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Innovation by acquisition

March 10th, 2010 General

Innovation by money What do Flash, Android, Hotmail, Google Analytics and Powerpoint all have in common? Can you guess?

The answer is: None of them were produced 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 huge companies really innovate. A significant amount of today’s most well loved and successful products originated with smaller companies which were shortly gobbled up by one of the huge players (Google, Microsoft, Yahoo, IBM, Oracle, etc).

We’d like to call this phenomenon “innovation by acquisition.”

Examples of innovation by acquisition

Here not more than is a small sample of well-known, successful products that started their lives outside the very huge 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 additional huge money maker, is also based on an thought from outside Google, although that company (Idealab) didn’t want to sell it, so Google went ahead and produced their own version regardless and settled the IP issues in court.
Google Analytics – was Urchin, until Google bought Urchin Software.
Blogger – was produced by Pyra Labs, which Google bought in 2003.
Google Docs – the word processor in Google Docs came from Writely, an app produced 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 started 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 initially acquisition ever).
Visio – was its own company before Microsoft bought it in 2000.

There are plenty of additional prominent examples. How in this area Postini (bought by Google), YouTube (bought by Google), Feedburner (bought by Google), Flickr (bought by Yahoo), Tasty.com (bought by Yahoo), and we could just keep going.

We picked these examples because they are widely known products by huge, well-known companies. Though, look at any really huge 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).

Really, 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 brilliant exit strategy and business plot.

The challenge of in-house innovation

These huge companies have resources aplenty. For example, Google has more than 7,000 public 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 huge companies is that they are saddled with a lot of inertia and overhead. They have plenty of money, but they are simply not lithe anymore. Smaller outfits can be flexible and instant, because they don’t have an existing corporate infrastructure to maintain. Thoughts can flow unhindered.

This is for example what Google desires to simulate with its well-known 20% time. Fascinatingly, 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 fascinating perspective, check out this article by Scott Berkun in this area Google’s 20% time.)

We’re sure that many additional companies have similar, if perhaps not quite as drastic, ways of cheering in-house innovation. But innovation also desires 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 huge 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 vital. 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 decipher it quickly, or explore an opportunity, this can be very effective. And huge 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 in this area (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 terrible 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-pleased companies and realize that a huge part of their product portfolio originates from outside the company.

On the additional hand, they should get two thumbs up for recognizing the potential of the companies they bought.