In the 1990s, Microsoft was famous for many things. It was the largest technology company ever. People liked to refer to it as the "evil empire," a term they borrowed from Ronald Reagan, who (probably) borrowed it from George Lucas. This was partially because its Windows software seemed to run on every single computer everywhere, but also because the company had an apparent practice of buying up any company that seemed to either threaten its dominance or could be reasonably melded into its already expansive list of computer services.
During the period between 1991 and 2000, in fact, Microsoft bought 53 different companies, including Fox Software, WebTV, Hotmail, LinkExchange, FASA Interactive, CompareNet, SendIt, and Visio. Lots of great startups offering unique functionality were gobbled up by The Beast from Redmond. Some of the functionality has remained (like Visio) and others have been relegated to the Recycle Bin of History (like, well...Hotmail in a year or two, I suppose).
It was hard to argue with this corporate strategy, ruthless though it may be. As competitors rose from the great swirling mass of the marketplace, Microsoft could simply pick off the ones that it felt held the most promise (or, I suppose, seemed the biggest threat). In fact, this is an interesting approach to innovation for a deep-pocketed company to take. Some companies - 3M for example - invest deeply in R&D (research and development) on their own. They have teams of scientists actively seeking to invent new things. This is great in that they are consistently coming up with promising new products. But it also means that they are consistently bearing the burden of flops and duds. And we know that there will also be significantly more flops than successes.
Not so for the deep-pocketed company. They can allow the overall marketplace to absorb the liability of the flops and simply skim off the top. Naturally, a company needs a lot of innovation to become deep-pocketed in the first place, but once there they can sit back and enjoy the fruits of the marketplace.
Or at least, they used to.
Instagram and Facebook and Other Things That Go Fast
When Microsoft was gobbling up companies, the pace of change and innovation was relatively slow. A company like Fox Software had a great database, but it needed to get it in a box and in a catalog and up on a store shelf in order for it to be successful. New products came out at a positively glacial pace. Today, a new idea may pop into the world's awareness in a fraction of that time, thanks both to amazing technologies that enable rapid development as well as evolved distribution points like the iTunes Store or the Android Market.
That means that even if you perceive a particular threat out there, buying it up may not necessarily solve your problem, because, simply, there may be another threat waiting in the wings. In fact, you can probably be sure that there is. There has always been a never-ending supply of great ideas that exist in the world and the fact of the matter is you can't buy them all.
We look now at the big news of late: Facebook bought Instagram for a billion bucks. Instagram was created in 2010 but grew rapidly becoming one of the most popular apps for the iPhone. Very recently it released an Android version, helping the app reach over 30 million users.
The common logic behind the purchase of Instagram by Facebook is that a deep-pocketed company decided to remove a potential threat from the marketplace. Facebook not only no longer needs to worry about Instagram growing, but it no longer needs to worry about Google or another rival snapping it up.
But so what? The Microsoft strategy of vacuuming up any potential threats is no longer viable, simply because there is no shortage of other apps that are waiting in the wings to take its place. Many people are already looking to Pinterest as the next likely candidate to get purchased. The blogging-message board site already has over 10 million unique monthly visitors and some brands have been heard saying that they see more traffic coming in from Pinterest than they see from Twitter. The top social app listing on iTunes is almost totally dominated by Pinterest apps.
As amazing as it may sound, a young company (Facebook) bought an even younger company (Instagram) using the corporate strategy of one of the old established companies in the space (Microsoft). But are they all operating as though the pace of change is the same that it was back in the '90s?
Facebook needs to remember that it also came out of nowhere, fast. That speed is what makes this world so dynamic. Yes, we have Instagram. But we also have Path and a bunch more. There is no way that Facebook or any other company is going to get rich enough (or have patient-enough investors) that they can keep spending that kind of money for everyone who pops up.
This simple fact is why this marketplace is going to be so exciting for so long: the big players will have no real ability to quash or integrate all their potential rivals, which means that a few of these little companies are going to slip on through and grow big on their own. Or that some of the second-tier players like Yahoo or AOL will have a shot at buying something interesting.
Or, just maybe, the big players are going to have to keep trying for innovation within their own four walls.
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Gary Stein is SVP, strategy and planning in iCrossing's San Francisco office. He has been working in marketing for more than a decade. Gary lives in San Francisco with his family. Follow him on Twitter: @garyst3in. The opinions expressed in Gary's columns are his alone.
March 19, 2014