Update: given Google’s Alphabet announcement on August 10th, I’ve written a new post which refers back to this one. You might like to read that one too.
That’s likely an odd title, but both the title and this post were prompted by a paragraph in a Wall Street Journal article about Google ahead of its earnings later this week. The paragraph, which references remarks made by CEO Larry Page at a meeting with large shareholders back in December, reads as follows:
Mr. Page said he looks to Berkshire Hathaway Inc., the insurance-focused conglomerate run by billionaire Warren Buffett, as a model for how to run a large, complex company, according to people who were at the meeting. Mr. Buffett has a cadre of CEOs running operating companies and doles out capital from the holding company to these businesses based on their performance each year.
I first saw references to this paragraph on Twitter, and subsequently decided to read the whole thing. While the tenor of the article overall is very much in keeping with my own views on Google (it seems to be facing increasing headwinds and is doing a poor job of explaining how it will weather them), this idea attributed to Page struck me as particularly odd, and somewhat worrying. And the simple reason is that, even though it’s perfectly normal (and sensible) for CEOs to seek to learn from other CEOs how to run their companies, Google is nothing like Berkshire Hathaway, and indeed it shouldn’t be. Below, I’ll outline several reasons why I find Page’s remarks concerning.
Berkshire Hathaway is a conglomerate
I don’t know any more about Berkshire Hathaway than the next person – it’s simply not a company I’ve spent a huge amount studying. But I have learned enough previously (and researched enough today) to provide a brief primer. First off, Berkshire Hathaway is, famously, a conglomerate. That means, in part, that one of its defining features is that it’s a very diverse business with many unconnected parts. Wikipedia’s definition is likely as good as any (emphasis mine):
A conglomerate is a combination of two or more corporations engaged in entirely different businesses that fall under one corporate group, usually involving a parent company and many subsidiaries.
Berkshire Hathaway itself wonderfully fits this description. Though the Journal article describes it as “insurance-focused”, in reality BH’s assets are incredibly diverse, including Dairy Queen (a restaurant chain), Fruit of the Loom (clothing), a railway, energy companies, half of Heinz, a whole range of others and, yes, a sizable insurance business. Many of these businesses are indeed run entirely at arm’s length, and they can be because they have no connection with each other. They can also be run in this way because they’re all profitable in their own right (at least at a divisional level), and so don’t need the other subsidiaries to prop them up. The only real connections between BH’s various businesses are the 25-strong headquarters staff and the fact that the company uses the “float” (the premiums received but not yet paid out on) from the insurance business as a cheap source of investment money for the other businesses.
Google is not a conglomerate
On, then, to Google, which I know and understand much better and which is very different from Berkshire Hathaway. There are several key points here:
- Firstly, Google isn’t a conglomerate – its businesses have hitherto had fairly strong connections with each other, and in some cases a very strong connection. At a basic level, almost all of Google’s businesses (until relatively recently) have been Internet services businesses, and even all its current businesses are at least technology businesses. That, alone, makes them far less diverse than most conglomerates, and than the the definition above suggests.
- Secondly, although Google has many products and services, it doesn’t have “many subsidiaries” – these products and services have largely been interconnected, as I just described, and as such can’t simply be treated as a series of subsidiaries to be managed separately, as Berkshire Hathaway’s various assets can.
- Thirdly, the pieces of Google aren’t and can’t be independent in the way BH’s various businesses are, because many of them (including some of the largest, such as Android and YouTube) simply aren’t profitable in their own rights. Though the management of some of these bigger parts can be given a measure of autonomy, they can’t run anything like BH’s various subsidiaries can because they rely on the other parts of Google to stay afloat.
I’m not sure which explanation for this disconnect worries me more – either Larry Page doesn’t understand these important differences between Google and Berkshire Hathaway, or he’s planning to turn Google into a true conglomerate along the lines of BH. Neither seems like a good sign. I’ve already talked about the first of these, so let’s tackle the second. Though some of Google’s recent acquisitions haven’t fit with certain popular visions of what Google is as a company, I believe they all fit if you look at the company through the right lens: as a machine learning and artificial intelligence company (something I wrote about in detail in this piece). I think there are still concerns about Google, as I said at the outset, but I don’t think over-diversification is one of the biggest.
However, if Page really is planning to build a conglomerate, that’s even worse news. For one thing, he’s absolutely the wrong guy to run it if he’s using Warren Buffett’s model as his ideal. Warren Buffett is, above all, a very shrewd investor, and Page’s major acquisitions have been anything but shrewd from a financial perspective. But using Google as a vehicle for further investments also doesn’t seem like a good idea, regardless of who’s running it. Conglomerates are notorious for diminishing rather than enhancing the value of their subsidiaries, and Berkshire is the exception rather than the rule (and Buffett has articulated clear reasons why).
The one way in which Google could be like Berkshire Hathaway
There is one small way in which Google might be like Berkshire Hathaway, and that’s the fact that Google, like BH, has one part of its business that generates significant sums of money that can be used to invest in the rest. At BH, this is the float – not technically profit, but still cash on hand that can be invested elsewhere. At Google, it’s the search advertising business that is Google’s profitable core. However, unlike BH’s insurance float, which seems fairly safe for the time being and has been steadily growing over the years, Google’s core business seems increasingly threatened, and it’s not clear that any of its other businesses are in a position to supplement or supplant it as a major source of revenue in the near future. The key difference, then, remains that BH uses its float to invest heavily in businesses that are already successful, whereas Google invests its profits into businesses that need the money just to run, because they’re unprofitable.
I think the most charitable reading of Page’s remarks is that he only sees Buffett’s model as a guide at a very superficial level – of giving his various direct reports a certain amount of autonomy. I certainly hope that’s what he meant by the comparison, because almost any other reading of them is worrying, to say the least.