Acquisition for Termination

by Krishna on July 22, 2012

I read Matt Gemmell's take on critics of Google's acquisition of Sparrow (an email client) with interest. It echoes some of what I previously wrote about entrepreneurs, i.e., they are in the game to benefit financially and because there are many business factors outside their control, sometimes it is worth selling the business when they have a chance. Innovation improves when there are more people working on new ideas, and you can only attract more people to your field if there are different ways for them to succeed, not just having to work on one business for years and hoping everything falls into place.

But Matt only gets part of the picture. And this has to do with the kind of acquisition where the acquiring company does not have any plans to continue development on the product. Essentially, they are buying the product to kill it. While this may be good for the two parties involved in the deal (the developers and the acquiring company) and you should be happy for them, it is not clear that this kind of situation is good for the industry.

Innovation benefits when there is competition. Not only is the end consumer restricted to the choices and decisions made by the larger company, the very existence of the smaller competitor makes the large company more aggressive about having a better product. There is less of a “take it or leave it” attitude towards consumers, instead, we get more, better features in the existing product. Sometimes, you initially see only a marketing push (maybe a FUD campaign), but if the competing product keeps biting into the market share, you see the larger company attempt to make big changes.

New products suffer from a lack of trust. There are significant barriers that a product must overcome before a user will choose it over the status quo. Functionality, security, usability, etc. But users also worry that if they spend time with a product, will it be there for them in the long-term? This is not an abstract concern, but involves real questions such as, what happens to their data if the company goes under? Will the application be updated frequently so that it keeps pace with general technology trends? How much time, effort and money would it take for them to transition out?

So startups have some convincing to do. There are many ways, such as providing easy import/export and being very transparent with their user community. But if the general trend in the market is that the older, larger company keeps gobbling up smaller competitors, then the likelihood of the average startup being around becomes lower. If the frequency of such occurrences is high enough, consumers will skirt away from products offered by new startups. And so it hurts the developers of startups in the future.

But as you can see, there are different contrasting trends. The higher likelihood of getting bought out increases the inflow of developers. But the lower likelihood of succeeding with your startup can drive away developers to market sections that do not have this problem. One event (as in the Sparrow acquisition) gives us little data to work on. We could ask questions, such as, are all the complaining Sparrow users less likely to purchase the product of another independent developer? Or are they angry enough at Google to encourage other independent competitors by purchasing their products? Not clear.

The general topic is also the subject of government regulation, as in anti-trust legislation. This is one tool that consumers can use (via elected officials) to prevent acquisitions that serve only the purpose of the larger company or prevent an effective monopoly. Whether they are used effectively depends on the quality of governance. But the intent is clear: There is a clear loss to the larger society when larger companies use mergers and acquisitions to destroy competition and stifle innovation. Whether such transactions are mutually beneficial (to the parties involved) or whether they deserve the benefits are independent issues to the societal effect.

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