Break Up The Techs!

You’ve heard the cry break up the banks, haven’t you? Politicians like Senator Elizabeth Warren of Massachusetts continue to press the argument that our global banks are too large, too diversified, and too complex to continue in their present forms.

If that’s what they assert about the global banks, though, what would they say about our global technology companies? Just last week, the telecommunications giant Verizon bought internet pioneer AOL for $4.4 billion. And at roughly the same time, Facebook announced its entry into the business of publishing original news stories.

Why are firms like General Electric and Citigroup shedding their non-core businesses and shrinking down to their core competencies, while others like Verizon and Facebook expand aggressively beyond their fundamental services? Most proponents of expansionary strategies offer the justification that seemingly unrelated businesses can be aggregated in order to recognize underlying synergies.

On the other hand, the potential for synergies was the driving force behind AOL’s ill-fated merger with Time Warner. That 2001 transaction, executed just ahead of the bursting of the millennium era technology bubble, is often judged to be one of the worst merger decisions in business history.

So how are firms to know when diversification is a sound strategy? And how are they to judge when it is a foolhardy one?

There’s never a foolproof way to know the answers to such questions with absolute certainty. Nevertheless, it’s easy to understand why Verizon believes that it can strengthen the revenue potential of its telecommunications backbone by integrating AOL’s online advertising function. And, likewise, it’s a cinch to envision Facebook expanding its online market share by leveraging its existing platform to publish news stories.

Conversely, it’s difficult to envision how GE’s ownership of NBC Television could have helped it sell more jet engines. And it’s hard to argue that Citigroup’s ownership of a Japanese retail bank network could have helped it expand in the United States.

So, at least in retrospect, we appear to be quite capable of differentiating between sound and foolhardy expansion strategies. Regrettably, though, it appears to be far more difficult to proactively foresee such results.

The Great Piggy Bank Adventure!

Where do you turn for personal investment guidance?

Do you read a newspaper such as the Financial Times or Wall Street Journal? A magazine such as Forbes or Fortune? Or are you an internet-savvy type who peruses web services such as MarketWatch or Motley Fool?

If none of these financial news outlets is particularly helpful to you, you might wish to try another source of information: Disney World!

Believe it or not, two weeks ago, Epcot Center in Orlando launched The Great Piggy Bank Adventure in collaboration with the Baltimore based investment house T. Rowe Price. This fun filled interactive experience features an animated pink piggy bank as a Personal Investment Guide (hence the double entendre P.I.G.) who leads his audience through a series of learning activities.

What is there to learn? According to Price, the content encompasses financial goal setting, personal budgeting, and asset diversification. Apparently, Disney World is now in the business of providing the type of guidance that is offered by your (human) personal investment advisors.

Mission Creep

Disney describes Epcot as a theme park that focuses on: (a) technological advancements, (b) innovation, and (c) wonder. Then why offer personal investment advice? There isn’t much (a) technology or (b) innovation in concepts like asset diversification, so we can only assume that Disney’s PIGs are attempting to create a sense of (c) wonder.

That might not be very difficult. After all, most American families are already wondering why they lost so much personal wealth during the great market crash of 2008.

Military forces have coined the phrase mission creep to refer to catastrophic failures when new goals veer dramatically from initial objectives.  Epcot Center was once designed to replace the historic World’s Fairs of yesteryear; we can’t help but wonder whether Disney’s investment center represents a mission creep of its core entertainment function.

After all, this wouldn’t be the first example of mission creep among media conglomerates. Time Warner’s disastrous foray into internet access via its AOL merger, for instance, destroyed over $100 billion of shareholder value. And the New York Times’ purchase of the Boston Globe has also been a money loser.

One Man’s Meat, Another Man’s Poison

So when is product line diversification a smart thing, and when is it catastrophically foolish? At the time it occurred, the merger of AOL and Time Warner was billed as a brilliantly synergistic combination of clicks and bricks; in retrospect, could we have predicted that it would end so badly?

Let’s review a few other examples to glean a little insight about this issue:

> Disney Land itself was originally conceived as a major business diversification from a product line of animated films. The strategy succeeded, in part, because the films’ characters were easily and convincingly replicated by genial costumed employees.

> On the other hand, Citigroup provides a sober example of overdiversification. As soon as Congress repealed the Glass Steagall Act, Citibank morphed into Citigroup through the acquisition of the insurer Travelers and the investment houses Salomon Brothers and Smith Barney. The result? A flirtation with bankruptcy, a government bailout, and economic ruin.

> Google, interestingly, has experienced both success and failure in its efforts at product diversification. Its Gmail messaging and Maps directional search services have helped it seize significant market share from rivals. But its development of the virtual reality system Lively flopped; it was quietly discontinued in 2008.

The Nexus of Need and Trust

It is indeed quite difficult to predict success or failure in product diversification efforts. Upon reflection, though, we might wish to consider the related functions of customer need and trust. In other words, if customers need someone to provide a service and trust us to provide it, then a firm may be advised to consider taking a risk and attempting to serve their needs.

For instance, consider Disney’s original decision to develop theme parks. Families in the 1950s needed vacation destinations to bring their children, and being familiar with the simplistic “mom and pop” local amusement parks that existed at the time, they trusted Disney to provide a superior experience. Similarly, several decades later, web surfers needed a search service to scour their email message files for information; they trusted Google to deliver this service because of its natural expertise in web page search technology.

But do any of us really trust our credit card issuers to pay our heirs when we (hopefully) die decades in the future? And do investment banking clients really need to obtain these sophisticated services from their checking account providers? In retrospect, it is relatively easy to understand why Disney and Google succeeded while Citibank failed.

When customer need and trust are both present, a product diversification strategy may well prove to be successful. Thus, if many of us need new financial information services and trust Disney to provide it, then the Disney P.I.G. may indeed become a hit. On the other hand, if many of us can’t quite bring ourselves to trust animated piggy banks to teach the fundamentals of personal investment planning, T. Rowe Price may be wise to look elsewhere for new growth opportunities.