Too Much Cash Bad for Internet and Enterprise Innovation?
Posted by Bob Warfield on December 22, 2008
Fascinating post by Larry Dignan where he looks at Bernstein analyst Jeffrey Lindsay’s musings. Lindsay likens Microsoft, Google, and Yahoo to Ford, GM, and Chrysler. His premise is that all of their cash is buying up successful Internet plays faster than VC’s are funding new ones, and that this is similar to what happened in the early days of the automobile industry.
Lindsay goes on to say that he thinks having too much cash is causing these big players to do the wrong thing. Microsoft loses $1.5B a year just to keep their hand in the Internet game, while all three are playing a cut throat price war on advertising. Meanwhile he thinks Google wastes too much money on inefficient internal product development. I remember a lot of complaining back in the first dot com bubble by people like Andy Grove about how strange things get when the cost of capital falls to nearly zero.
Adding to the general blight on innovation is Lindsay’s contention that the big players don’t do anything once they’ve acquired the innovative companies and their management teams. Not only do they not do anything, but they simply copy each other’s strategies. Lindsay says they’re like yesterday’s unsuccessful media conglomerates, and blames this tendency for AOL and Yahoo’s downfalls.
I tend to agree with what’s been said here. I’m not completely sure it’s bad for innovation though. At some point, companies quit innovating as much and just focus on execution. Provided they are acquired after that point, it may actually benefit innovation. After all, the creative people who built the company may then go on to do something else innovative. But it does tend to mean that the particular product, strategy, or niche plateaus and goes nowhere.
The other thing that struck me about the article is that it applies to Enterprise software just as much as Internet software. There are big companies like Oracle waiting for their next acquisition fish to grow big enough to be worth hooking. Meanwhile, there are relatively few new plays being funded by VC’s. The SaaS crowd is very promising, but the dot com bubbles (there’ve been two now, haven’t there?) have starved the formation of new Enterprise plays. In fact, the SaaS group is not very far along taking over from the perpetual license companies precisely because there are not yet great SaaS companies in every niche.
One of the things I keep waiting for is for the tech industry to show signs of maturity in understanding how to manage acquisitions. There are some great models out there like General Electric, Johnson and Johnson, or 3M. Most Tech Industry acquisition doesn’t have that great “collection of independent companies under one big brand” approach. Our methods are more about milking companies that have peaked. This is certainly a lucrative business (Oracle doesn’t do badly at all!), but I’m not sure it is as successful as what we see outside Tech. The closest thing we have to it so far seems to be Cisco in terms of its ability to keep acquired franchises relatively vital and growing. Does anyone know of other great examples in the Tech Industry?