Thursday, June 19, 2014

Monitor your Teenager by Satellite: How Google May Demonstrate the Power of Complementarity

Google has just acquired satellite firm Skybox, and got plenty of attention for the acquisition. Two things stood out. The first was the low price – well 500 million dollars, but this is not expensive for a firm with the capabilities of Skybox. The second was the potential for new services combining the satellite imagery with other technologies and services. Skybox has six satellites in space and is launching 18 more, giving it the majority of satellites in the world that can take images of very high resolution and sell the images commercially. Sell commercially, as opposed to deliver the images to the government that owns them, like spy satellites do. This advantage is likely to continue for a while because its satellites are currently the cheapest high-resolution satellites in the business.

What exactly does high resolution mean? They can take pictures of parking lots that allow counting of vehicles parked there, a capability that has already been used to predict revenues of Walmart and iPhone release dates (although Apple is secretive, it is still necessary to park trucks outside Foxconn factories in order to ship out iPhones). All it takes to use the capability is to know a location and a good time to take the picture, because the satellites pass frequently, so you can now check for cars parked near your house when you are away for the weekend and have told your teenager not to host a party.

Of course, the main use of such satellite imagery is corporate intelligence. And, I am using the word intelligence in the same meaning as its use in naming CIA: spying. Although some of it will have no particular target and much potential usefulness, like finding out whether crops are failing in some part of the world (helps speculators, but also farmers elsewhere) or giving real-time improvements of maps (the first use of these satellites that Google is planning), other uses are less benign. Corporations can monitor each other’s facilities easily, just as Foxconn is now being monitored. Governments that do not have the resources to launch spy satellites, meaning most governments, can now order images whenever they want to check something -- like the location of refugees that they would like to remove or imprison.

As I write this, it strikes me that the examples I am giving are simple, and might not be enough to justify the price of Skybox. But, that is where the complementarity comes in. Skybox satellites have good flight paths and optics, but at the end of the day they are flying cameras with decent software. But add Google to the equation, and you get flying cameras, excellent software, and immense databases. These two companies have different capabilities, and when listing them it looks a lot like they could be combined to make something completely new. Skybox and Google are complementary, and complementarity is a good start of innovation. The innovations might involve valuable new products and services, and they might also involve worrying levels of monitoring and privacy breaches. We don’t know in advance, except that there will be surprises.

Mims, Christopher. 2014. Amid Stratospheric Valuations, Google Unearths a Deal With Skybox. Wall Street Journal, June 15 2014.

Saturday, June 14, 2014

When to Merge? Looking at External and Internal Relations

The merger between advertising giants Omnicom and Publicis created news for a long time, until the day when the cancellation of their merger created news. What happened? The story reported by Wall Street Journal involved many operational issues such as incorporation, choice of who firm to make the formal acquisition, and regulatory approval, but it was also pretty clear that the relations between the firms had become problematic. The CEOs clashed over a number of issues related to the new organization, such as its location (Omnicom is a US firm, Publicis is French) and key staffing choices. In the end, the firms called off the plans and both CEOs admitted that the relation between the potential merger partners had not been good enough.

Is that a good reason for calling off a merger? Possibly, but it is one that gets too much focus because such internal relations are relatively small-scale and temporary. For example, one of the CEOs, Publicis’s Levy, was supposed to retire soon but had not done so because of problems finding a successor. But relations are still important for merger success, except they are a different kind of relation. All firms have relations with other firms, as alliance partners, suppliers, or customers. Not all relations are important, but some are, like key client relations are for advertising firms. Managers pay surprisingly little attention to what kind of relations would be best for a merger, and even researchers have overlooked the issue.

A recent article by Michelle Rogan and Olav Sorenson in Administrative Science Quarterly addresses it by looking at mergers, and in fact mergers among advertising firms. Their focus is on whether firms are more likely to merge with each other if they share clients, and whether mergers have lower performance when the firms share clients. The reasoning is simple. Shared clients means familiarity because the firms are close competitors, and it can also mean over-confidence in the results of the merger. Shared clients also means that little new is added by the merger, because the merged firm gets a deeper relation with existing clients rather than a broader set of clients. Two problems follow. First, the client may not want to have a deeper relation because it sees the advertising firm as trying to gain power (Michelle Rogan and I have an article about this). Second, the firm will fail to build complementarities in its client portfolio, which can hold back innovations (my book with AndrewShipilov and Tim Rowley discusses this). So far theory.

What did they find? Evidence showed that the theory was correct on both accounts, meaning that the firms made exactly the wrong mergers. They merged when sharing clients, and shared clients meant that the performance was reduced after mergers, both when looking at loss of clients and in looking at billings per client. 

So the conclusion is clear. When looking at whether to merge or not, relations really matter. Except that the relations that matter are between firms, not between CEOs.