Google's new parent company Alphabet just passed its first big test

Google's parent company Alphabet just had its first big executive shake-up, and it underscores one of the important tenets of its new operating structure: Alphabet is a bunch of independent companies with central oversight. When any of the companies hits trouble, Alphabet will decide whether a CEO change is necessary.

In this case, Tony Fadell, the CEO of Nest, the smart-home company Google bought for $3.2 billion in 2014, is out, replaced by former Motorola executive Marwan Fawaz.

The Alphabet executive team, not Fadell, led the hiring process for the new CEO, according to a person with knowledge of the process, reflecting the parent company's main role: wrangling its subsidiaries and "characters."

Over the past year, Nest has faced product outages and delays, management complaints, and missed sales goals, according to various reports in The Information, Business Insider, and Recode.

Fadell said in a blog post that his plan to leave had been in the works since late last year, before these critical reports surfaced, and a Nest representative said that Fadell's decision to step down was his own choice.

'Strong leaders and independence'

When Google became Alphabet last August, CEO Larry Page said that under the new structure his exec team would handle capital allocation and revenue goals for its individual businesses, which would prosper through "strong leaders and independence."

As executive chairman Eric Schmidt recently put it, if those CEOs "don't do well, they'll suffer the consequences."

Right now, 99% of Alphabet's revenue still comes from Google and its "Other Bets" lost $802 million last quarter, so keeping a tight grip on their operations is important. Page says part of his new role at Alphabet is being a talent scout, searching for the right "characters" as subsidiary CEOs are called internally.

Although Nest has grown its revenue 50% year-over-year, according to a statement from Page following Fadell's resignation, the leadership change is greeted warmly from an external perspective, at least.

"Nest has been kind of sideways for a while, on the product and partner front," Forrester analyst Frank Gillett tells Business Insider. "I'm not surprised there's a CEO change."

Patrick Moorhead, analyst at Moor Insights, says he hopes the shift will usher in new product categories.

"It has been years without a new category product or even a radical improvement on the current products," he says. "I'd like to see Nest go after home security, lighting, whole-home energy management, garage door openers and sprinkler systems."

Fadell will remain involved in Alphabet as an adviser to Page.