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Innovation by acquisition

Innovation by moneyWhat do Flash, Android, Hotmail, Google Analytics and Powerpoint all have in common? Can you guess?

The answer is: None of them were created by the companies who now own them. They were acquisitions.

These products have continued to develop at their new homes, but the seed of innovation that sparked an actual, new product came from the outside. The key word here is innovation.

Sometimes you wonder how much big companies really innovate. A significant amount of today’s most popular and successful products originated with smaller companies which were later gobbled up by one of the big players (Google, Microsoft, Yahoo, IBM, Oracle, etc).

We’d like to call this phenomenon “innovation by acquisition.”

Examples of innovation by acquisition

Here below is a small sample of well-known, successful products that began their lives outside the very big companies who now own them:

  • Flash – was Macromedia’s product before Adobe bought Macromedia in 2005.
  • Dreamweaver – was Macromedia Dreamweaver.
  • Adsense – came out of technology from Applied Semantics, which Google bought in 2003. Adwords, Google’s other big money maker, is also based on an idea from outside Google, although that company (Idealab) didn’t want to sell it, so Google went ahead and created their own version regardless and settled the IP issues in court.
  • Google Analytics – was Urchin, until Google bought Urchin Software.
  • Blogger – was created by Pyra Labs, which Google bought in 2003.
  • Google Docs – the word processor in Google Docs came from Writely, an app created by Upstartle which Google bought in 2006. Google Spreadsheets, another part of Google Docs, originated from technology bought from a company called 2Web Technologies.
  • Android – Google’s Android OS began life at Android Inc., a company Google bought in 2005.
  • Hotmail – was bought by Microsoft in 1997.
  • Powerpoint – came out of Forethought, a company Microsoft bought in 1987 (its first acquisition ever).
  • Visio – was its own company before Microsoft bought it in 2000.

There are plenty of other prominent examples. How about Postini (bought by Google), YouTube (bought by Google), Feedburner (bought by Google), Flickr (bought by Yahoo), Delicious.com (bought by Yahoo), and we could just keep going.

We picked these examples because they are widely known products by big, well-known companies. However, look at any really big company within any industry and you are likely to find examples of innovation by acquisition.

That said, some companies are more aggressive than others when it comes to acquisitions. Google comes to mind here. Within the last two weeks, Google has bought Picnik, an online photo-editing application, and DocVerse, an online document collaboration service. Expand your lasso to include a full month, and you can add another two companies (Aardvark and reMail).

Actually, since its IPO in 2004, Google has been on such a spending spree that entrepreneurs often jokingly (or not) refer to “getting bought by Google” as an excellent exit strategy and business plan.

The challenge of in-house innovation

These big companies have resources aplenty. For example, Google has more than 7,000 people in research and development. Microsoft has even more. That’s a huge amount of brain power if channeled effectively. So why don’t we see innovation in proportion to those numbers? They should be innovation powerhouses.

One problem for big companies is that they are saddled with a lot of inertia and overhead. They have plenty of money, but they are simply not agile anymore. Smaller outfits can be flexible and quick, because they don’t have an existing corporate infrastructure to maintain. Ideas can flow unhindered.

This is for example what Google wants to simulate with its famous 20% time. Interestingly, they seem to have gained some success with it, because according to Google, 50% of their products come out of projects started this way. (For an interesting perspective, check out this article by Scott Berkun about Google’s 20% time.)

We’re sure that many other companies have similar, if perhaps not quite as drastic, ways of encouraging in-house innovation. But innovation also needs to be recognized, and if you have a huge corporate infrastructure and thousands of employees, things tend to get lost in the shuffle.

Another dilemma is that big companies with a lot of existing products often need to spend a significant amount of effort and resources on the continued development and maintenance of those products. This backlog of products is paying the bills, so they are important. This is a problem (or luxury) that startups don’t have; instead they can spend all their energy on that new, exciting product. They don’t need to maintain the status quo.

