164-Acquisitions to Gain Product Capability

There are three primary reasons to make an acquisition. First, the acquirer may use the acquisition to reduce its cost by consolidating and reducing the total cost of overlapping cost functions. Second, the acquirer may seek to gain a new set of customers. And, third, the acquirer may be seeking a product capability which it does not have. In general, we believe that a successful acquisition will meet at least two out of these three criteria.

Recently, both Apple and Google have made important acquisitions. (See “Audio Tip #104: Where is the “Profit” in Expansion?” on StrategyStreet.com.) Both of these acquisitions have the bonus of acquiring a product capability that the company needs. Google acquired AdMob, a company which places ads on mobile web sites and applications. This is a very fast-growing market. Apple, shortly afterwards, followed suit by acquiring Quattro Wireless, a smaller competitor of AdMob. Google needs this acquisition in order to extend its advertising expertise into the mobile market. Apple needs its acquisition in order to make some revenues on the many free apps that run on its iPhones.

Which of the two companies is likely to be more successful in its acquisition? (See “Audio Tip #200: Using Acquisitions to Create Economies of Scale” on StrategyStreet.com.) Apple should certainly be able to generate revenue relatively quickly because there are so many free apps already out for the iPhone, which run on an advertising business model where the app is free to the consumer. On the other hand, Apple’s culture is hardware oriented. The company may have difficulties in dealing in a largely service-oriented market.

That won’t be Google’s problem. It already lives in the advertising world. In addition, AdMob is a much larger company than is Quattro. Google is likely to have acquired a new product capability with a lower cost structure than its Apple/Quattro Wireless competitor.

Posted 1/25/10

Update:

Apple appears to be the winner of its race with Google, even in advertising. In part, this is due to its control of its own ecosystem. In another part, this is due to the benefits to Apple of the app tracking transparency Apple introduced.

Apple seems to be able to overcome Google’s apparent software advantages. In 2021, Apple sold 240 million iPhones while Google’s Pixel 6 did not sell well. Google software has a combined 4.3 billion users compared to Apple’s 1.65 billion users. In addition, android is far larger than Apple in the smart phone operating market. However, Apple’s users are wealthier than average and more willing to spend money on apps. In addition, Apple has an integrated app and hardware system which enables the company to collect more revenue per customer than does Google. Google’s software runs mostly on third-party hardware, so Google does not have the revenue opportunities on each customer that Apple enjoys.

Apple has introduced App Tracking Transparency, ATT, which allows the user to choose whether an app can track the user’s activity across other company’s apps and websites for the purpose of advertising. Since Apple controls its full ecosystem, it gathers much more data about its users than companies, such as Google, who do not control their full ecosystem. As a result, many analysts expect Apple to surpass Google as the world’s largest ad company.

Apple is the winner here because of its fully integrated ecosystem. It offers advertisers a relatively unique Function advantage of providing full information on its users to potential advertisers. This innovation reduces the resources advertisers would have to use to collect equivalent information from other sources. See HERE and HERE for more explanation.

8/22

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