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.┬áThat 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!

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*Image source: Flickr (labelled for reuse)

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[Book Review] Dogfight: How Apple and Google Went to War and Started a Revolution

The long drawn Apple vs Google argument is totally fleshed out in this book. Though i had read the Jobs biography by Walter Isaacson & I’m feeling lucky by Douglas Edwards, this read had more comparative facts to offer. It starts with Apple to point out that through iTunes, Apple controls almost 25% of all music purchased. They also have a sizable share in the $18 billion video market. Fact is that Apple spent nearly $150 mn in building the first iPhone. The initial parts of the book talk about how the employees were burnt out working 60-80 hour weeks continuously for two years & kept resigning only to join back in a day. It was such a high secret project even within Apple’s headquarters that there were secret walls built overnight to keep the entire thing a secret from its own employees. The first phone that Jobs unveiled was actually a prototype & the team had no clue how they were going to keep up with shipment orders in 2 months!

Google had a different approach in contrast. I think this was the best way they could keep services free. This is because Google would release a product when it was 80% finished. Like any Google service or product it would be free with a constant feedback loop from the users. That’s how they gained insight in to the later 20% of the product to build in the finishing touches. It’s also critical to know that since the products were free, user expectations were not high & therefore you wouldn’t see an outrage on the scale of Apple Maps or Antenna issues the way Apple had to face.

Its remarkable to see the way employees from both companies kept playing musical chairs with companies in the Silicon Valley at that time. Andy Rubin, the guy who worked on Android was an ex-Microsoft employee. Even before Google bought Motorola, Apple had a partnership with Motorola for iPods back in 2004. Some prominent Apple employees who quit to start their own companies eventually made big to only sell-off their company to Google. A good example of this is Nest. Fights between the corporations such as Yahoo! & Google for Adwords have been covered well, in addition to the big Apple vs Samsung trial and the Microsoft anti-trust campaign against Google. A good part of the book also covers the role Eric Schmidt had to play since he was at Google & the board of Apple at the same time (he was not a part of most iPhone meetings).

The last part of the book has a futuristic take on who is going to win the platform war. An interesting point to note is that Google, Amazon, Microsoft, Facebook & Netflix are sitting on a cash pile of $300 bn which is enough to buy all the media houses & broadcast networks. With changing media consumption patters and device preferences, this battle is just getting heated up for now. As for me, i will say this a great and insightful read. Ditch the articles you’ve been reading & deep dive in to this book. For all you know, it will give you more facts & perspective to fuel your arguments!

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