:: The Park Paradigm ::

Markets for the Digital Generation

Traditional brokers in every industry are struggling to adapt to a new paradigm in markets whereby - enabled by ever more powerful information technology - value is migrating away from (organizing or facilitating) transactions as the marginal cost of doing so continues to fall, in some cases tending towards zero. On the other hand relatively more value is accruing to processing and settling transactions (especially where ‘physical’ delivery is necessary) and more and more importantly to the data sets created by and around the transactions themselves. In the traditional context/business model both these areas were seen at best as secondary derivatives to the core business of ‘broking’ transactions. The associated revenue streams were seen as ancilliary, and were often spun-off and/or outsourced in order to focus on the lucrative commission-based transaction business.

So it is easy to understand why time and again, in industry after industry, the incumbent ‘kings-of-the-castle’ are in denial as to this shift in value. It’s not just the money; what makes accepting the transition all the harder is a deep cultural bias that paints transaction processing and data management as ‘boring’ or ‘un-sexy’. And of course, it is easier said than done to (as Jack Welch was wont to say) ‘destroy-your-own-business’, especially when it is not entirely clear what exactly the new winning business model should look like. Indeed that is what makes times like these so exciting for entrepreneurs and disruptive innovators.

It is also heartening to see that - at least in some cases - the courts are lending a helping hand in terms of ruling against monopolistic practices - such as the refusal of the National Association of Realtors to give fair access to the MLS housing data in the US (via TechCrunch):

The National Association of Realtors has settled its antitrust case with the Department of Justice, and has given online realtors full access to the industry-standard Multiple Listing Service (MLS) Databases. The MLS is a comprehensive listing of homes that are are available on the housing market, and until this point the NAR has restricted access to online brokers.

The irony is that - whatever short term gain they might have realized with this approach - by not taking a step back and trying to understand the impact (and inevitability) of structural change in their industry and markets, they are on track to squander a fantastic opportunity to leverage what will likely be one of their most valuable assets going forward. It’s probably not too late - on paper at least - but they better hurry: there are significant costs and barriers to replicating the MLS database, but they are not infinite nor impregnable and with each passing day they become lower and lower.

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Scanning through my newsfeeds this morning, a couple seemingly unrelated posts on Google caught my eye. The first over at Silicon Alley Insider picked up on the recently published Fortune list of ‘Most Desirable MBA Employers’ highlighting the remarkable fact that almost a quarter of graduating MBA students say they want to work at Google. First red light flashing.

The second was a post over at Technosailor taking issue with Jeff Jarvis’ view that the current problems of Twitter could be solved were they to be acquired by Yahoo Microsoft Google. Second red light flashing.

Call me a cynic, but my first reaction to the MBA poll is that it is a giant contrarian indicator - if MBA’s are dying to go work somewhere, you can bet you are at or close to a top. (At this point, I’d love to have a couple of eager analysts that I could send off to complile a regression analysis of Fortune’s MBA poll results vs stock market returns over the last 25 years or so. I don’t so I can’t but having read Fortune regularly for the last 15 years or so, my gut and addled memory tells me it is so. Any MBA’s out there want to dig up the data and prove me right or wrong? Perhaps I should try the Mechanical Turk, but can’t be bothered…)

I don’t know enough about the examples Technosailor gives, but assuming they are correct (they seem plausible given my limited knowledge), this is starting to sound an awful lot like traditional big company disease (of which Microsoft is just one of many examples across every industry.) Given Google’s enormous growth in every metric including importantly number of employees, one has to wonder if they - no matter how smart they are - can escape the laws of corporate physics.

I know it has been asked a million times before but is Google the next Microsoft? (At least from a financial point of view…) At the start of 1996, MSFT traded at c. $6/share. Four years later they peaked at almost $60/share. GOOG IPO’ed at c. $85/share in 2004, and just over three years later peaked at over $700/share. Both moves of approximately 10x. Since 2000, MSFT has been more or less range bound at around $30/share, despite continuing to grow it’s top and bottom lines and produce prodigious amounts of cash. I’m not suggesting history will repeat itself exactly - perhaps we have not yet seen the peak in GOOG’s share price (sell at $850?), and I’m certain they will continue to grow their top and bottom lines and produce prodigious amounts of cast in the next 5-10 years. But…will the stock eventually settle at around $500 - 600/share…? Is it conceivable that Google, like Microsoft before it, will become the place where good companies are bought only to disappear?

Acquisitions are hard. As Anand points out in the comments to my recent post on financial sector M&A, most companies are bad at it. The few exceptions to this are companies that make integrating acquisitions a (if not the) core competency of the company. And by the way, it’s even harder when you are talking about service companies and the only real assets are people and their work culture. I would guess that there is no way that a company as successful and fast growing as Google could have the corporate infrastructure, let alone the corporate DNA to effectively manage serial acquisitions of growth companies and their dynamic founders.

So what should they do? I don’t know. But I think the answer probably lies less down the path of making acquistions and more towards the idea of either returning more and more cash to shareholders (to squander as they like) or if they/shareholders are convinced that Google’s leaders have a competitive advantage in identifying new business opportunities, they should set up some sort of strategic fund structure to get the financial (and many of the strategic) benefits of being able to identify talented teams and promising businesses, without the pain of having to manage exponentially increasing corporate complexity.

They should think like some of the more enlightened oil-producing states (think Norway’s Oil Fund) - the gusher of cash they produce carries with it risks. If they don’t want their share price to stagnate going forward, it might come down to avoiding the corporate variant of Dutch Disease…

And to finish, a trip down memory lane: a Fortune article from July 2000. Try reading it replacing “Microsoft” with “Google” throughout. Spooky. The headline:

I Remember Microsoft: Once computing’s red-hot center, Microsoft now has a tough time retaining its best and brightest employees. Here, some who left reflect on what they learned–and why they find life on the outside so much more alluring.

Update: Silicon Alley Insider wonders ‘..is Google the best company in America or a train wreck?

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