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Failure is all the rage—for tech companies

Why failure has consequences, even if these tech giants have convinced themselves it doesn’t


 
CREDIT: Kimihiro Hoshino/AFP/Getty Images

CREDIT: Kimihiro Hoshino/AFP/Getty Images

In the history of American corporate bellyflops, a few unfortunate moments have tended to stand out. The Ford Edsel. Yeah, that was a painful one. How about New Coke? Ouch. And don’t even get me started on Google Glass.

Ah, but there’s the rub. You see, by almost any measure, Google’s debut in the wearable computer market—an eyeglass-like device that simultaneously lets you harness the power of the Internet from anywhere, while getting you punched in the face in certain parts of San Francisco—was a costly blunder for the company. For all the hype and promise that accompanied the arrival of Google Glass, the things now litter eBay, selling for half the cost of what the unfortunate souls who bought them originally paid. There’s still the occasional analyst who touts its potential down the road, in some distant version, but what the world now knows as Google Glass has been an utter failure.

But this is Silicon Valley we’re talking about, and so that’s seen as a good thing.

Totally blowing it has increasingly become something to boast about in the tech sector. In a recent feature, the New York Times pointed to scores of blog posts written by entrepreneurs detailing how and why their ideas went wrong. The paper noted that failure is now a badge of honour among tech entrepreneurs. You’re not the real deal until you’ve crashed and burned at least once and lived to tell about it. The popularity of failure as a virtue is borne out in the current mini-boom in books about business defeat, titles like Fail Fast, Fail Often: How Losing Can Help You Win and The Up Side of Down: Why Failing Well Is the Key to Success. And, increasingly, the concept is being exported beyond tech as traditional businesses try to emulate Silicon Valley’s start-up culture. In an interview with Maclean’s in September, a senior executive at industrial conglomerate General Electric said the company embraces failure as part of its business process: “The focus is not to be perfect, but be iterative. If you’re going to fail, fail quickly, then come back and iterate again.”

It’s an appealing ideal for entrepreneurs: Learning to overcome failure is crucial for anyone trying to strike out on his own or launching a start-up. But there’s a wide gulf between failure as a business philosophy for start-ups, and the wanton waste that now characterizes many decisions made by Silicon Valley’s biggest tech companies. Consider just a few frivolous examples from the likes of Google, Facebook and others. In 2012, Google bought money-losing handset-maker Motorola for US$12.5 billion, only to sell it off earlier this year for US$2.9 billion. In addition to Google Glass, the search-engine company has pinballed from one product launch to another, with only very mixed results. At the same time, Facebook CEO Mark Zuckerberg shows no sign of letting up on his acquisition binge. Facebook forked out US$21 billion to buy Whatsapp, a messaging service that generates less than US$1 million a month in revenue and suffered US$138 million in losses last year. Consistently, tech companies are getting more deals wrong than right. In the rest of the corporate world, heads roll when that happens. Instead, Facebook’s shares are trading at a multiple of 85 times earnings. By comparison, Apple, a company far, far less prone to failure,has a price-to-earnings multiple of just 17.7.

The biggest misstep of Google, Facebook and their kin might have been that, after frittering away tens, if not hundreds of billions of dollars, their core business models have failed to evolve away from their reliance on advertising, a precarious business model, as any newspaper exec can tell you. Google still makes close to 90 per cent of its revenue selling ads, a formula virtually unchanged after years of expansion into the wireless market (Android warranted just two mentions in Google’s most recent quarterly report), while Facebook’s dependence on ads plastered on its users’ “newsfeeds” is even greater.

Nevertheless, some management consultants have been quick to spread the gospel of virtuous defeat to other industries, despite its obvious limitations. Large industrials have more physical assets than tech firms do, meaning that, when an investment goes sour, it’s harder to bounce back. For instance, Google’s move-fast-and-break-everything approach won’t translate well to a carmaker with hundreds of factories and obligations to thousands of dealerships. In fact, Google’s sprawl means it now resembles those behemoths more than the lean start-up it once was.

