Posts filed under “Apprenticed Investor”
Defense! Google’s Nest Labs acquisition is a smart move
Washington Post, January 26 2014
With the Super Bowl just a week away, the age-old question of whether offense or defense wins big games is at hand. “The best defense is a good offense,” goes the saying, with the Denver Broncos called the best offensive team ever. The Seattle Seahawks are no slouches either, with their top-ranked defense and an explosive offense.
The question of offense or defense has been on my mind since Google acquired Nest Labs for the eye-popping sum of $3.2 billion.
If you look at this purchase solely from the perspective of an investor, it seems quite pricey. After all, this is a relatively new start-up with modest revenue in a niche market of thermostats and smoke detectors. From the perspective of those deploying capital in the expectation of a return on investment, future gains are likely to be paltry relative to the billions invested.
But if you consider this from the perspective of a technology company horrified at the prospect of becoming irrelevant, the acquisition looks very different. Rather than look at the costs of making an acquisition like this, consider the risk of failing to aggressively play defense. History is replete with examples of tech firms that were marginalized by new companies and technologies.
Indeed, some of the biggest strategic errors have occurred in the past decade alone. The companies that ignored specific risks from the latest innovations came to rue that decision. Think BlackBerry circa 2007 — it hardly thought of Apple’s newfangled touchscreen iPhone as a threat to its core business. Yet BlackBerry’s global market share collapsed from nearly half of all smartphones sold in 2009 to less than 3 percent today.
Microsoft offers a similar cautionary tale. A monopoly market share combined with an arrogant CEO — Steve Ballmer refused to let his kids have an iPod or use Google — left the software giant blindsided by threats to the core business. Indeed, hubris led the makers of the world’s dominant operating system to miss or ignore many tech developments: social networking, search, cloud computing, smartphones, tablets, MP3 players, user-generated content, blogging, microblogging (Twitter) and location-aware apps. But it was Apple’s iPad (along with other tablets such as those using Android) that became the biggest threat to their basic Windows laptop/desktop PC business.
Perhaps the granddaddy of cautionary technology tales is Eastman Kodak. The film and camera manufacturer was so dominant that, according to a case study by Harvard Business School, in 1976 “Kodak controlled 90 percent of the film market and 85 percent of camera sales in the United States.” Astoundingly, it was Kodak itself that developed the digital camera in 1975. Fearing that digital photography would cannibalize its photographic film business, the company buried its own invention. That helped sales for the next decade or two, but, eventually, digital cameras came to dominate photography. Rather than own the future, they clung to the market share of the past. It should surprise no one that Kodak eventually filed for Chapter 11 bankruptcy protection.
None of this has been lost on the founders of Google, with their dominant position in search. Their acquisitions and research and development actions suggest that they are cognizant of how easy it is for a company to lose its grip on its primary market. This is especially true for dominant firms that became complacent — like Kodak, Microsoft and BlackBerry did.
I credit Google for having the foresight to identify threats to its main business of selling advertising against search results. The potential loss of market share in the mobile space led them to the Android acquisition. That gave Google a solid footprint in mobile, preventing it from having to play catchup like BlackBerry and Microsoft did. Lower-priced Android phones now have a dominant market share (and Android tablets have a respectable share) — even though neither is especially profitable versus Apple’s iPhone. However, they ensure that Google’s core search business has a large and growing footprint in the mobile space.
One can only imagine the conversations occurring in Mountain View today had Google not made that Android purchase. Might the Nest Labs acquisition look like a similar no-brainer years hence? It has the potential to be, if not quite as large as Android, then perhaps nearly as important.
Most of Google’s home technologies have failed to catch on in a major way. The Android@Home platform didn’t, and the Nexus Q streaming media device has not set the world on fire. Don’t even ask about Chromecast Dongle (whatever that is).
While Google’s internal R&D has not created the next YouTube (Google Plus, anyone?), it has put together a very good track record of acquisitions that enhance its core business. YouTube has grown into a huge winner, giving Google a dominant position in online video. Variety reported that the video division grossed $5.6 billion in ad revenue in 2013. (Google’s stock price increase after the announcement of the YouTube deal paid for the $1.65 billion purchase). Motorola Mobility — another pricey purchase at $12 billion — as a clever patent acquisition; it has mostly insulated Google from countless mobile patent infringement lawsuits against Android.
Meanwhile, the Wall Street Journal reports that Nest Labs is selling 100,000 smart thermostats a month — a respectable number for a start-up.
