Why are tech firms buying out smaller start-ups?

Consolidation in the technology space. It’s happening. Much has been said, heard and analysed when it comes to the recent Whatsapp acquisition by Facebook. Valuations were being tossed around and here’s an interesting graphic on whether it was worth $19 billion to start with. That being said, i’m looking at bigger forces at play in the technology space. As textbook economics will tell you, consolidation is a phase that kicks in mature markets when the big players begin to swallow the smaller and more active ones up.

Acquisitions have been happening for quite sometime now. But some of the interesting one’s in recent times have been Google buying Motorola and then selling it off to Lenovo. Microsoft buying out Nokia and they did give in to market pressures by releasing an Android phone just yesterday at the Mobile World Congress’14. Microsoft also bought Skype nearly a year back and killed its own messenger. Software firms have been increasingly snapping up hardware companies. It’s clearly about building capabilities to have more integrated software and hardware. Apple has been doing this for decades with a very closely knit user interface that has been winning customers over for years. Pretty much like them, the other companies are also trying to tightly integrate services to have the customers locked in for longer period of time. Look at Google, that is trying to foray in to nearly every possible nook of our life as it builds its inventory for the internet of things. You’re using maps, gmail, search and docs for starters. As any marketeer will tell you, its always cheaper to retain customers than to go out and acquire new ones.

Here’s a drill-down of what i think about the entire consolidation bit:

1. Customer stickiness: Companies want customers to buy a product and integrate it so tightly that they are unable to breakout.

2. Eat the competition: As start-ups have more breathing room and flexibility for innovation, let them build great products as the big cats will swallow them up to eventually kill the competition if any.

3. M&A industry: Who else is laughing all the way to the bank? Consulting firms. In fact software acquisitions made up nearly half of the deal value in this space as per PwC.

4. Increasing usage: Big tech players are always looking for means to increase usage and as Metcalf’s law says, the value of any network lies in the number of connected users on it. Hence you see why software services have been aggressively merging or finding new ways of driving usage for their platforms.

5. Start-ups don’t always need an IPO: It’s increasingly difficult for a small company to go public and put itself under the scanner. Investors and analysts will slice and dice not only excel spreadsheets but also any single move that key people make. By cashing out and selling themselves to a larger firm, they can avoid all the pain. All of this when they might have not even achieved the vision they started out with.

6. Hide failures better: The chances of a start-up making it big are rather slim. In fact, the odds seem to be against them. Once they have generated enough buzz and got a fancy valuation. The small fish can then afford to dissolve in the system and chances are if they were going to fail, little would anyone get to know about it.

With all of this in place, we can only hope for better products and services. While some of these partnerships may have benefited the firms, what remains to be seen is how innovative they can really get. For now, the entire space has become a playground for many small firms to pitch their products and see how quickly they can go to market or gain more funding. At the end, the customer stands to benefit the most from this!

 

*Image source: Flickr (labelled for reuse)

Kejri-Wal: Another Brick in the Wall

“We don’t need no education”. The opening lines of this Pink Floyd song, instantly signal a need to overthrow oppression & signal individuality. Something i think Arvind Kejriwal has been trying a bit too hard off late. The point is if you interpret Another Brick In The Wall, you would see that Pink Floyd doesn’t mean to say that education is not needed. The lyric has don’t & no in the same line effectively nullifying the argument. They mean to say that education is needed & to oppress the system needs you to be a part of it. We’ve heard that before, to change the system be in it. Contribute to change rather than being the clogging hole.

Arvind Kejriwal is spearheading the Aam Aadmi Party that was formed out of the India Against Corruption Team. They started out on a good note, recruiting just about anyone. The idea was that this is a democratic party and anyone can help in running the state. Nearly 50,000 volunteer registration receipts were handed out as farmers, whizkids, corporates and activists jumped on the bandwagon. Populist measures? I think so. It’s one thing where traditional parties get singers or film stars to join a party when they have no knowledge of the constitution. Apart from knowing what’s wrong in their suburb, how much would the average indian know about the same constitution? I don’t think much. At least, i don’t have a clue.

On winning the Delhi polls, only chaos unfolded. There were raids, FIRs filed against prominent corporate houses and individuals. Cuts in water & electricity rates when the nation is running fiscal deficit. Not too good for our economic health. Here we are trying to cut out subsidies and Kejriwal ups the ant by subsidizing it further. Maybe, he was keen to earn brownie points really fast in to the game. But following that up with a Dharna to simply get the some policemen suspended? There is a process to be followed, that’s how governments all over the world are run Mr. Kejriwal. To his defense, he said that the constitution doesn’t state that a minister cannot protest. Fathom this, the country’s prime minister getting down to a dharna. Doesn’t it sound like Kejriwal’s interpretation is flawed? Presumably so.

Testing waters were always running rough. Outrage on twitter has become the rage with Kejriwal’s antics. The last straw was the passing of the Jan Lokpal bill. Tabled for discussions, the bill couldn’t be passed and this led to Kejriwal & some his parties representatives resigning to protest. In this world, there can’t be absolute black/white. I think they could have waited more & be a part of the brouhaha to get the bill passed. Quitting was a premature idea according to me. Now they are fired up for another rally, Jhaadu Chalao Yatra because apparently roaming around with broomsticks in 24 states by cleaning schools will help in cleaning corruption in high end places. Sounds completely illogical to me. I think this will only be an avenue to recruit more members for the party as Arvind Kejriwal sharpens his claws for the Lok Sabha elections. I do hope the AAP is able to deliver some promise as its got so many hopes pinned on it. Till then, i leave you with this funny video that has humorous take on all that Arvind Kejriwal has been up to.

