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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), (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.

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