Tech Merger Mistakes Create Déjà Vu


Flops, failures and mis-steps. These, unfortunately, are an inevitable part of becoming successful in a dynamic environment. But honestly, folks, do we have to keep learning the same lessons over and over? When something is massively uncertain, you can’t plan it in the same way that you would if you actually knew what you were doing!

I was reminded of this when reading recent press accounts of the sad fate of AOL’s once high-flying social networking site, Bebo. AOL paid $850 million for the business (business? concept, perhaps) in a top-secret deal announced on March 13, 2008. At the time, hopes were high that Bebo would do wonderful things for AOL. Among the reasons for the strategic acquisition were that Bebo was big, that it was global, that it would pave the way for “engagement advertising,” that it brought new, younger users into the AOL fold, and that it would help AOL to achieve a strong position in the social-networking space. And besides, AOL was a fast-eroding asset in need of a turnaround. Perhaps a big acquisition was just the ticket.

Hmmm. Not so fast. Not more than a week went by before AOL executives (who hadn’t been consulted) expressed reservations about the deal. Among their issues, according to TechCrunch:

The concerns of the senior executives who actually run AOL (and reportedly were not consulted on the top-secret acquisition) include: the general difficulty of making money placing ads on social networks (see Google’s missed quarter), “flattening traffic growth at Bebo” (see chart below), overly-rosy revenue projections for Bebo that might have been three times too high, and the likelihood of losing Bebo’s most talented employees (the founders are already out of there).

And of course now, two scant years later, AOL’s Chief Executive Tim Armstrong calls the business a “major distraction” and basically gives it away to a private equity firm.

The whole story is eerily similar to another ambitious, highly uncertain tech play, this time starring an ill-fated partnership between IBM and Sears. I refer of course to Prodigy, often cited (together with its rival Compuserve) as one of the first services that allowed people to access Internet-like functionality for shopping. The initial business model (remember, this is pre-Internet) depended on customers using a proprietary network run by IBM and paying a flat monthly fee for a given amount of connection time, more if they stayed on the service for longer.

While I won’t bore you with all the details (those with an interest can see the company history), the pattern is similar. Assumptions about how people would behave, what they would spend on, and what would drive economic value were simply not borne out. Among the mistakes? Thinking that people would use email primarily as an adjunct to shopping, not for communication. Providing email, unfortunately, was designed into the service as a loss leader — meaning that the more people used it, the more money the company lost. Ironically, Walter Mossberg, the Wall Street Journal technology editor, panned Prodigy, observing that AOL (yes, AOL!) was “the sophisticated wave of the future among such services.” Observers estimate that IBM, Sears, and other counterparties lost over $1.3 billion on the venture, and then basically gave it away. Today, the remains of what was once Prodigy operate as an Internet service provider in Mexico.

These are not isolated examples, nor are they the product of uniquely deranged management decision making. Not at all. IAC/Interactive spent $1.85 billion to acquire Ask Jeeves in a desperate attempt to counter Google’s march forward. Yahoo acquired Overture for $1.6 billion, then promptly decided to replace most of its technology with Yahoo technology. Yahoo also acquired Geocities for $3.56 billion (wow) and, of course, Excite was acquired by the now-defunct @Home for $6.7 billion.

What is the common pattern in all of these cases, and in the other big, failed ventures in my “flops” research file? Here’s the list:

  • Untested assumptions taken as facts
  • Few low-commitment tests
  • Too little experimentation
  • A “damn the torpedoes” attitude about investing
  • Few alternatives should the primary strategy not work out
  • No thought given to recouping or redirecting in the event new discoveries are made
  • Often, powerful leaders passionately committed to a given course of action

I’m seeing similar mistakes today in the social networking/social media space. Folks, let’s remember that most really interesting growth opportunities take a lot of experimentation as they unfold. I can’t necessarily give you the keys to figuring out what company is going to be the next Google. But surely we can stop making the same big, expensive mistakes while we figure it out.


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