Yes, $3.2 billion is certainly a lot of money to you or me, but it’s barely 5 percent of Google’s cash. It’s a pittance relative to its $388.8 billion dollar market cap. The risk to Google is not the cost of acquisitions such as these, but the risk to its core business down the road of failing to do so. If the “connected home” is a thing a few years hence, what new or existing company might be doing to Google what Apple did to BlackBerry?
When big tech-driven firms make acquisitions of this sort, they are doing so for very different purposes than investors do. They are acquiring engineering talent. They shave off years of research and development with a known outcome, rather than a who-knows-what outcome years down the road.
Google’s founders have had a good eye for imagining what technologies will be significant in the near future. No one asked Google to develop self-driving cars, but it helped them with street views for Google Maps. Nor was there a clamor for an alternative platform for mobile, but they turned this into a tremendous asset and created competition in the space. The same can be said of purchases in e-mail security or local advertising or even robotics.
Might Google be wrong that the connected home is the next new thing? Certainly. Perhaps nothing of great value will develop from this purchase. But if Larry Page and Sergey Brin believe this could be a significant technology, then it is a small price for Google to pay to ensure it participates in the integrated-smart-home market.
If not, what’s $3 billion to a $390 billion company sitting on $55 billion generating $5 billion per quarter in free cash flow? Consider it a small insurance payment.
On Monday, we saw a sell-off of more than 1 percent across major U.S. markets. Europe and Asia followed suit the next day. Judging by my e-mails I received, this was it, the beginning of the end, and “you unrepentant bulls are finally going to get what you deserved.” Except not quite yet. Tuesday and…Read More
Yesterday, Business Insider posted a huge piece, wherein they ask various folks for their best idea for a decade. With the low key headlne, Wall Street’s Brightest Minds Reveal Their Best Investment Ideas For The Next Decade, here is how I responded: Financial planning: “As it turns out, that is an easy question: Our own…Read More
Last week, we published a 2,500-word opus on what lessons could be learned from the rise and fall of gold. There was lots of feedback on the general concept and many of the specifics. By and large, the response was positive, with most of the pushback coming from those who were long gold or other…Read More
> I did something different with my Sunday Washington Post Business Section this week. Starting with the 2,500 word long form discussion I wrote for Bloomberg, I simplified this and edited it down to half that length. The print version had the headline Bitten by the gold bug? You’ll do well to heed the…Read More
This morning, I have a massive 2500 word piece at Bloomberg looking at the rise and fall of Gold.
The key to the discussion are the 10 lessons that we all can takeaway from that cycle and the experiences of Gold investors. Hopefully, these will make us each better investors in the future.
Here is the intro:
“It has been quite the ride for gold: from under $500 an ounce a decade ago, to above $1,900 in 2011, gold gained more than 400 percent. Since its peak of ~$1,921.15 on Sept. 6, 2011, however, the shine is off the yellow metal. Gold plummeted 38 percent, recently breaking below $1,200. Yesterday’s close is within 5 percent of the lows, at $1,241.
If a 20 percent drop is described as a bear market, and a 30 percent fall is called a crash — what do we call gold’s almost 40 percent plummet?
This column is not an “I told-you-so” or an exercise in “Goldenfreude” (describing a “delight in gold bugs’ collective pain”). Rather, it is an attempt to learn some investing lessons from the epic rise and horrific fall of gold.
As an investor, I am a gold agnostic: When used properly, the metal is a potentially valuable tool in an investment arsenal. There are times when it makes for a profitable part of a portfolio, as in the 2000s. There are periods when it is a speculative and dangerous trade — such as the 2010s. There have also been decades when it does nothing, earning no return, generating no income, essentially dead weight to a portfolio, as in the 1980s and 1990s…”
Full column after the jump:
10 financial resolutions you can actually keep By Barry Ritholtz Washington Post, December 29, 2013 It’s that time of year, when many people resolve to be better: Gotta lose 20 pounds, stop smoking, start exercising. Human nature is such that come January, there will be a 20-minute wait for the elliptical machines in…Read More
I wrote this a decade ago, and if you keep only one resolution this year, this is the one it should be. It will open a cascade of improvements for your finances . . . Take Responsibility for Your Stock Losses Barry Ritholtz RealMoney.com, April 12, 2005 “He who blames others…Read More
Over the past few weeks, I have been trying to push back against the usual contingent of bears. In particular, I have argued that this bull cycle is not yet over, markets are not in bubble and that people have been sitting for too long in way too much cash. John Coumarianos of the Institutional…Read More
> My Sunday Washington Post Business Section column is out. This morning, we look at the question of How much cash should you hold in your portfolio?. This is yet another column that looks like its about investing but really is about psychology. As I noted prior, people have been sitting on big piles…Read More