SpectatorBytes

Upon learning of Facebook’s acquisition of Friendfeed, very few industry people (myself included) were surprised that Facebook needed to acquire a company to bring in talent to compete with Twitter. However, if one takes a step back, this news should have at least raised an eyebrow. Currently, Facebook is one of the hottest digital media companies and has a best-in-class engineering team. The question that should have been on everybody’s mind is: why would Facebook, of all companies, need to buy talent through an acquisition? The answer is rooted in the dynamics of digital media. The pace of innovation is accelerating so fast that large organizations can quickly fall behind in emerging areas on the Web. Acquisitions are a quick way to catch up.

This situation is not exclusive to Facebook. Most other large digital media organizations have relied on acquisitions to bring new talent into the fold. This is a pattern we have all seen for several years now. Organizations clearly benefit from embracing 3rd party innovation. So, if this is the case, why are digital organizations consistent victims of not-invented-here (NIH) organizational cultures that make it difficult to leverage external innovation? I have witnessed this first-hand as buyer, seller, and advisor. NIH is one of the primary reasons failed integrations outnumber successful ones. Cultures inside large organizations are not designed to effectively leverage 3rd party innovation. Large organizations naturally find it easier to adopt a culture that prides itself on internal innovation rather than the ability to embrace external talent.
While answering the question of why NIH tends to flourish as a culture inside large digital organizations could generate a pretty interesting post, I would rather jump ahead and make the argument that digital media companies cannot afford to tolerate NIH sentiments. The main reason is that small pools of talent can compete with large organizations on an even-level playing field and prefer to remain independent. This has created a situation where the pace of innovation in the broader marketplace is much greater than that inside large organizations. Several years ago, large organizations used to have significant advantages over small startups. They had the ability to develop proprietary systems. They had the deep pockets needed to pursue R&D projects. They had marketing dollars to promote their products.

These advantages, however, have diminished significantly in the current environment.  Given the level of web services infrastructure that exists today (distribution systems, monetization engines, marketing tools, etc.), smaller teams can drive significant innovation without requiring much capital. They can easily get their products distributed. They can access monetization engines, etc. Moreover, the upside for top talent to go at it alone is more compelling and the potential for a payoff may be greater than it has been in the past (though the overall payoffs for talent may be smaller given the size of exits). The result is a much more distributed talent pool than in the past. In the coming years, we are likely to find the number of digital outfits to grow rather than to shrink.

If these are the market dynamics, large digital media organizations would be well-served by embracing 3rd-party innovation. This means actively fostering organizational cultures that look to leverage external talent to strengthen their product experiences rather than to compete with them. This is particularly true in the post-Twitter era where open APIs can enable groups of talent to quickly leverage each other’s capabilities to rapidly create defensible ecosystems of consumer experiences. In other words, innovative companies can leverage each other’s skills to create a distributed infrastructure of services capable of competing with large, centralized organizations. In this context, large organizations are likely to struggle to keep up with the speed of product development, market testing, and innovation that these ecosystems of companies can enable.

If we agree that Facebook is in a battle against Twitter, Twitter’s ability to defend its position with limited internal resources is very impressive. I would argue that the ecosystem of Twitter-focused companies including Bit.ly, TweetDeck, Collecta, Twitpic, Tweetfeed, etc., has made Twitter a much stronger competitor than the actual size of its organization (fewer than 100 people) would have allowed.

The current dynamics reflect the evolution of open systems/platforms, which has been happening for a while. As I have mentioned before, Amazon and eBay were pioneers of this approach in the early 2000s. However, I think the evolution has gotten to a point that large digital media organizations can no longer ignore and thus NIH is not something that they can continue to afford.

This does not imply that centralized organizations should cease to exist but rather that they need to evolve into environments which foster specialization around their core capabilities, build expertise around integration and platform services, and provide adequate support to their ecosystems.

Our industry is increasingly imitating life, where it is important for companies to have friends…many talented friends. Facebook certainly realized that Friendfeed was a friendship they needed to make.

I would appreciate hearing about some of your experiences with NIH.