Insights
By: Gerrit Smit
How Alphabet outsmarted Meta
Entrepreneurship underpinned by good governance is Alphabet’s great strength – Gerrit Smit
The typical tech entrepreneur is a free thinker, a natural innovator, unconstrained. Particularly when it comes to running their own business. The downside of a company culture established on this basis, however, is that it doesn’t always prioritise the sort of corporate governance and business disciplines necessary to achieve best-in-class status.
As part of the Stonehage Fleming Global Best Ideas Equity investment philosophy, we look for four fundamental pillars of quality. One of those is high quality management. This can be understood as a combination of strong entrepreneurship, good governance and business discipline. Entrepreneurship alone, in other words, is not enough. Without the other elements that characterise quality management, a technology company – however big – can fall foul of the sorts of risks that accompany any business.
Take Facebook and Google, now rebranded as Meta and with a new parent company – Alphabet – respectively. On the face of it, they are two companies with a lot in common. Founded within six years of each other – Google in 1998 and Facebook in 2004 – they are equally part of the original line-up of tech heavyweights alongside Microsoft and Apple. They are, however, very different from one another.
Meta is still run by original founder, Mark Zuckerberg. At Alphabet, while Sergey Brin and Larry Page remain co-founders, controlling shareholders, board members, and employees, they both stepped back from executive roles in the business in 2019. Even in the early days, they were savvy enough to appoint a strong chairman in Eric Schmidt, recognising the huge value a chairman brings in steering and governing a business.
The effects of these fundamentally different approaches are far-reaching. In 2019, Alphabet appointed a very strong external CFO in Ruth Porat, previously CFO and Executive Vice President of Morgan Stanley, with a long career in corporate finance. With her, she brought material financial experience and discipline to a business where the founding entrepreneurs had taken the conscious decision to step away from the purse strings in order to leave their creativity and ambition unchecked.
Meta has not prioritised financial management and disciplines in the same way. Indeed, it is difficult to call to mind the name Facebook’s CFO, David Wehner, who moved internally to take the role in 2014. Since then, investors have not heard a great deal from him. It appears to be a classic example of Mark Zuckerberg’s dominant style and apparent reluctance to grant others any real authority to own the major corporate responsibilities within Meta. It is noticeable that two other prominent appointments – Cheryl Sandberg and Nick Clegg – have also gone rather quiet.
This dominance is a phenomenon seen elsewhere at Meta. Alphabet has successfully diversified its company into different types of business ‘drivers’ and spread real responsibility around the heads of those various businesses. Meta, on the other hand, is more monocultural in this regard, over-relying on social media as a source of business.
Starting life as the Google search engine, Alphabet went on to develop Android, Google Chrome and Google Maps. They bought YouTube and Deep Mind (AI) and started a cloud business, all the while continuing to work on other diverse entrepreneurial ventures. They even explored smart glasses, autonomous driving and satellite technologies via its Loon subsidiary.
Meta, in contrast, has stuck pretty relentlessly to the social media sector. Furthermore, when they acquired Instagram and WhatsApp, the owners of those businesses were made to ‘buy into’ the then Facebook model. It appeared those people did so, believing that they would retain overall management responsibility. That didn’t happen. In a move directly opposed to what Alphabet has done in devolving real power to their different business units, these key executives opted to leave Facebook. The new acquisitions were then fully assimilated into the Facebook model, thus creating a bigger one-sector company, powered by the same social media driver and subject to the same risks.
Elsewhere, Zuckerberg’s approach has not fully succeeded to put in place other fundamental business controls. As the business grew organically, governance failed to keep pace with the growth of social media. This has landed them in trouble with regulators on many occasions. Only last month, Meta was fined €17m for breaching EU data privacy laws. The Irish Data Protection Commission said their platforms "failed to have in place appropriate technical and organisational measures" with regard to 12 data protection infringements. These sorts of occurrences affect confidence in the governance of a business both internally and externally.
Today, by renaming the company to Meta, Mr Zuckerberg appears to be shifting some of the business’ eggs to a different basket to compensate for the maturing social media at its core. It is still unclear how the Metaverse will play out, as there is no real foundation yet for understanding how people will actually use it or how profitable it may be. Microsoft have been working in the space for a long time and may well now apply it profitably in Activision Blizzard should their takeover bid succeed.
For Meta, their latest move may be a case of ‘too much’ rather than ‘too little, too late’. Not only have they thrown serious money at the new venture, but it also fuels the perception that social media has become over-competitive, the market having reached maturity. With Meta’s weaker foundation to fall back on, Alphabet’s management style, it seems, is doing better for its shareholders.
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