The upside of acquisitions

There are of course upsides to innovating by acquisition. If you can throw money at a problem to solve it quickly, or explore an opportunity, this can be very effective. And big companies usually have money in droves, just waiting to be invested.

  • If it’s a market you want to enter, by entering it via acquisition you have one less competitor to worry about (because you own it).
  • You get an immediate influx of expertise.
  • By starting with an existing product you get a head start on the application development or get access to well-developed technology.
  • In these days of patents and lawsuits, many companies also have another valuable asset: IP.
  • In many cases, by buying an existing product you get access to its customer base. This can sometimes be worth more than the product itself.

Final words

Acquisitions are in no way inherently bad or evil. It’s just a different way of accomplishing a goal. Still, you can’t help but be fascinated when you look at some of the more acquisition-happy companies and realize that a huge part of their product portfolio originates from outside the company.

On the other hand, they should get two thumbs up for recognizing the potential of the companies they bought.



10 comments
Sebastian
Sebastian

Great article. The examples are a perfect match for a presentation I am currently working on. Has anyone else have examples for tech acquisitions that - are not too visible - had been highly integrated in the running business (like MS-DOS, PowerPoint etc.) - and real success stories? Thank you in advance! Sebastian

Rachel
Rachel

The interesting thing is that Flash wasn't even Macromedia's baby, it was initally developed by Jonathan Gay, a student who then went on to work for Silicon Beach Software. It was originally Macromedia who was the gobbler rather than the inovator

Ygdrazil
Ygdrazil

And the apple desktop was bought from Xerox where the top brass said that nobody wanted to sit around in the office with mouse on their desks...

Pavan Soni
Pavan Soni

The questions still remains ~ do you acquire technology or talent. Often what happens is in an attempt to acquire an attractive technology, the people behind it are left behind. The creators treat it as an exit strategy, while for the acquirers it's an entry into something they wanted to be at. Ergo not all such acquisitions remain successful. As the force that has brought them so far is now missing. As for the new parent they may at times find it difficult to evolve to the desired climax (anyways who cares)! Take for instance eBay. Don't know what's happened to the skype acquisition. An emerging technology (way of life) didn't find any place in another growing company. So acquisition still has a long way to prove any causality with innovation.

heiko hebig
heiko hebig

MS-DOS was also acquired by Microsoft - way back in 1981.

John Dowdell
John Dowdell

For what it's worth, I've seen a more rapid pace of innovation with Flash since the Adobe acquisition five years ago... initiatives like the cross-industry Open Screen Project would be difficult to imagine under a smaller company like Macromedia. Agree with you that each style fosters different kinds of growth. jd/adobe

ross
ross

Nice article. That's why I admire Apple. Even with their $50 billion dollar war chest, they rarely acquire other companies. They grow their own products in-house. They concentrate on doing a limited number of things really well, with great support, instead of fracturing into 99 different markets and products, as, for example, Google is doing, and not supporting any of them very well. (I'm not saying Apple invented each and every one of their successes, just that they tend to observe others, and then study it a long time, and re-invent it much better.) I have never had Google answer a single one of my emails asking for help or support. Google Voice is a giant beta test with nobody at the controls, as is Nexus One, and many other of the myriad projects and experiments they are doing all at once. What with 99 products at once, no wonder they can't spare the time to respond to users' pleas for help. They should take a page from Apple: do search engines and do them really well and support them, and then jettison half of the falderal they are dragging along. With Apple if I call 1-800-SOS-APPLE I get a knowledgeable, friendly person within 3 mins who helps me, and if necessary overnights me a complementary replacement (or some equivalent kind of over-the-top service). Or I can just walk into an Apple Store. Consistently top-rated customer service. Microsoft is also struggling with the burden of all the many products and services they've tried to ingest and support. They are like a tree that badly needs a good pruning. Same for Adobe (for example acquiring Macromedia) -- they are both imploding under their own weight. In short,' Customer is King', and 'Keep It Simple, Stupid': Two time-tested keys to loyalty and success over the long haul.

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