantra “don’t be evil” is now seen by many as the personification of evil.
The rot has gotten inside the company, with Google accused of wrongdoing by #MeToo organizers, union organizers and right-wing agitators. Pichai has already cut back on its vaunted “all-hands” meetings, fearful of leaks.
How Pichai and Porat deal with this won’t just impact shareholder value. It could determine whether the internet remains a global resource, or whether it will be Balkanized, as the old phone networks were, by governments who see communication as a threat.
Heavy government regulation, and a natural corporate reaction, could also turn Google into a new AT&T (NYSE:T). The latter is a risk-averse company that misses new opportunities like the cloud itself. Google, founded in 1998, is now worth more than three times AT&T.
The Bottom Line on Alphabet Stock
As an investment, Alphabet stock looks like a star. But it has done no better than the Nasdaq Composite average over the last two years.
Barring a dividend, don’t expect anything better, until Page and Brin really are out of the way.
Dana Blankenhorn is a financial and technology journalist. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL and BABA.