What you should know about Bitcoins (Crypto Currency).

We’ve all heard about file sharing P2P software. But how would it be to share Money?

This is exactly the basic idea behind Bitcoin. Keeping in line with all sorts of internet activity, bitcoin works on a platform which ensures cryptic transactions. This has also been popularly referred to as crypto-currency.

Started off in January 2009, by an individual/group called as “Satoshi Nakamoto” (identity yet to be ascertained) this currency works across the world with no country / existing financial board or committee having any control over issuing it. The only way of tracking the movement of bitcoins across the world is through timestamps. Simply put, each time i intend to pay you 1 bitcoin; I would be digitally signing off on a hash of timestamps for the previous transactions and your address (IP). Leaving out the technicalities of how transactions are processed, here some finer points to ponder:

1. Valuation: Since there is no central issuing authority, there is little control over how much should a bitcoin be valued at. It started off with a group of individuals setting a value which has fluctuated majorly in the past 2 years. Back in Jan’13 1 bitcoin = $13, however post the Cyprus banking collapse its value has inflated to $137. As of now, the total value is 21 million bitcoins. According to experts this represents a bubble in the making.

2. Purchase Analysis: Being an open platform, all transactions are open to be viewed by all. This would help organisations to run all kinds of analysis to better understand buying patters, industry trends and major deals being cracked with payments being made in bitcoins.

3. Code Loopholes: Hackers are waiting to exploit systems such as these. While frauds, phishing and snooping impact even the most secure banking systems, this could only become more easier to crack. An episode did take place in August ’09 where a high number of bitcoins were generated and siphoned off to 2 accounts. This was however tracked and the additional bitcoins generated were wiped clean.

4. Taxation / Economy: In the real world, the government has tax slabs and means of defining how much of an individuals wealth would be taxable. However, in a virtual system such as this it will be tougher to devise a system on similar lines.

 

Those were a few of the pointers that sprung up when i was reading up on this alternative currency. Many economists have written it off as an experiment and there is mass contemplation over whether bitcoins can even be converted in to real money. But there are a set of enthusiasts who are willing to receive their salary in the form of this currency! It would be interesting to see how big bitcoins eventually become or if these would just end up to be a fad. My take on it? I’d hold off till i hear my neighbors talk about it!

Cut the Austerity! It’s Monetary Easing Season.

Well, yes its time to cut the austerity. Central Banks all over the world are envisaging means to break the shackles of low or stagnant demand and what better tool to use when the usual monetary policy measures fail? The answer lies in Quantitative Easing. This basically is a program wherein the Central Banks delve in asset purchases in order to inject liquidity in to the banking system hoping that it would lower borrowing costs and spur demand in the long run.

So the fever originated with Eurozone around 2 weeks back when the ECB announced that it would actually be good to start seeing some  money moving around the economy(‘s). Here began asset purchases that actually started off on a good note, seeing a drop in borrowing costs and indices rising across the world. Signalling, maybe? But a short run move like this is bound to impact in the long run. Cause no one can really point out when the inflationary phase begins to kick in. Which is a concern as the ECB didn’t really put an end date to this. Essentially to counter this they have created a deposit scheme wherein banks would be able some interest too. Although this looks like a foolproof plan, but heaven’s forbid if a default falls through we know one good economy which would not be so happy – Germany.

Now what started off in Eurozone, gave a slight nudge to the american counterparts to wake up and smell the coffee. In light of low demand and flattening consumer sentiment, the FED decided to roll in (much awaited) QE3. I believe this was being rattled for in the pipeline quite some time. Yes, there may have been a Chinese, “Eureka! Here comes the Sun” moment when this was announced (Although there is strife speculation China may opt for monetary easing too by lowering reserve ratios). So more liquidity in the american economy does sound good and it actually lead to rising indices again. However it doesn’t really seem to be hitting the housing market as of yet. With banks playing clever in keeping borrowing costs still high, to soak in any sudden surges in demand this ensures that there is no lowering of the housing prices as well. A vicious cycle, you see. Not for long though, as banks will soon begin to lower interest rates. So happy days would be here again, albeit in a little while. Again just like the Eurozone, the FED has not kept any end date to this program. Which means, this is pretty much in place until we see a good build up of the economic prospects. Say inflation and unemployment.I wonder if there would be any more policy upheavals. But this should fix some problems, in the short run.

Closer home, today Japan already reeling under a heavy national debt chose to go ahead with nearly double the asset purchases. Objective being the same, to infuse economic mobility in an otherwise deadbeat economy. Growing uncertainties in the economic environment ended up pressurizing the Yen which moved higher to 79/Dollar. This is bound to hurt the export driven economy. However losses should stabilize soon. 

Given the bleak setup with respect to global economic confidence its hard to say which economy (rather part of the world) would see a rebound soon. But these moves are surely going to help build back some of the demand and see some parameters correct themselves. However will these be sustainable changes? Only time would tell.