Scale matters in Tech. This has never been more true as businesses increasingly go global.
Consider Netflix’s $13 billion content investment in 2018. Amazon and its Borg-like Prime service is also a significant content player. To round out the “Big 3”, consider Disney and its ESPN+ SVOD (“subscription video on demand”) service as well as Disney’s forthcoming Disney+ SVOD service. With the above as backdrop, imagine it’s 2015 and you are AT&T CEO Randall Stephenson. Yourself and the Board are contemplating whether to pursue HBO – which at the time was the original content crown jewel. It’s now 2019, AT&T has acquired HBO/Time Warner and HBO is no longer the crown jewel but a sub-scale content asset. How quickly times change. Sure, HBO/Time Warner content may provide AT&T with an edge over Verizon, Sprint/T-Mobile and enable AT&T to catch-up with Comcast/Universal. However, where to go from here? There is no scenario in which AT&T catches-up to the Big 3. Therefore, how much capital do you allocate to the content business over the next 3-5 years if you’re AT&T? How do you think about global distribution and how may distribution change over the next 3-5 years?
Moving to Enterprise/ Infrastructure Software, consider the case of IBM which has placed a significant bet on Cloud Services. Late to the cloud game, IBM trails Amazon’s AWS unit (the enterprise cloud pioneer), Microsoft Azure and Google. To play catch-up, last year IBM announced a $34 billion (63% premium) acquisition of Red Hat. Too little too late. IBM remains a sub-scale “cloud” player and does not have the balance sheet to invest at the same rate as AMZN, MSFT or GOOG. The $34 billion would have been far better deployed years ago in pursuit of high margin Information Services companies such as CoStar (tkr: CSGP), IHS Markit (tkr: INFO), Solera (pvt.) and Verisk (tkr: VRSK), that could have provided IBM meaningful scale in specific verticals. Further, the data generated by those Info Services companies could have provided grist for the mill – i.e. data for IBM Watson to analyze and productize.
So what’s the moral of the story? The top 2-3 players in a given market typically capture 80% of that market. Therefore, if you can’t be the number 1, 2 or 3 player in a given market it may not be worth competing. The long-term ROIC equation may be better served by defining a new market, or competing in a different market where you may quickly capture a leadership position.
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