US Internet Giants Set on Relentless Acquisition?

By October 01, 2014
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Since the late 1990s, Silicon Valley has shown a determination to gain and keep the upper hand in all digitally-oriented sectors, and the major Californian players have been acquiring companies for increasingly astronomical sums. Clearly the overall strategic importance of digital is not to be underestimated.

Instagram, Whatsapp, Oculus Rift, Titan Aerospace… these are all pioneering companies which have been purchased, mostly at the startup stage, for huge sums of money by the giants of the Internet, mainly the GAFAM 5 – Google, Apple, Facebook, Amazon and Microsoft. Whatsapp, a Mountain View-based startup which created a proprietary cross-platform instant messaging subscription service that now boasts over 600 million active users worldwide, was bought by Facebook for $19 billion in February this year. By way of comparison, Google acquired YouTube in 2006 for just $1.6 billion and Instagram cost Facebook a mere $1 billion in 2012. In a digital economy where being able to react fast to opportunity is one of the key success factors, these Internet giants have shown no hesitation in buying up disruptive companies at every touch and turn, counting on extraordinary growth prospects based on huge communities of loyal users. Now a recent report from the French Institute of International Relations (IFRI), warns that GAFAM appear to be systematically swallowing up any and every company which looks like creating disruption, and that they seem prepared to stray away from their core businesses in order to keep their competitive edge and remain innovative.

Dual acquisition strategy

The report points out that the US Internet giants’ acquisition strategy has been based on two linked approaches – pursuing both ‘horizontal’ and ‘vertical’ integration. On the horizontal front they move quickly to acquire startups where the business is often still in its infancy, a strategy which is taking them little by little outside their original field. For instance, in investing $192 million in ride-sharing service Uber, Google is building an outlet for Google Car, thus widening the ecosystem for its services. Meanwhile their vertical takeovers are slowly giving them control over the entire value chain of their core businesses. For example, in April Google purchased Titan Aerospace, a company founded in 2012 which makes solar-powered, high-flying drones, snatching the prize away from Facebook, which was strongly rumoured to be about to move in for Titan. The company which started out as a search engine has already considerably widened its footprint across the digital universe but the acquisition of Titan looks likely to increase Google’s capabilities in the whole field of mapping and strengthen the company’s influence in worldwide Internet connectivity, as the drones are able to stay 20,000 meters high for up to three years and could bring wireless Internet to the most remote locations.

Digital becoming a battleground?

Google and Facebook together notched up $33 billion worth of acquisitions and stakes during 2012-2013. If the Web giants continue to take over companies – many of which do not yet have any clear business model – for such astronomical amounts, this is bound to have an effect not just on the world economy but geopolitics as well. Some commentators are already talking about a new speculative technology bubble which, this time around, would involve sums far greater than the valuations placed on fledgling companies during the ‘dotcom’ bubble of the early 2000s. Whether a bubble is building or not, however, the whole digital area is indisputably one of the great economic and strategic issues of the 21st century and many countries are having difficulty facing up to the challenge posed by the crushing domination of the United States in this field. The IFRI report authors argue that the Internet giants are in effect fast becoming purveyors of US ‘soft power’, cleverly attracting users to highly-appealing services and hooking them to a universal brand image and a universal way of life.  This approach poses serious questions for Europe – a prime market for GAFAM – whose legislators seem unable or unwilling to stem the tide of cultural invasion with regulation.  To have any serious chance of facing down the power of the US giants and creating its own Internet ecosystem, a country needs size. The obvious examples are China, where e-commerce giant Alibaba is proving to be a powerhouse, and the Russian sphere of influence, where search engine Yandex has a strong local following. Nevertheless, as digital technology encroaches on all layers of society, the question of who has control over the Internet ‘backbone’ is already a vital strategic issue, for both commercial companies and national authorities.

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