Death by acquisition: Google's string of failed acquisitions
Bad capital allocation or corporate strategy?
For the past two decades, Google and its parent company Alphabet have spent tens of billions of dollars on purchasing 200+ new products and ideas - be it through out-right acquisitions to get access to new products or acqui-hires to bring new talents onboard. These moves have always been geared towards pushing Google into entirely new areas, from genomics and healthcare to autonomous transport so as to continue as the vanguard in the technology industry and reduce its dependence on ad revenues. But is it good for the American economy or even the world? That’s the question the US Federal Trade Commission is interested in.
Critics say that larger companies use these deals to buy their potential competitors before their businesses have a chance to gain momentum, in some cases to simply close them down. At the very least, the presence of Big Tech prevents new entrants and dries up venture capital for new companies trying to develop the next great inventions and bring them to market. Google is so dominant that it can distort the market - easily crush the competition with predatory tactics, or simply buy up any potential threats before they get big enough to become a full-fledged challenger - often referred to as the “Kill Zone”.
A case in point for Google’s predatory practices is Patrick Spence, who created Sonos, a company which pioneered smart speakers. Initially Google Assistant and Alexa voice controls were allowed to be used in its products. However, due to Google’s aggressive discounting to sell its range of Google Homes, Spence had to launch a patent infringement lawsuit against Google in an attempt to protect Sonos. He alleged that Google was using its dominant position to squeeze out smaller players, some of which were former partners. Another example is Alphabet investing in Thumbtack, a marketplace for skilled workers, but then rolling out a competing service, Google Home Services later.
The “Kill Zone” strategy is less obvious since smaller acquisitions may not be widely reported and the growth path of the acquired companies may not always be predictable enough to identify them as potential future competitors. But it does exist. Economist Ian Hathaway examined investment data in internet software, corresponding to the industry dominated by Google and found that, since 2012, initial venture-capital financings in startups have declined in industries directly exposed to Google’s core activities by nearly 25% each year, a much steeper drop as compared to investments in rest of IT at negative 6%. A paper published in HBR found that when the threat of Google’s entry is higher, fewer app makers will be interested in offering a product for that particular niche.
Let’s look at the chilling effects due to some of Google’s acquisitions. Google’s stranglehold on online advertising can be linked back to the acquisition of DoubleClick and AdMob. Both made technology to serve and target graphical ads on Web pages, display ads by DoubleClick while AdMob served ads within mobile software applications. Google acquired DoubleClick in 2007 for $3.1 billion and Admob in 2009 for $750 million. Interestingly, both these deals were reviewed and green-lighted by FTC. Could they have been competing with Google, Facebook (and increasingly, Amazon) in the digital advertising space today?
Founded in 1999, Postini provided email security, instant messaging security, and email archiving services that filtered e-mail spam and malware (before it was delivered to a client's mail server). By 2005 Postini had processed over 2.5 billion email messages weekly and provided anti-spam services to over 4,200 companies. Google took notice and acquired it in 2007 for $625 million and killed it in 2012. Most of its features were integrated in Google Apps.
Picasa was a popular image organizer and image viewer for organizing, editing and sharing digital photos. Started in 2002, Google acquired it in 2004 and following allegations of stagnation in the software due to artificial resource constraints and users moving away, it was shut down in 2016. All existing users were migrated to an unknown site called Google Photos. Started in 2005, Slide was a photo sharing software for social networking services, which later became the largest developer of third-party applications for Facebook. It was acquired in 2010 by Google and killed off in 2012. Picnik suffered a similar fate - acquired in 2010 and shuttered in 2012. Had they not been acquired, could Picasa, Picnik and Slide have given Google Images a run for its money? Perhaps.
In 2010, Google acquired Aardvark, a 2007 founded mobile based social search solution that allowed users to ask questions and find information from people in their network through instant messaging and email. Aardvark arrived with a stellar reputation in the tech community and a skyrocketing user base. Google shut it down In September 2011, citing lack of product market fit.
Keyhole (2004), ZipDash (2004), ImageAmerica (2007), Skybox Imaging (2014) and Urban Engines (2016) were all acquired and merged into Google Maps. In 2011, Google purchased Clever Sense, a maker of mobile apps for personalized recommendations for nearby restaurants, bars, and other venues and closed down its app, Alfred, in 2012 after deploying its offerings on Maps. And after acquiring Waze in 2013, Google has been slowly integrating Waze features into Google Maps, even copying its main differentiator, real-time reports from the community. With no USP left, Google just has to wait for its over 100 million active monthly users to migrate to Google Maps.
“Embrace, extend and extinguish”, anyone?
Another way Google staves off competition is through acqui-hires, offering the golden handcuff - unbeatable compensation packages with strong job security and plenty of perks and benefits, to tech talents. An analysis of startup founders’ LinkedIn profiles by Times magazine found that about two-thirds of the startup founders that accepted jobs at Google between 2006 and 2014 are still with the company. In 2012, Google acqui-hired Rose and members of Milk’s product development team, reportedly to work on projects related to Google+. Acquisition of Bump in 2014, a mobile application that allowed two smartphones to send files between devices wirelessly, was an outright acqui-hire for its talent, not a technology-acquisition deal. Gecko Design, Rangespan, Jetpac, Angstro, SocialDeck, Katango, and Meebo were also classic acqui-hires. The most well known example might be Google’s acquisition of DeepMind in 2014, where it obtained an artificial intelligence team of 50 odd people considered to include the leading thinkers in the field of deep learning - now an integral part of Google Now and Google X initiatives.
Start-up founders do have a more nuanced view of these acquisitions. There may be good reasons for selling to a larger company, from a “fire sale” of businesses that are floundering to finding ways to accelerate their growth. Certain startups are specifically designed with such an exit in mind - by building capabilities that a larger company will probably need in the future. Moreover, Google also creates opportunities for entrepreneurs to create complementary products or enablers for niche markets, too small for such a larger player.
The answer to fostering innovation, according to global consensus, is stricter implementation of anti-trust regulations. But are regulators in any position to make accurate judgments about what new markets are being cordoned off through these acquisitions, and which small acquisitions will provide the key to unlocking them? Can they defeat Google, which collects signals about how internet users are spending time and money through Chrome, Gmail, Android, Play Store, Cloud service and more to identify emerging rivals faster than ever before?
About the author: The post is written by Abhirup Roy with relevant edits from our editorial team. Abhirup is a graduate from IIM Ahmedabad and works with Zolo Stays.