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Out of Focus

  |  May 24, 2004   |  Comments

Too many companies are determined to grow horizontally. Why can't they be happy with focused, profitable businesses?

The other day, a venture capitalist called. He was considering investing in an advertising technology company I know of and wanted to know about its current business and plans for growth.

The company in question is doing well. Its tools are solid, and it's starting to win clients from competitors. But I told the caller something he didn't want to hear -- something no investor or executive wants to hear.

I told him this company should try to stay small. I told him by focusing on its core product, it could become great at that one business. It could carve a small but profitable niche for itself in a difficult environment. I said pushing into new businesses would probably lead to mediocre products and endanger the company's profitability.

Too many companies are determined to grow horizontally, to expand into new businesses and become everything to everybody. It's a strategy perpetuated by the success of market leaders: the leading portals offer everything from Web hosting to PC games. The leading ad servers offer everything from site analytics to catalog mailing.

These days, map sites want to be city guides. City guides want to be shopping sites. Social networks want to be dating sites, and dating sites want to be social networks. Everyone wants to be a search engine, except for the search engines, which want to be portals or ad networks.

Why can't companies be happy with focused, profitable businesses? Why can't they see success in offering an excellent product to a loyal customer base at a solid profit? Why don't they realize the value of staying small and serving clients who don't want to use a behemoth company for their maps, restaurant reviews, or Web hosting?

Lately, I've seen expansion lust creep into some of my favorite small companies. For years, even when I worked for a competitor, I admired Atlas DMT. It always focused on the business of agency-side ad serving, nothing else. When clients expressed a need outside of ad serving, Atlas would partner with best-of-breed solutions. Clients raved about Atlas' technology and level of service.

Over the last six months, Atlas changed course. It's bought a search marketing firm and a site analytics company. Soon it'll announce the acquisition of a rich media technology as well.

Atlas still offers good products, but it's now forced to focus inward rather than outward. It has to pay attention to integration issues as well as client issues. I hope it can pull this off, but I'm not convinced it can. Growth has already cost Atlas its image as a scrappy competitor, something clients found attractive. And I haven't heard anyone rave about its service in quite a while.

Even some bigger companies, such as Google, appear destined to the same fate. After years of building its reputation as a clean, simple search engine with zero distractions, Google is experimenting with its formula. I doubt the company will ever clutter its site, but it's starting to clutter its brand.

What once stood for Web search now also means news, sports, finance, Web-based email, blog hosting, Usenet groups, yellow pages, a shopping search engine, and a social network. Consumers came to Google because it was just a search engine, nothing more. Google has turned itself into a portal.

Of course, Google will never admit to being a portal. That would open it to industry sniping and maybe scare off a few investors who remember what happened when Excite, Lycos, and AltaVista tried to become portals. Google has ventured far beyond its core business and in the process has started to lose what consumers love most about the site: simplicity and focus.

Search is such a powerful business that Google will do just fine, no matter how far it strays. But why take focus off a large, high-margin business and put it on small, low-margin businesses? Why gamble leadership in search of tiny revenues from blog hosting or stock quotes? It seems both an unwise business strategy and an inelegant product strategy.

Maybe I'm too much of a business aesthete. Maybe I'm shouting into the wind. But I see beauty in doing one thing well. I wish more companies, and more investors, agreed.

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Nate Elliott Nate Elliott covers online advertising as an associate analyst for Jupiter Research. He is regularly cited in the media as an expert on rich media, search marketing, and ad serving technology. Prior to joining Jupiter, Nate was DoubleClick's Senior Manager for Rich Media and manager of the DoubleClick Studio design team, roles in which he worked with clients such as AT&T, Kraft, General Motors and IBM. Nate founded and co-chaired the IAB Rich Media Task Force, the group that set the first industry standards for rich media advertising. He has also worked for Macromedia, driving the Flash Multi-Tracking Kit as de facto industry standards for tracking clickthroughs and other interactions within Flash ads. He isregularly cited in the New York Times, the Wall Street Journal and elsewhereas an industry expert.

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