Was Google’s $1.65 billion acquisition the result of decision traps?
For lunch I had the seared Yellowtail, sautéed wild mushrooms, basmati rice and asparagus. Dessert was by comparison pedestrian – luscious squares of peanut butter brownie, and to top it off, a Google ice cream sandwich. That’s not a typo – my lunch was at Google’s Mountain View campus and, yes, they have their own branded ice cream treats.
Perhaps more interestingly is that, by my count, visitors in the cafeteria outnumbered Google employees two to one. Indeed, when I initially arrived at the campus and asked the lot attendant where I could park, he glanced at his watch and said, “Anywhere you’re lucky enough to find – it’s lunch time!”
If you aren’t aware (unlike apparently thousands of Silicon Valley workers) lunch is gratis at Google – for employees and visitors alike.
When I asked my host how Google justifies this and the other ostentatious expenditures I encountered on my tour, he replied that – according to co-founder Larry Page – “Google’s greatest cost is opportunity cost.”
It’s a great philosophy if you can afford it.
And it can lead to all kinds of decisions including gambling $1.65 billion on YouTube.
ON THE SURFACE
The rationale for the YouTube acquisition seemed obvious to the media. In one swift stroke, Google had both taken the offensive – by entering into a new and presumably lucrative advertising venue – and had bolstered its defenses – by plucking YouTube from the clutches of its search rivals.
How much will advertisers pay for access to YouTube’s dedicated following of 20 million unique monthly visitors? According to Paul Keung of CIBC World Markets, the figure is between $200 to $300 million for 2007 alone.
And what would happen if YouTube was acquired instead by Yahoo! or Microsoft? The single greatest threat to Google comes from the other search players. As a one-trick pony, Google can ill afford competitors slowly siphoning away its core revenues.
WHAT LIES BENEATH
A closer examination however surfaces several challenges that have the potential to derail the above strategy. First is the widely reported copyright issue. A few multimillion-dollar lawsuits levied by disgruntled copyright owners could quickly add to the cost of the acquisition. Second is the question of the on-going loyalty of the YouTube community. Once the illegal and ethically questionable videos go and the advertising arrives, will YouTube viewers stay loyal? Switching to similar, more subversive, video sharing sites is not difficult for today’s ‘YouTubers’. Third is the nature of business in Internet time. YouTube’s own ascension took under two years and should serve as a reminder that the next cultural phenomenon – which could draw from YouTube’s audience – has probably just hatched in a Palo Alto garage. Fourth is the ephemeral nature of fads. It’s possible that YouTube and its Web 2.0 brethren will rapidly move through the product lifecycle and into decline (it is illuminating to note that in the past year traffic is eroding on both MySpace and Facebook).
The Decision-Making Process
One would hope that Google’s decision-making process resulted in mitigating strategies for these uncertainties. Moreover, the process would have detailed precisely how Google and YouTube would operate together to maximize gain.
Unfortunately, the evidence is to the contrary. First, the process reportedly took less than two weeks (a benchmark M&A decision timeframe from the Palo Alto based Strategic Decision Group [www.sdg.com] is six months). Second, Google spent $130.5 million on 15 companies in the year prior to YouTube, so it is unlikely that the internal mechanisms for evaluating and integrating acquisitions were sufficiently robust for the YouTube deal. Finally, there does not appear to be a plan yet for integrating the two companies’ services. YouTube is operating as a virtually independent firm and no plan has been announced for Google Video (Google’s competing service).
The Decision Traps
So given the uncertainties and the process issues, it is possible that Google management – like many of us – fell victim to a variety of decision-making traps.