Facebook (FB), Amazon.com (AMZN) and Alphabet (GOOGL)-owned Google are gobbling up companies with a Pac-Man-like ferocity, evoking comparisons to the conglomerates of 50 years ago — and Apple (AAPL) could join them. Should you worry?
Consider: Facebook snapped up shopping search engine TheFind this spring and virtual reality startups Pebbles Interfaces and Surreal Vision last year, building on the social networking leader’s 2014 purchase of Oculus VR. E-commerce giant Amazon nabbed cloud computing startups Amiato, 2lemetry, Elemental Technologies and Italy’s Nice, as well as chipmaker Annapurna Labs, which brought it new data center technology. Google and its parent Alphabet acquired at least 15 small companies last year, many with mobile technologies.
Conglomerates of the 1960s and ’70s such as IT&T overreached. By the 1980s, many were dismantled. Some tech pundits fret that Google, Amazon and Facebook could stray too far from their core businesses as well.
But the digital-age conglomerate is a different animal than the classic conglomerate. Gulf & Western and others like it cobbled together diverse, mature businesses that churned out free cash flow. Alphabet, Amazon and Facebook are focused on innovation. For them, there’s risk in missing out on the next big thing.
While stumbles are possible, smart deal-making — or maybe just placing enough bets for some to hit the jackpot — could pave the way for continued growth and share appreciation for years to come. By this reasoning, some analysts say, Apple may not be diversified enough as the smartphone market matures and could become a more ravenous acquirer itself.
“In a world where innovation is coming regularly, where you don’t know what’s coming next or what might eat your lunch, it may make sense to be diversified or make some crazy bets and hope that some are going to pay off,” said Gerald Davis, a University of Michigan management professor and co-author of “The Decline and Fall of the Conglomerate Firm.”
Unlike the classic conglomerate, new-age digital ones are often looking for synergies with a core business. “Something that looks like a conglomerate on the surface might be a lot more coherent underneath,” said Davis.
Facebook’s Long-Term Vision
Artificial intelligence, cloud computing, augmented reality and the Internet of Things are some of the most sought-after technologies.
Facebook’s 10-year plan includes artificial intelligence and drone-delivered internet service, as well as virtual and augmented reality. While virtual reality immerses a user in an imagined or replicated world (like video games), augmented reality overlays digital imagery onto the real world.
The company looks to leverage its social networking platform by pushing into live video and e-commerce. It’s been buying mobile software startups and app developers.
Facebook made a big bet with its $21.8 billion purchase of mobile messaging service WhatsApp in 2014. The jury is still out on whether that investment will pay off. But Facebook’s $715 million purchase of Instagram in 2012 is widely acknowledged as a winner. The photo- and video-sharing site now has 400 million users and 200,000 advertisers. The site boosts Facebook’s engagement with young consumers, creating opportunities to advertise to them.
Amazon’s Growth Strategy
Amazon, once mostly an online bookseller and now an e-commerce giant, has placed big bets on cloud computing and warehouse-sized data centers. To keep the momentum going for its Amazon Web Services cloud computing business, where Q1 revenue surged 64% to $2.57 billion, Amazon has purchased at least five startups.
Its interests don’t stop there. Amazon is building a fleet of drones to deliver products. It has also expanded from e-commerce to making its own home electronics and streaming video to customers. Amazon even appears to be building a UPS-type shipping company.
Then there’s Alphabet-owned Google, which over the years has bought the likes of YouTube, DoubleClick, Waze and Nest Labs.
Google bought online video website YouTube for $1.65 billion in 2006. Analysts estimate YouTube will have $9 billion in 2016 revenue. Though its profitability is unclear, Bank of America Merrill Lynch last year estimated YouTube’s value at $70 billion or more.
Another Google gem was buying Android, a mobile operating system software maker, for $50 million back in 2005. Google Android-based mobile phones now dominate the worldwide market in unit shipments.
Google’s experimental businesses span life sciences, self-driving cars, internet services provided via fiber or balloons, and more. Besides its many buyouts of mobile technology companies last year, Google in November purchased business software developer Bebop for $380 million to beef up its cloud business.
Will Apple Respond?
The diversification and far-flung investments of Facebook, Google and Amazon may put them in a better position to keep growing profitably than Apple, which has remained focused on iOS software products. With smartphones maturing, Apple’s Q1 marked its first year-over-year revenue drop since 2003.
