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By Alistair Barr 

To see how Google Inc. Chief Executive Larry Page hopes to turbocharge a growing fleet of speculative projects under a new holding company, look at Nest Labs.

After Google acquired the maker of connected-home devices for $3.2 billion in 2014, Nest kept its own recruiters and its own system for vetting job candidates, skirting Google's famously deliberate hiring process. Nest still rents computer servers from Amazon.com Inc., rather than use Google's data centers. Nest co-founder and CEO Tony Fadell also curbed some Google perks, such as free food, to maintain Nest's scrappy vibe.

Mr. Fadell and co-founder Matt Rogers negotiated unusual autonomy for Nest. Now, as Google reorganizes and creates a new parent company, Alphabet Inc., it is using Nest as a model for running its other startup operations--the "bets" in Alphabet--according to people familiar with the plan.

The restructuring separates Google's core businesses--including Internet search, the Android operating system and YouTube--from newer unrelated businesses such as Nest, Google Life Sciences and Fiber, the fast Internet service. Mr. Page will remain CEO of the Alphabet holding company, but step back from running Google's core to oversee the other units, which will operate more independently. A date for the new structure hasn't been made public, but Google said it would start providing quarterly results for the core and startup operations with the fourth quarter.

"If Google can deliver more broadly what it gave Nest, that predicts success for the rest of the Alphabet projects," said Max Levchin, a co-founder of PayPal Holdings Inc. who spent more than a year at Google after it bought his social startup Slide in 2010.

Under the new arrangement, the "bet" companies will do their own hiring, write their own contracts and plan their own marketing campaigns, with an eye toward moving more quickly, the people familiar with the matter said. Executives at Google's core businesses will focus on things like search and advertising and won't be distracted by having to assess and approve the plans of Alphabet projects.

Executives got an unexpected glimpse of the new order on Aug. 11, one day after Mr. Page announced the reorganization. As they convened to discuss one of the young bet businesses, Sundar Pichai, who will be CEO of core Google, wasn't there. The others waited for a time, but then realized Mr. Pichai didn't need to be there. The meeting went ahead without him, giving the incoming Google CEO time for other priorities.

"It gets a little faster, more efficient and a little more independent," said Andy Conrad, CEO of Google Life Sciences, one of the bet companies. "I act as a CEO of an independent company instead of a senior executive within a large company."

That might seem like splitting linguistic hairs, but former Google executives say new projects historically have struggled to get resources, which flow to larger divisions that generate more revenue. Business units within Google compete for talent, these people say, both in number of employees, and sometimes, for specific people.

Dr. Conrad said he feels freer to make decisions without considering the effect on other Google businesses. "Sundar will act in the best interests of Google Inc. I will act in the best interests of Google Life Sciences," he added.

Many entrepreneurs believe "it's easier to do their business outside Google rather than inside," said Max Ventilla, who left Google in 2013 to found an education startup. "There's a lot of red tape for head count and money to get through at Google."

Alphabet grew out of Mr. Page's concern that rising complexity was limiting Google's ability to expand into potentially big sectors including transportation, health care and communications, said people familiar with the reorganization.

In a 2012 conference call with analysts, Mr. Page said Google aspires to spend 70% of its time, money and other resources on core businesses like search, 20% on related new businesses and 10% on projects in new areas. But, he added, "We've really struggled to even have 10% on the speculative things."

Alphabet will help Mr. Page meet this 10% goal, according to people familiar with the plan, though the increase will likely be gradual. Longer-term, this will result in more and bigger "moonshot" investments, some of these people added.

That suggests that investors, who cheered the Alphabet reorganization in hopes it would reduce Google's spending and boost profits, may be disappointed. In a recent note to investors, Bank of America Merrill Lynch analyst Justin Post said there is a risk that spending "is about to accelerate under the new structure."

Nest has expanded quickly since joining Google, to more than 1,000 employees, from about 300. It acquired video-monitoring and home-security startup Dropcam for $555 million and developed a home-networking standard called Weave.

Nest co-founders sought independence because they feared getting bogged down in Google's bureaucracy. In addition to its own recruiters and computer systems, Nest also kept its own legal and marketing departments. Its employees retained Nest email addresses. Nest is headquartered in Palo Alto, Calif., more than four miles away from Google's Mountain View campus. The division even had its bikes painted with Nest's light blue corporate color, in contrast to Google's logo-echoing multicolored bikes.

"We've always been run very independently. Alphabet just formalizes that. It's a great way to scale a company." said Mr. Rogers.

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(END) Dow Jones Newswires

October 01, 2015 16:06 ET (20:06 GMT)

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