It shouldn’t be forgotten that we are in an investment climate characterized by near-zero interest rates and easy access to free money. The same lack of discipline that historically leads to investment bubbles is enabling tech companies to make wild and frivolous bets.

Failure has consequences, even if these tech giants have convinced themselves it doesn’t.


 

Failure is all the rage—for tech companies

  1. Some of the silly business decisions and failure examples mentioned in this article are actually not failure nor bad business decision blunders, when you analyze the business dynamics a little closer. Take the Google US$12.5 billion buy-out of Motorola in 2012 then sell it to Lenovo for US$2.9 billion a year later; on the surface this looks like a US$9.6 billion lost to Google in this deal. However, when we drill into the details of the deal, we will find out there are net benefits for all three companies involved (Google, Motorola & Lenovo).
    Google purchased Motorola for 2 main purposes. The first one, which is more on the surface, to re-energize the Android’s ecosystem by using some of Motorola’s patented technologies.
    Also, Google still owes and kept much of Motorola’s patents even after selling to Lenovo; those patents which can be later sell off individually and yield a much higher price or keeping them to Google’s strategic benefits (e.g. preventing other competitors owning certain technology patents first is a strategically sound move).
    The Second reason is a little less obvious but it is more important but very much related to the first.. and the real reason for Google to purchase Motorola at the first place. Having Motorola onboard, Google made use of Motorola hardware manufacturing capacity to produce “stock” Android experience devices (FYI, stock Android experience means, no manufacture customized UI on top of the Android OS on the device, e.g. Samsung put their TouchWiz UI on top of their Android devices. Almost all mobile manufacturers put their proprietary UI on top of the Andriod OS).
    One may ask, why Google all of a sudden so insist on producing “stock” Android phones? Well, apparently, Samsung in the recent years has been pushing their customized UI, TouchWiz on their Android devices a little too much and adding too many bloatwares on their devices, as it began to slow down Android performance on their devices. Even worse, Samsung began to build their own OS, Tizen, which looks identical to its TouchWiz interface, an obvious development to switch over from Android OS to Tizen eventually. Fearing that Tizen will out gun Android, given Samsung’s dominance on the Android market, Google saw this as a threat to their Android OS in the long run.
    So…in response, Google with Motorola, produced a few stock Android base devices like the Motorola X & Motorola G to make a statement in the market (particularly toward Samsung), to show that they have the ability produce their own devices, even if they cut tide with any one of the partner manufacturers. And they strategy worked! In January, 2014, Samsung and Google signed an agreement, which include some patent deals and also Samsung would tone down TouchWiz and reduce the number of bloatwares. This move also re-established Android OS’s importance within the market.
    As for Lenovo purchasing Motorola off Google (in fact, Google announced the sales of Motorola to Lenovo two days after they signed the agreement with Samsung!) It is beneficial to Lenovo as well, as a world leading mobile manufacturer; globally, they are one of the top five manufacturer. And eagerly waiting for the opportunity enter the North American market. As Motorola is a much more well-known brand name then Lenovo in the North American soil, Lenovo may as well manufacture mobile hardware with Motorola brand name on top to enter the North American market. A $2.9 billion buying an entrance ticket into the North American market, seems fair enough to Lenovo and Google (remember, Google still retain all the other Motorola’s patents, they are just selling the brand name to Lenovo literally).
    All-in all, in the Google buy-out then sell off Motorola example, it is a win-win for everyone. Well except for Samsung I suppose.
    Companies sometimes make some really bizarre business moves or decisions that are hard to comprehend by the general public but that are actually making a lot of sense and strategically sound. Just that, if we really want to analyze the situations we need to do a lot more digging, which most of the general public don’t even have the time to do so and sometimes certain critical information are not even available to the general public for analyzing the complete picture.

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