How the Tech World is Winning Through Deals in New Markets

By: New Markets Advisors

A comprehensive growth strategy generally requires a well-balanced portfolio of organic growth programs and adjacency plays that support the core business. Winning in adjacencies is not always easy. In fact, many companies decide every few years to timidly test the waters of new markets before ultimately returning to the safe and stable profits that they know the core business can provide. 

Nevertheless, those that leverage key assets from the core and use new market opportunities to bring hard-to-capture value back to the core can save themselves from the do-or-die decisions that need to be made when a company waits too long to evolve. To that end, several major tech deals over the past few months have done a good job illustrating five of the primary ways companies can use new businesses in adjacencies to support the core.

• Customer lock-in — Between Amazon’s recent announcement of its Amazon Prime price hike and the general rise in eCommerce free shipping offers, some have begun to question the value of Prime. In fact, ShopRunner — a Prime-like service that works across a wider variety of retailers — recently announced that it would offer a free one-year membership to individuals willing to leave Prime for ShopRunner. In a move to ensure that it keeps this attractive pool of customers, Amazon announced a deal with HBO that will give Prime members free access to select HBO programming. In effect, Amazon is using its unique infrastructure and bargaining power to provide shoppers with (beyond-the-core) value that other retailers cannot easily replicate.
• Differentiate the core — Earlier this year, Lenovo announced that it was purchasing Motorola’s smartphone business for nearly $3 billion. In addition to giving Lenovo access to a wider and growing customer base, this deal will make Lenovo one of the few major players to have successful global product lines in PCs, tablets, and smartphones. In addition to being able to share resources and expertise across device categories, Lenovo will have the opportunity to leverage this adjacent new business to differentiate its devices by offering cross-device integration and a one-stop shopping experience that most other device manufacturers cannot provide.
• New sources of value — The FTC just approved Facebook’s plan to spend $2 billion acquiring Oculus, a leader in virtual reality technology. While Facebook has expended substantial effort optimizing and enhancing the desktop and mobile arenas, the Oculus acquisition gives it a springboard to a new platform that is still in its infancy. By moving beyond its core competencies and buying a right to play in the virtual reality space, Facebook can help shape the development of an adjacent space, securing a long-term space for Facebook to grow into. This looks to not only create value for the consumer — through a new way to experience interconnectedness in the digital age — but also to create the potential for a plethora of new profit models for the core business.
• Block asymmetric threats — Prior to announcing its plan to buy Oculus, Facebook also spent $19 billion purchasing WhatsApp, a messaging app for mobile devices. Although part of its high price tag was driven by its large customer base (over 450 million monthly active users worldwide as of the acquisition date), Facebook also paid a premium to ensure that it could protect against indirect competition. WhatsApp provides an enormous base of mobile messaging users looking for a cheap alternative to SMS, with particularly large opportunities in emerging markets. Since the acquisition, WhatsApp’s user base has grown fastest in Brazil, India, Mexico, and Russia. By buying such a big stake in an adjacent domain, Facebook is sending clear signals about its intentions for mobile messaging.
• New consumption occasions — One of the earliest tech acquisitions this year was Google’s $3.2 billion purchase of Nest — the second largest acquisition in Google’s history. Although there has been massive speculation surrounding Google’s motives, it is clear that the deal offers the potential to bring Google multiple new revenue streams. At the basic level, making a big play in the connected-home space allows Google to credibly sell smart devices in a world over-saturated with analog alternatives. More interestingly, Nest’s devices allow the company to gain insight into the real-time energy demand and behavior of connected-home customers. Coupled with Google’s existing analytics capabilities, Nest’s utility partnerships could lead to a new business model that allows Google to profit by saving money for both consumers and utilities.

After seeing companies like these succeed in adjacencies, many others will try to do the same. Of that group, most will see diluted short-term profits and realize that they do not have the stomach for the uncertainty that a foray into a new market always brings. Many will bring in a new CEO with a leaner, back-to-basics approach that focuses all efforts back on the core business. Nevertheless, a small number of the best-run businesses in that group will succeed in their new market expeditions. And those businesses will have two things in common. First, they will leverage enough of the core’s defining competencies to earn a right to win in the new space. Put another way, they will borrow the assets that let them win, and leave behind those that would slow them down. Second, they will use the play in the new market to improve the core by bringing in value that would otherwise be expensive or difficult for the core to access. Most likely, that value will take the shape of one of the five categories from above: locking in customers, differentiating the core, creating new sources of value, blocking asymmetric threats, or creating new consumption occasions. By creating a plan that succeeds along those two dimensions, companies will be able to use new market plays to bring significant value back to the core.

Story by Dave Farber.