The company that today calls itself Alphabet traces its origins to the creation of its subsidiary Google, a pioneering internet search company that was launched in the late 1990s and which has since expanded into a digital commerce, advertising, software and technology company of global proportions. The company has a market capitalisation of more than US$500 billion and ranks among the largest companies on the planet in terms of market value.
History: Optimising Internet Utility
Alphabet (and its precursor, Google) is the creation of computer programming specialists
Larry Page and Sergey Brin. They met as graduate students at Stanford University in 1995. In their studies, they had been working on a universal digital library project at the school under the supervision of Stanford professors Terry Winograd and Hector Garcia-Molina and the sponsorship of the National Science Foundation.
At the time of the project, the internet was still in its relatively early stages when it came to public use. Digital communication between computers had been developed as early as the 1960s through the work of the Advanced Research Projects Agency funded by the U.S. Department of Defense.
By 1989, following the development of inter-network communications protocols, Tim Berners-Lee had developed a method of using hypertext links to index pages found on computer networks. His system for the first time allowed universal access to computer information archives to the broad public beyond the computer and scientific research communities that normally accessed them through government agencies and university research centers. However, indexing and accessing all the information available on a growing network of computers around the globe remained a daunting task.
During his graduate studies and work on the digital project at Stanford, Page developed an interest in tracing backward linkages from websites and he set out to find a process to discover which web pages received the greatest number of links.
As early as 1994, some commercial web search applications had been developed and search engines such as Yahoo!, Lycos and AltaVista were operating. They considered only text cues, though, and did not examine web linkages in depth.
Working with Brin, who specialised in mathematics, Page formulated an algorithm called PageRank. It was able to list web pages according to the number of links they showed back to other web pages in addition to the number of connections to the pages linking to those pages. As each web link made between web pages normally represented a human action, this technique was understood by Page as a way of capturing human relevance and interest of web pages according to the number of other pages users had chosen to link to them.
Thus, using this methodology, they were able to create a hierarchy where more popular and relevant sites rose to the top of their listings and less popular, less relevant sites fell to the bottom. Page also wrote the program with a concern over its ability to track the expanding volume of the cumulative universal database across the internet.
In March 1996, Page used his own Stanford homepage as starting point for testing the program and let the web crawler work outward from there. The initial test returned a set of 24 million pages. Using PageRank as a foundation, Page and Brin formulated a search engine they called Backrub. Page and Brin's search application gained popularity within Stanford's computer science department.
The initial web search engine, BackRub, was written in Java and Python programming languages. The program ran on a series of Sun Ultra and Intel Pentium computers using a Linux operating system. The main database was kept on a Sun Ultra II with 28GB of disk storage.
With the success of their experimental search engine, Page and Brin considered launching an internet search company of their own.
Their fellow grad student at Stanford, Sean Anderson, suggested the name Googolplex, a term coined by mathematician Edward Kasner in 1920 to mean 1 followed by 100 zeros. The name was an allusion to the large search capacity of their search engine. When later registering the name, Page and Brin shortened it to Google.
Initially, Page converted his dorm room space into a storage room for his web servers needed for the operation, and the two men used Brin's room as an office space. Eventually, they transferred the operation to a friend's garage off the Stanford campus.
Financing The Birth Of A Technology Giant
In August 1998, Page and Brin obtained US$200,000 in financing from Stanford professor David Cheriton and Sun Microsystems co-founder Andy Bechtolsheim. With that investment, they incorporated Google Inc. on September 4, 1998. Google subsequently obtained other large cash injections from private investors including Sequoia Capital, Kleiner Perkins Caufield & Byers, Angel Investors, Yahoo! and Time-Warner. Both Stanford University and the University of California-Berkeley also held stake during the initial formation of the company. Page and Brin's initial stake was estimated at around 40%.
In March 1999, the company moved to its headquarters in Mountain View, California.
Seeking To Fulfill A Vision
Google expanded rapidly through both its own organic growth and acquisitions of other technology companies. Its search engine alone grew to capture more than 60% of total market share.
Following Google's founding, Page and Brin said in a letter to investors that they weren't striving to create a "conventional company" and that they didn't intend to become one. Additionally, they said they could be expected to make "smaller bets in areas that might seem very speculative or even strange when compared to our current businesses."
"From the start, we've always strived to do more, and to do important and meaningful things with the resources we have," Page wrote. He added: "We've long believed that over time companies tend to get comfortable doing the same thing, just making incremental changes. But in the technology industry, where revolutionary ideas drive the next big growth areas, you need to be a bit uncomfortable to stay relevant."
While Google quickly became known for its efficiency as a search engine, one of its promising early sources of revenues was advertising. The company's ability to scan the internet gave it a capillarity that proved to be well suited for that purpose. To this day, advertising remains a backbone source of revenue for Alphabet's pioneer company, Google.
In October 2000, Google launched its subsidiary, Adwords, aimed at tapping the potential for marketing and advertising through internet links.
Eric Schmidt And A Decade Of Rapid Growth
In March 2001, Page and Brin hired Eric Schmidt as Google's chairman. He previously served as the CEO of Novell and chief technology officer at Sun Microsystems. Page took up the post as president of products and Brin took the position of president of technology.
