Method or madness?
Yet again, Microsoft strikes buying a very interesting private company with excellent potential: Powerset, who describe the deal thus:
Powerset has always been a small company with big dreams, with the ultimate goal of changing the way humans interact with computers through language. We set out to improve search by indexing Web pages based on the meaning expressed in them rather than just the literal words. Powerset licensed breakthrough technology from PARC, hired world-renowned computational linguists and search engineers, and recently released a search and discovery experience for Wikipedia articles. Our technology helps to improve search results and also makes new features possible, such as Factz, which aggregates information from many articles to summarize a topic.
With any startup, the challenge is to take the seeds of an idea and grow it into a viable company. At Powerset, we transformed our idea into a world-class semantic search platform, demonstrating the future of search with our Wikipedia search experience. But building a large-scale semantic search engine is expensive, requiring an engineering effort and computing resources beyond what most start-ups could ever imagine. Because our goals around improving search align so well, Powerset has decided to team up with Microsoft. We believe that this is the fastest way to bring our technology to market at a large scale.
I have been following Powerset closely for approximately 15 months, ever since I first learned of the company and had I been up and running with my new venture at that time I certainly would have tried hard to learn more with the goal of becoming involved as an investor. Ex-colleagues can attest to my long-standing belief that search – and in particular semantic search – lay at the very heart of the core value proposition of a modern investment bank. Further, intelligent search is key to creating robust markets in just about anything. Indeed, a few years ago I tried to interest my former employers in doing what I thought was a very low risk and potentially highly valuable (strategically and financially) deal with Fast Search & Transfer (which btw was acquired for $1+ bn by Microsoft(!) in January.) Suffice to say that my views did not command a consensus amongst management at the time…
For me the value of intelligent search in financial services and markets is self-evident and so I’m not inclined to waste your time elaborating. With this in mind, despite having no ‘skin in the game’ I have to admit to feeling a certain disappointment upon hearing the news that Powerset was selling up to Microsoft. And given the valuation as guessed by TechCrunch, the investors certainly haven’t hit a home run (c. 2-3x would be my guess), so why did they do it?
The answer seems to be in a nutshell: the very significant capital costs of building the computing and storage infrastructure needed to scale up Powerset to the entire web. This certainly seems reasonable, and I get the impression that both sides are very keen to ‘over-communicate’ (see for example this great interview on TechCrunch) in order to counter the expected ‘default’ view that here is yet another great emerging company about to get swallowed then crushed by the Borg… I hope I’m wrong and “Powerset: A Microsoft Company” really does turn out to be a win-win. Still even if it does, I remained convinced that it will only be an exception that proves the rule.
The Economist framed it well in their recent article titled “After Bill”:
Mr Gates’s reply to Mr O’Reilly was not entirely reassuring. The firm, he said, now has dozens of “quests”—revolutionising television, automating data centres and creating software ten times faster. Perhaps this fragmentation of Microsoft’s ambition is only natural. In its 33 hectic years the company has swollen to nearly 90,000 employees (see charts); revenues this year should exceed $60 billion and net income reach almost $18 billion. Even Microsoft’s own senior executives struggle to grasp its growing empire. The firm now sells 75 different products, many of them in lots of versions.
I’m sorry but 90,000 employees? In a business that is wholly reliant on human creativity, initiative and in a market that demands resilience and near real-time reactions to a fast-changing environment? 90,000 employees? 75 different business lines? Too complex. Too much complexity.
In this, Citigroup and Microsoft are highly analogous: their core ‘innovation roll-up’ strategies should work a charm but in reality don’t seem to work at all. This comes down to the drag from increased complexity and bureaucracy, more than offsetting the gains from new and innovative technologies and business opportunities. Many companies fall into this trap. And yet the only time we see even the potential for breaking up these behemoths into more optimal pieces is either in situations of distress (and even rarely then) or through vigorous ‘activist’ outside shareholder pressure. It’s a mystery to me why more CEO’s don’t have ‘cell division’ on the top of their corporate agenda. Too much testosterone? (A derivative of the ‘power corrupts’ rule?) It mystifies me because if they did this, it would almost certainly bring them success and more importantly a giant ego boost: just imagine the powerful wave of growth and innovation that would be unleashed if these corporate giants divided into more manageable elements and released their excess capital in the bargain?
They could be heroes. If just for one day…
