Certain Habits

I was working on a presentation for a client recently and stumbled over an interview with Eric Schmidt, the CEO of Google.

He was asked about their mergers and acquisitions. His answer was an interesting look inside the relationship between he and Larry and Sergey, the founders.

One day Larry and Sergey bought Android, and I didn’t even notice. Think about the strategic opportunities that has created. Sergey found Google Earth one day while he was surfing on the Web. And then he walked into my office and told me he bought them. “And I said, ‘for how much, Sergey?’ And it turned out to be a few million.”

Okay, a couple of comments.

• What must it be like to be Sergey? “I was surfing the web this morning and bought something.” “I hope it wasn’t another pair of Vibrams?” “No. I bought a company. They have have satellites. They’re backed by the CIA. Looks like fun.” “How much?” “Oh, not much. Less than a billion.”
• Google’s strategy—to organize all the world’s information and make it accessible and useful—scales. It’s fundamentally acquisitive and more likely than not, most pieces will fit somehow.
• The tone of the comment is very revealing about what it’s like to be on a roll, seemingly able to do no wrong. While most pieces will likely fit somehow, that doesn’t mean the acquisitions create, rather than destroy, shareholder value. At least in the short run.

That Android and Keyhole worked out doesn’t justify Google’s current M&A policies. It’s only natural that at its size, Google will struggle to manage many acquisitions. The entrepreneurial culture that made start-ups worth acquiring is lost when they become assimilated into the mothership. You don’t write the same piece of software faster by throwing more man hours at the problem. Complexity and top-down management change the kind of programs that get written.

Whether Google’s approach to M&A is wise depends almost entirely on the wisdom of their larger strategic bet. If Google is like a tollbooth on the information superhighway, siphoning up pennies in pay per click revenue and software commitments and intrinsic value inherent in the data, then almost anything they can buy and open source that makes the Internet more useful, valuable or popular will ultimately generate ROI. Even YouTube, through which Google is underwriting most video traffic on the Internet, pays its way, in a manner of speaking, without solving the direct revenue problem.

The risk inherent in this bet, though, is manifold. As the internet changes, is Google’s tollbooth on the main artery or a bi-way? Will total traffic rise faster than revenue per search falls? Will size aid or impede Google’s core product development? Does size pose a risk to its (until now mostly spotless brand)? What about regulators (FTC on line one?).

One thing is certain. Google will continue to be fascinating to watch.