Monday, August 22, 2011

Companies that Destroy

Creative destruction, a core element of capitalism, is intended to weed out inefficient and unprofitable processes, companies and industries by directing resources towards individuals and businesses that are capable of creating more value than competitors. Creative destruction is meant to drive an industry forward, not hinder it. But over the last few months, creative destruction has shown its dark side. Consider, for example, the case of Flip Camcorders. Flip was a profitable camcorder business purchased by Cisco in 2009. The Flip business was loved by consumers, raved about by tech columnists and had growing revenues. Cisco bought the company in order to expand their presence in the consumer marketplace, but the problem was that Cisco knew next to nothing about the average tech consumer. That experiment of expanding beyond just being a business supplier effectively ended less than two years after Cisco bought the independent company, and instead of selling or spinning off the Flip business, the company decided to kill the product line outright.

Another example is the WebOS operating system. Acquired when HP bought Palm last year, WebOS was meant to power the next generation of HP smartphones and tablet computers. Early on, however, HP didn’t devote enough attention and resources to developing the platform. In the fast moving world of smartphone and tablet technology, that lack of focus meant the platform fell way behind very quickly. HP did eventually release some underperforming phones and a touch screen tablet but after slow initial sales, HP last week announced that it would be abandoning the system and, more surprisingly, steering the company away from consumer electronics altogether. Unless the system is quickly open sourced by HP, this decision means the effective end of a very fast, innovative operating platform.

Also, think about the purchase by Facebook of the pioneering book publisher Push Pop Press. The publisher specialized in creating innovative, interactive ebooks. After the acquisition, Facebook announced that the publisher wouldn’t be issuing any more ebooks. There is no doubt that the technology purchased as part of the deal will be integrated into Facebook in some way, but there are very few successful, innovative book publishers in the book industry. Facebook just killed a leader in the industry.

These cases show that it is not just inefficiency or unprofitability that kill great companies or products, it can also be due to incompetence, inattention, or, in the case of the Push Pop Press acquisition, a mismatch between the industry that a company is in and the industry an acquirer of the company is in!