Wednesday, May 5, 2010

Hitting the tropopause

A mature cumulonimbus reaches the tropopause and, unable to rise higher, spreads into the characteristic anvil.Some of us old-timers are feeling a bit uneasy. My friend Seth is having flashbacks and reliving Q1 2000. I long ago overcame my own PTSD, embracing my dot com bubble grief after being repeatedly compelled to recall the events in excruciating detail by various lawyers and accountants (ah, the joy of working for a big company.) But I have my own reasons for unease, perhaps no less from the gut than Seth's, but disguised as usual in analytical trappings.

Years ago I was having drinks with a Wall Street friend when the bar TV announced that the Fed had lowered interest rates. The talking heads excitedly averred that this was a good thing. My friend scoffed: "They don't lower rates to make things better, they lower them because they think things are going to get worse. What does the Fed know that this buffoon doesn't?"

Every action is a reaction, a compensation for something else. Google and Apple are acquiring companies left and right. The linked article attributes this to competition between them, but what does this mean? Why are they competing with each other in the first place? No one (aside from the free-thinking Henry Blodget) seems to be correctly attributing this.

When companies anticipate growth in their core business flattening, they start to move outside of their competencies. When there are huge opportunities, companies go deep, become expert at what they do, and need to partner with others to provide complete solutions to customers. When they start to see opportunity becoming limited, they go broad and try to lock up adjacent markets*.

The general path of a new industry is (1) a profusion of new companies, each commercializing some aspect of a quickly-growing technological domain, and then (2) the consolidation of these technologies under a few roofs. This consolidation is not necessarily acquisition; technologies do not always need to be acquired, sometimes they are just replicated. The signal aspect of this consolidation is not an acquisition binge, but a move from cooperation to closed.

Thus Google shows its insecurity. As does Apple. And Twitter and Facebook.

Blodget, linked above, explains how Google has started to exhaust its opportunity in search. It makes sense for them to move into other markets (display, mobile, social, office apps) to compensate. This is an easy case to make**.

Apple, though, is the darling of Wall Street. Everything they do has been gold. They conquered music and mobile in short order. Now they're trying to move into TV/print with the iPad and advertising with the iAd. There's a case to be made that, with the knowledge gained with iTunes and the associated music sales, TV/print is within Apple's ambit. But advertising is a stretch. Failure here is not only a possibility, but likely***. Apple doesn't know advertising****.

Why would Apple take this gamble? Because they are scrambling for avenues of growth. That they don't see future growth in their core businesses is what troubles me, contra Seth. And that they think there may be growth to be found in someone else's business is not really all that comforting. Google thought it could get growth from Wave or Buzz. You don't know anything important about businesses you're not in.

That this panicky scramble for growth should hit Google and Apple is natural, given their size and their domination of the the markets in their respective primary growth engines. But Twitter is doing the same thing. So, it seems, is Facebook. Their actions say that they think the time for growth through innovation is past, the time for controlling as much of their market's profitable opportunities has come.

So, this is my unease. Have we reached that point already in the growth cycle? I don't think we need to wait for this decade's AOL to buy this decade's Time/Warner to ask "what gives?", if you were around ten years ago, you're probably asking it already.

* Allyn Young, in his 1928 speech "Increasing Returns and Economic Progress", said

Much has been said about industrial integration as a concomitant or a natural result of an increasing industrial output... But the opposed process, industrial differentiation, has been and remains the type of change characteristically associated with the growth of production.
Or, as David Warsh interprets Young in his Knowledge and the Wealth of Nations:
Such integration seemed to be a function of maturity. A young and growing industry dis-integrates; that is, artisans leave established firms and go into business for themselves, supplying several competing firms with components. There are spin-offs, breakaways, start-ups.
I think this is right even though it is, qua Young, a bit of a non-sequitur*****.

** Although, IMHO, they are moving too quickly to limit their display platform, shutting out
before critical mass is reached companies that would cooperate to build it to critical mass.

*** Just as it was in music and mobile, of course. Hindsight being what it is, these things may now seem inevitable, but they certainly weren't. Just because something pays out doesn't mean it wasn't a gamble.

**** The New York Times quotes Steve Jobs as saying, re their complete lack of knowledge of the agency side of advertising: "TBWA [has] been instrumental in helping [us] navigate an unfamiliar business." To anyone in the ad business, this is an extremely suspect statement. The TBWA folk are some of the very best in the world at making ads, but they are not advertising business strategists. There are a lot of people who could give extremely good advice on entering the ad business, but the guys who live and breathe making the ads aren't on the list. It's a completely different conceptual level.

To be expected because, since Warsh doesn't write footnotes, we have reason to doubt his seriousness. Serious people write footnotes. Like this one.

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