Spend money to make money7/2/2014
Continuous growth is the demand of every shareholder and blight of every company. Everyone from CEOs down to mailroom clerks wants to rake in profits as much as investors, but failure to recoup bigger and bigger profits can quickly kill their job and reputation. How do companies bring in new riches? Through diversification or innovation.
To stay relevant and profitable, practically every company must diverge from its initial path. Microsoft started as a software company, Apple was a computer manufacturer, Google a search engine and Facebook a social network. While all these companies still hold a major footing in these arenas, they’ve all pushed into other industries with varying levels of success. Apple makes the majority of its profits from phones and digital sales, Google is in advertising, software development and content distribution, and after entering the stock market in 2012, Facebook started spraying a firehose of cash at various tech startups.
You could argue that diversification is a type of innovation. However, the quickest path to wider profit streams isn’t research and development; it’s monstrous acquisitions. Facebook acquiring Whatsapp for $19 billion, Google’s purchase of YouTube for $1.6 billion, and Microsoft spending $7 billion on Nokia isn’t originating tech ideas; it’s bartering for them.
Tech giants acquire young startups to save the blood, sweat and wasted dollars on ventures that might fail, and acquisitions quickly alter the perception of the services the company can offer. Diversification might be the least sexy word to consumers, but to investors, it’s downright seductive.
Diversification isn’t a sure thing. When media giant News Corp. bought MySpace in 2005, it seemed like a ruthless move to dominate social media. But News Corp.’s poor understanding of the marketplace quickly morphed MySpace from blue chip web property to junk bond ghost town. News Corp. learned the pricey lesson of diversification. Not all billion-dollar acquisitions lead to endless profits. CV
Patrick Boberg is a central Iowa creative media specialist. Follow him on Twitter @PatBoBomb.