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Can Digital Conglomerates Be Fixed? June 24, 2013

Posted by Bernard Lunn in Uncategorized.

Traditional conglomerates, offering diversification to investors within a single operating company, went out of fashion in the 1980s when Funds and other financial innovation offered more efficient diversification. The management mantra became “core competency”.

Conglomerates have re-appeared in the digital realm. There are two types of digital conglomerates, both created accidentally through acquisition logic that made sense in a pre-digital era:

1. Traditional media roll-ups. The logic here was to save costs on shared overheads. For example, in a print business, scale enabled you to negotiate lower costs for printing and circulation management. Many of these companies have successfully discarded their legacy core but still have the underlying conglomerate structure.

2. Acquisitions to fill the growth hole left when the original Competitive Advantage Period ends. The logic here was that integration would better serve the user. This applies to pre-mobile online companies such as Yahoo and Facebook. The Competitive Advantage Period is halving with each generation of technology, so this creates some huge once-great companies that are becoming missionless conglomerates. These companies have strong cash flows and balance sheets so they can easily buy the digital ventures being eagerly “exited” by venture backed startups, but the users don’t see any integration logic. Users can integrate by simply clicking. If the integration is a bit more difficult an incubated venture can create something using “programmable Web” APIs in one long Red Bull fuelled weekend.

In both cases there are still some reduced costs from scale in negotiating lower server hosting costs but this is tiny – a rounding error on a rounding error because Moore’s Law means that server operating costs keep falling.

In both cases there are still some reduced costs from scale in senior management and admin overheads. This will tend towards the same logic that applied to the earlier generation of conglomerates. The Head Office overhead will scale back to become more like a Private Equity Fund, limiting its role to capital allocation and CEO monitoring.



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