Alphabet Inc has a lot of parallels with how Berkshire Hathaway is structured and just like Warren Buffet, we now have to think of Larry and Sergey as investors, not entrepreneurs per se. Looking at them in this new light gives some ideas of why this was done.
1. Freedom of capital allotment: Larry and Sergey now act as money managers and have larger freedom to assign substantial capital to any business they choose. Under Google, they would be subject to shareholder questions like "Why invest in Calico (a life longevity company) when it has no demonstrable impact on ad revenues?" or "Is Project Loon (balloon based internet) really strategic to Google?" As shareholders of Alphabet, you are trusting their judgment as money managers and not as operators of any particular company.
2. Taxation benefits: Under the new structure, Alphabet Inc. does not engage in any business operation, which enables the holding company to reduce the responsibility of owning a business. Alphabet Inc has no manufacturing, no products and no services. This allows it to maximize the profits and minimize taxation liability because the dividends it gets from subsidiaries are not taxed (if ownership >80%).
3. Risk mitigation: New structure means that any individual company does not bear liabilities of other companies. This means Google Inc does not bear any liability for potential moonshot projects like Google X that might have substantial losses. Google Inc., becomes a predictable business with predicable growth/ revenues.
4. Google Inc escapes quarterly scrutiny: Alphabet might not choose to declare the P&L accounts for Google Inc., in depth. e.g Amazon did not explicitly mention the revenues and expenses of AWS as a business line until Q1 '15. We had to make assumptions/ predictions. Investors think that AWS can be highly valuable as a standalone business, which means that Amazon stock as a whole is undervalued. If this is true, that means as a company, Google has 1. More freedom for R&D/ risky projects 2. Not to worry about quarterly results or shareholder perception.
Edit: As new details emerge, here are the current "portfolio" companies of Alphabet and the people leading them
Unknown: Deepmind, led by Demis Hassabis
Looks like moonshots such as Project Loon and the self driving car are under GoogleX for now. Maybe, they will be spun out as separate companies once they are ready for commercial launch.
5 Size Google is getting pretty big in size. It is no longer as nimble a company as it was a few years ago as larger its size the more baggage it carries. There's only so much one can do to ensure the culture in the company stays as intended. New model of this rejig will hack away all the bits not required for the individual companies within the Alphabet portfolio making them suitable for the cutthroat competition against smaller startups.
6 Ecosystem . Alphabet would most likely shove its VC businesses into a separate entity which all of a sudden will find themselves become a very key player in the VC industry. More than any other company and startups, the VC industry should be the one most worried because of this announcement because this evening Google transformed itself (or will transform itself?) into a foundry of startups. 600 years ago foundries used to be for forging metals, and now these new types of foundries would be forging companies and startups.