An Innovation Slowdown at the Tech Giants
Seen anything new and big lately from Cisco, Yahoo or even Twitter?
For
more than a half-century, big technology companies have led the way in
inventing revolutionary products and services, from calculators to smartphones.
Startups, meanwhile, have built upon those creations with innovations like
peripheral devices and software applications. This was as true for the IBM
360 computer as it was for the Apple.
But
something fundamental has shifted in Silicon Valley. The emblematic event was Facebook's February acquisition of the mobile messaging
startup WhatsApp for an astounding $19 billion. WhatsApp was barely five years
old and had 55 employees. The question from one end of Silicon Valley to the
other was: What possessed Facebook to spend that kind of money?
Surely
there must be a method to Facebook CEO Mark
Zuckerberg's
apparent madness. In fact, a strategy is emerging: In 2012, the social media
giant bought Instagram for $1 billion. The number of Facebook users grew less
than 4% last year, but the number of Instagram users jumped 23%. Millennials
are getting bored with the website and abandoning the platform in far greater
numbers than their parents—the kiss of death—are joining.
So
Mr. Zuckerberg has two options: radically transform his current product (no
small matter with the drag of 1.3 billion users), or buy the Next Big Thing.
And the next one. Then the one after that.
It
may prove a brilliant strategy. But it also means that Facebook, one of the
most innovative companies of the past decade, now depends on purchasing the
inventiveness of others. The company isn't alone. Look around Silicon Valley
and it's hard to find established companies still devising their next products
in-house. Seen anything new and big lately from Cisco?
Even
Apple, tech's most innovative company under Steve Jobs, now seems to
have slowed down with Tim Cook as CEO. During
Jobs's tenure, the company produced three landmark products—the iPod, iPhone and iPad—in
little more than eight years. Now, after four years, customers are growing
impatient waiting for the rumored iWatch, which, if real, won't appear until at
least autumn. Meanwhile, Apple has purchased nearly 30 companies.
Google though it
requires employees to spend part of their time inventing, has acquired more than
150 companies in its history, including drones and Boston Dynamics's robot
cheetahs. Even Intel has been slogging along for the past few years.
On
the other hand, even if they are short on new ideas, most of these companies
are long on cash, with some of the biggest war chests in American industrial
history. Apple is sitting on $160 billion—enough to buy the entire next
generation of tech startups.
We've
seen this strategy elsewhere. It defines the pharmaceutical industry, where
young biotech companies develop new drugs, shepherd them through the Food and
Drug Administration approval cycle and if, against great odds, they succeed are
quickly snapped up by pharmaceutical companies for a handsome payday. Those
that don't get FDA approval quickly die.
Is
that the future of Silicon Valley and the tech industry? It's what Oracle CEO Larry Ellison has been doing
at his software companies for decades: buying the latest enterprise software
companies, firing their employees, and adding their products to Oracle's
portfolio. No one else is that ruthless yet, but Mr. Ellison has a history of
being ahead of his time.
Why
are large tech companies losing the ability to innovate? Entrepreneur and
author Salim Ismail studies the new generation of "exponential
corporations," enterprises that grow 10 times faster than the average
rate. He believes that established companies simply aren't structured for this kind
of speed. So their only choice is to buy those companies that can still
innovate rapidly.
If
Mr. Ismail is correct—and the current dynamic in Silicon Valley suggests that
he may be—we're on the brink of a major restructuring of business strategy,
venture capital and almost every part of the high-tech world. It may be time to
stop waiting for famous tech companies to roll out the hottest new product and
start investing in startups that can sell their innovations to big companies.
Tech appears to be evolving into a different kind of field: one that is,
paradoxically, more static at the top but also more dependent on
entrepreneurship than ever before.
Mr.
Malone's new book, "The Intel Trinity How Robert Noyce, Gordon Moore, and Andy
Grove Built the World's Most Important Company" (HarperBusiness), will be
published in July.
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