Schmidt's tenure was marked by a series of acquisitions that promoted expansion of company services and growth.
In February 2003, Google acquired Pyra Labs, developer of the Blogger blogging service, for an undisclosed amount. In April 2003, Google acquired online advertising software company Applied Semantics for US$102 million. In June of that same year, the company launched Adsense, a content-targeting advertising service that allowed internet publishers to reach Google's large network of advertising clients. In 2004, the company launched its email service, Gmail, and acquired photo-sharing website Picasa.
Under SEC rules at the time, companies with more than $10 million in assets and 500 or more shareholders were required to make a public offering of shares. And on August 19, 2004, Google went public. In its IPO, the company offered 19.6 million shares of its total (271 million shares) at a price of $85 per share. The share sale was carried out by underwriters Morgan Stanley and Credit Suisse using an online auction format.
The initial sale totaled about US$1.7 billion and gave Google a starting market capitalisation of US$23 billion. Many of the company's employees who obtained shares before the launch instantly multiplied their wealth with the sale.
In 2005, following the purchase of Where 2 Technologies, the company launched its Google Maps service. The same year, for US$50 million, it also acquired the Android mobile operating system, a rival to the iOS system used on Apple mobile devices such as the iPhone. In 2006, Google bought the YouTube video site for US$1.65 billion. In 2008, Google acquired ad-serving company Double Click Inc. for US$3.1 billion. Later in that year, it unveiled its own internet browser, Chrome, which challenged Microsoft's popular browser, Internet Explorer.
In January 2010, Google launched its own touch-screen mobile phone, the Nexus One, to compete with Apple's iPhone. In the same year, it made an acquisition of the mobile advertising company Admob for US$750 million, and also launched a US$700 million takeover of flight information provider ITA software, Inc. At this time the company also launched investment arms, Google Ventures and Google Capital; its own technology incubator project, GoogleX; and Fiber, a high-speed internet and cable TV service. In 2011 the company created Google+, its own social network, in response to the popularity of social networks such as Facebook.
It was during this era that the company began promoting its annual Google I/O software development conference to foster ongoing relationships with developers who worked with the company's technologies.
Page Re-takes The Reins
In April 2011 Schmidt stepped down as the CEO of Google, and founder Larry Page took over the role. Schmidt remained linked to the company in an advisory role. During his 10-year tenure, the company had expanded in size from 400 employees to more than 24,000.
As CEO, Page continued the company's expansion with acquisitions, purchasing software and internet service companies such as Apture, Meebo, Sparrow and Zagat. Since then, the company has launched several new initiatives including anti-aging biotech company Calico, in 2013, and Nest, a maker of internet-connected devices for the home, in 2014. In 2015, it launched Sidewalk, a company focused on smart cities.
Technology From A To Z: Alphabet
On August 10, 2015, Page and Brin launched Alphabet as the parent company of Google and their other companies. At the same time, Page left the CEO position to Sundar Pichai, the former product chief at Google.
In comments to investors, Page has hinted that he feels better suited to an advisory role who will scout for new ideas than a day-to-day manager of the company's sales, technical operations and corporate positioning. "In general, our model is to have a strong CEO who runs each business, with Sergey and me in service to them as needed," Page wrote in a letter to investors, reaffirming their commitment to "the business of starting new things."
Regarding the purpose of the new entity, Page said that the collection of companies wouldn't be a large consumer brand and that the Alphabet subsidiaries should have independence and develop their own brands.
The name "Alphabet," he said, symbolized the company's work as it was "one of humanity's most important innovations, and is the core of how we index with Google search!" He said it was also a play on the words "alpha bet," or a bet on "Alpha"—an investment return above benchmarks, which according to Page is what the company strives for.
Much of the drive behind Google and Alphabet is owed to Page's own intellectual curiosity. While he is associated with the companies, they should be expected to keep pioneering new areas of technology and internet services.
In an interview, Page's former graduate school adviser noted that Page was most interested in developing "cool" things from the beginning.
"Even before he came to Stanford, he was interested in cool technical things that could be done," Winograd said. "What makes something interesting for him is a big technical challenge. It's not so much where it's headed but what the ride is like."
Since its initial launch as Google, the company has grown at a pace of about 20% per year and now generates about US$60 billion in revenues annually. Its share value has increased more than 1,000% since the company went public. Alphabet stock hit an all-time high in December 2015, and it briefly surpassed Apple as the world's most valuable company after posting strong quarterly earnings in February 2016.
What's Ahead At Alphabet?
With its current portfolio of companies and investments, some of the "cool technical things" that can be expected from Alphabet in the coming years could include the following:
- Self-driving cars
- Space exploration through funding of the space exploration Xprize
- Modular phones with replaceable modular components
- 3D mapping to help smart objects navigate in real-world 3D environments
- Healthcare products for treating ailments such as Parkinson's disease and diabetes
- Smart contact lenses to sense changes in body conditions
- Renewable energy projects
- Global internet accessibility initiatives
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Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…