Update on the New #Conglomerates

My blog on the New Conglomerates has proven to be one of the most popular I have written. I’d been contemplating an update for a while, even before I heard this week’s announcement that Verizon is buying the bulk of Yahoo!. Talk about being prescient…. So, just over two years later, it feels very timely to return to the topic.

Image sourced from dc.wikia.com

Image sourced from dc.wikia.com

Of the so-called FANG tech stocks, when I was writing back in May 2014, Facebook had recently acquired WhatsApp and Oculus VR. However, apart from merging Beats Music into its own music service, Apple has not made any big name deals, but has made a number of strategic tech acquisitions. Meanwhile, Amazon has attempted to consolidate its investment in delivery company, Colis Privé, but got knocked back by the French competition regulators. Netflix finally launched in Australia in March 2015, and within 9 months had 2.7 million customers, a growth rate of 30% per month. Finally, Google has since renamed itself Alphabet, and purchased AI business Deep Mind.

Over the same period, Microsoft appears to have reinvigorated its strategy: back in May 2014, Microsoft had just completed its acquisition of Nokia. Since then, Microsoft has announced it is buying LinkedIn (following the latter’s purchase of Lynda.com in 2015), but has also shut down Yammer, which it had only bought in 2012. The acquisition of LinkedIn has been framed as a way to embed corporate, business and professional customers for its desktop and cloud-based productivity tools (and maybe give a boost to its hybrid tablet/laptop PCs). On the other hand, Microsoft has a terrible track record with content-based products and services, as evidenced by the Encarta fiasco, and the fact that Bing is an also-ran search engine. I think the jury is still out on what this transaction will really mean for LinkedIn’s paying customers.

So, what are the big tech themes, and where are the New Conglomerates competing with each other?

First, despite being the “next big thing”, VR/AR is still some way off being fully mainstream (although Pokémon GO may change that….). Apple and Google will continue to go head-to-head in this space.

Second, content streaming is not yet the new “rivers of gold” for publishing (and the sale of Yahoo! might confirm that there’s still gold in those advertising hills….). But music streaming (Apple, Spotify, Amazon and Google – plus niche services such as Bandcamp and Mixcloud) is gaining traction, and Amazon is building more content for SVOD (to compete with Netflix, Apple and Google). But quality public broadcasters such as BBC, ABC and NPR are making great strides into audio streaming (via native apps and platforms like TuneIn) and podcasting. One issue that remains is the fact that digital downloads and streaming still suffer from geo-blocking, and erratic pricing models.

Third, Amazon continues to build out its on-line retail empire, even launching private label groceries. Amazon will also put more of a squeeze on eBay, which does not offer fulfillment, distribution or logistics and is a less attractive platform for local used-goods sellers compared to say, Gumtree.

Fourth, Amazon is making a play for the Internet of Things (which, for this discussion, includes drones), but both Apple and Google, via their hardware devices, OS capabilities and cloud services, will doubtless give Amazon a run for its money. Also, watch for how Blockchain will impact this sector.

Finally, payments, AI, robotics, analytics and location-based services all continue to bubble along – driven by, for example, crypto-currencies, medtech, fintech, big data and sentiment-based predictive tools.

Next week: Another #pitch night in Melbourne…





Amazon, Apple, Google: Are they the New Conglomerates?

Are Amazon, Apple and Google the new conglomerates? If so, should we be concerned that these leading digital businesses increasingly resemble ‘old school’ industrial behemoths?

The classic model of a conglomerate generally describes a holding company that either owns or has controlling stakes in a diversified range of operating businesses, often in unrelated industries.

Conglomerates largely went out of fashion in America and Europe in the 1980’s and 1990’s (following an era of acquisitions and asset-stripping in the 1960’s and 1970’s), resulting in leveraged buy-outs, spin-offs and partial IPOs, etc. as owners and investors  realised that the total value of the individual parts was greater than the amalgamated whole. Although some major cross-sectoral mergers and acquisitions did occur after this period (e.g., AOL and Time Warner, Vivendi and Universal) most M&A activity was confined to single industry players, in pursuit of market share, economies of scale and other business synergies.