The Apple Car may be the next big thing, but it will take investment. CEO Tim Cook, on Apple’s fiscal Q2 earnings call in April, told analysts Apple had made 15 acquisitions in the past four quarters to speed up product development. He also said the company “would definitely buy something larger than we bought thus far” to help current efforts or its “entry into a category that we’re excited about.”
Apple has the biggest cash hoard of all tech companies, but it has made mostly small acquisitions. An exception was Beats Electronics, a music-streaming and headphones company purchased in 2014 for $3 billion.
Under both Steve Jobs and current CEO Tim Cook, Apple has steered away from the “transformational” deal. After Apple’s March quarter disappointed, speculation has resurfaced that it could buy Time Warner (TWX) or another media firm, such as Netflix (NFLX). Some pundits have asked whether a major deal could speed Apple’s move into electric self-driving cars.
There is more than meets the eye to the digital conglomerates’ strategies.
Gene Munster, an analyst at Piper Jaffray, says Amazon has zeroed in on its e-commerce and cloud businesses, while Google has ventured far afield.
“The irony is that Amazon has become the most disciplined within what they do, despite investors’ belief that they spend like drunken sailors on different things,” said Munster. “Google’s goal with the ‘other bets’ is to solve real-world problems, and those can be outside of their core business, which is advertising.
“Facebook is somewhere in between. Oculus may part of some future aspect of social. But the bigger driver is (CEO Mark) Zuckerberg’s belief that there’s a new competing paradigm and it’s going to be augmented reality.”
One thing that the new digital conglomerates have in common with the conglomerates of old is their strong-willed leadership. At IT&T, it was CEO Harold Geneen.
At Amazon, Facebook and Google, controlling founders rule. Zuckerberg, Amazon’s Jeff Bezos and Alphabet’s Larry Page and Sergey Brin call the shots on what project to launch next, just as Apple’s Steve Jobs did. In April, Facebook proposed a new class of nonvoting stock to be issued through a special dividend, but Zuckerberg will continue to control the majority of voting power. Google’s Page and Brin have a similar structure that protects their control.
With founders at the helm, the companies preach patience.
Facebook, which paid $2 billion for VR company Oculus, rolled out its first virtual-reality headset in March. On Facebook’s Q1 earnings conference call with analysts, Zuckerberg said VR investments might not pay off for years. “This is early, and it’s going to take a long time,” he said.
Google took a strong step to position itself to take new directions when it restructured last year into Alphabet to manage its far-flung investments.
Google’s founders have praised Warren Buffett’s Berkshire Hathaway (BRKB), which in 2015 made its biggest acquisition ever, buying Precision Castparts, a maker of aerospace components, for $37 billion.
When forming the Alphabet holding company, Google committed to a Berkshire-like management structure of giving the fledgling businesses autonomy — though they financially depend on the core Google business.
“Even if Alphabet is in a tech, venture capital-like space, it can take one page from Berkshire and not micromanage,” said Lawrence Cunningham, a corporate law professor at George Washington University.
Nest Labs, the smart-home device maker that Google acquired for $3.2 billion in 2014, had a strong CEO in Tony Fadell, a former Apple executive. Fadell was one of the main executives in charge of developing Apple’s iPod, which led the way to the iPhone and iPad. Nest, though, has struggled in bringing new products to market. Alphabet on June 3 said Fadell would be leaving as CEO.
Successes And Failures
Success is not assured for any of the digital conglomerates’ new ventures. Amazon failed with the Fire Phone and with Destinations, a travel website.
Google acquired smartphone maker Motorola Mobility for $12.5 billion in 2012 and then sold it off two years later for less than $3 billion, though it retained the company’s patents.
The Apple Car, if it ever happens, would be a significant departure from Apple’s consumer electronics roots.
And investors are keeping an eye on the operating losses for Google’s “other bets,” as it calls its new business investments. Alphabet reported that its other bets had a net operating loss of $802 million in Q1, up from a $633 million loss a year earlier. Revenue more than doubled but was still just $166 million, peanuts for a company with $75 billion in sales last year.
But YouTube’s growth shows what’s possible, Google CEO Sundar Pichai said on Alphabet’s Q1 earnings call.
“What seemed like a moon shot a decade ago has grown into a booming community of engaged users, creators and brands unlike any other video platform,” Pichai said.
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