Despite this trend, various types of conglomerates (grounded in the ‘traditional’ industrial model) still exist – including the Chaebol of South Korea, Japan’s Keiretsu, China’s mega-SOEs, the trading houses of Hong Kong, and the FMCG “House of Brands” that fill our supermarket shelves. The UK-based Virgin Group and India’s Tata Group  represent contemporary examples of ‘old’ conglomerates as they operate across very separate and distinct businesses and industries.

Conglomerates are usually created by a need for vertical/horizontal integration or a basic desire to build diversified revenue streams. Some build on a core competence, then find an opportunity in a seemingly unrelated field – thus a company like General Electric, with deep expertise in power generation, storage and transmission, diversified into financial services as a way to help customers fund the purchase of its products.

Sometimes, conglomerates evolve as a result of financial necessity – Canada’s Thomson Corporation (now Thomson Reuters) once owned interests in North Sea oil and gas alongside its newspapers and media companies, but then divested most of these assets to focus on its publishing businesses across legal, scientific, financial, tax and accounting information.

For a long time, it also owned a vertically integrated travel business in the UK, comprising a charter airline, a package holiday company and a chain of high street travel agents.

As it was explained to me when I first worked for Thomson in the late 1980s, the rationale for this diversification was simply a question of cashflow: most of the information businesses were subscription-based, with revenues usually collected in the 4th quarter. Although summer package holidays generated a far lower margin than the information businesses, customers paid up front – normally in the 1st quarter, and up to 6 months in advance, creating more consistent cash flows across the business.

At times, conglomerates may need to diversify into new geographic or sectoral markets to avoid anti-trust measures if they come to dominate a particular territory or industry. However, as we have seen in recent years (Microsoft, EMI, Thomson Reuters) anti-trust measures have been used to force divestment or corporate restructures, across jurisdictions and markets.

Whether they have done so by design or by default, the case can be made that Amazon, Apple and Google have become the new conglomerates. Let’s take each in turn:

Amazon – began as an on-line retailer of hard-copy books, and has since moved into sales and distribution of digital content (books, films, music, games, software); a trading and sourcing platform for a wide range of consumer products; an electronics manufacturer (Kindle); cloud computing and data hosting services; and its own branded credit cards.

Apple – originally a manufacturer of personal computers and proprietary operating systems, now a vertically integrated digital content distribution business; a bricks and mortar retailer; a smart phone manufacturer; a key platform for the capture, creation and playback of audio-visual content (with a growing presence in broadcast television); a provider of cloud services; and now exploring opportunities in the automotive sector.

Google – what was once a late-entrant to on-line search has probably become the closest of these three internet giants to being a ‘true’ industrial conglomerate. In addition to its e-mail and social network offerings, Google has developed its own mobile device operating system (Android) and web browser (Chrome), plus smart phones (Nexus) and laptops (Chromebook). It rivals both Apple (most notably in mobile phones and apps distribution) and Amazon (principally for ebook distribution), and is making inroads into Microsoft’s dominance of productivity software. Plus, with Google Cars, Google Goggles (not forgetting Google Maps, Google AdWords, the Google Books Library Project and the 2006 acquisition of YouTube), Google is clearly on a path to being a diversified technology-based business, with integrated businesses across digital content, entertainment, transportation, navigation, archiving, streaming….

Meanwhile, all three have been investing in robotics; and surely telecoms (network carriers), biometrics, renewable energy, education, health, banking and financial services can’t be that far behind.

The risks for these neo-conglomerates are that they will either lose focus, over-reach themselves, or destroy the core businesses that lie at the heart of their success. Worse, they could fall foul of anti-trust provisions if they continue to become vertically and horizontally integrated – a threat equalled only by international moves to call tech-based multinationals to account for their cross-border tax planning.

As with all empires, the fortunes of conglomerates tend to wax and wane, and while the three companies discussed here have remained close to their core businesses, it will be interesting to see how each of them ensures that they continue to add value while not stretching the boundaries of their capabilities.