Don’t buy that internet company

By Felix Salmon
December 14, 2010
Jim Surowiecki in this week's New Yorker.

" data-share-img="" data-share="twitter,facebook,linkedin,reddit,google" data-share-count="true">

“The history of the Internet is, in part, a series of opportunities missed,” says Jim Surowiecki in this week’s New Yorker. Blockbuster could have bought Netflix for $50 million dollars; Excite turned down the chance to buy Google for less than $1 million.

But how valuable were those opportunities, really? If Blockbuster had spent $50 million on Netflix, then it would just have run out of money that much more quickly. There’s no chance that Blockbuster’s management would have let Netflix grow, unencumbered, in the way that it did independently. Similarly, Google would have been stifled as part of Excite: it would have been nothing more than one of many search algorithms competing on the internet.

Buying internet companies is very, very hard: even if they are set to be very successful on their own, that’s no reason to believe that they will have similar success in-house. Google bought Foursquare back in 2005, when it was called Dodgeball, but then closed it down; only when its founders left Google and recreated the company as Foursquare on their own were they able to succeed.

And so I’m suspicious that Surowiecki’s employer, Conde Nast, is going to do well with its new $500 million warchest. Conde is rich, and can buy companies, but at that point the problems start: it’s always much easier to spend money on acquisitions than it is on internal growth, with the result that those acquisitions can end up starved of money. Conde is a particular case in point: it bought Reddit and neglected it so badly that the site ended up having to run a pledge drive to raise needed funds.

Big established companies with their own revenue streams simply don’t have the skillset needed to be the next Y Combinator or Softbank, and they probably shouldn’t try. If Conde is smart, it’ll restrict itself to taking minority stakes in companies where it can be strategically helpful. Otherwise, it’s liable to end up looking like News Corp with MySpace.


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

Felix, thanks for this. If only New York Times Digital had realized and further capitalized its “Abuzz” (a social/news community gone since ’04)? It was a much earlier Facebook and Twitter, with intense global reach and participation. NYTD owned it and, well, disabled it. Abuzz contributors’ efforts, alone, to locate those lost on 9/11 and to console its members around the world is now tucked away within the Library of Congress. -bleuz00m

Posted by bleuz00m | Report as abusive

What about if Blockbuster had bought Netflix for $50m *and* put Reed Hastings and his team in charge of all Blockbuster’s digital/online operations…?

Posted by johnband | Report as abusive

Reddit didn’t need a pledge drive because they were “so badly neglected” by Conde Nast. They needed a pledge drive because the site isn’t profitable. Conde Nast has been artificially propping that site up for five years and it STILL hasn’t made a dime worth of profit.

Companies don’t buy sites so they can continue to throw good money after bad year after year after year. They buy sites because they hope to make a profit on them. After five years, it is now obvious to even the most optimistic dreamer that Reddit is a proven loser. In 2011 you will see Conde Nast dump that pig for pennies on the dollar.

Posted by LouFr | Report as abusive


Bullseye: you nailed it.

Posted by crocodilechuck | Report as abusive

Interesting post. Not sure I agree on one thing. I remember Dodgeball as about finding where your friends are in order to meet up. Foursquare seems more about reporting where you are in order to state “I’m a regular”. There’s a bit of difference in those motivations and the latter seems more likely to end up profitable (since the venue may want to attract regulars rather than a sudden crowd).

In a similar vein it wasn’t Google the search engine that was sucessful it was Google the search-advertising engine. Given Excite was a portal, it would likely have been a disaster, but the Google that is a big company now isn’t the one they would have bought. The ‘idea’ that made the money came later (I was once told it came from Yossi Vardi in a casual conversation with Page and Brin).

Posted by nicfulton | Report as abusive

Google “adwords vardi brin”, it seems to report that Yossi’s idea was important, if not actually the seed of the idea.

Posted by nicfulton | Report as abusive

Disruptive technologies, generically. Hard for successful managers to admit that everything they know is wrong. But then, Felix, how many of your beliefs about the nature and future of the journalism business are wrong, and what career decisions are you making now that will be fatal, say 15 years out.

Business is a full contact sport.

Posted by ARJTurgot2 | Report as abusive

The question of building versus buying IP is always a tough one. If a company decides to get into a particular game, buying the IP can save months if not years of development time. However, the cultural fit is often bad, and the goals and directions of the two companies may be different, and can ultimately result in that IP not being used as it is intended. I’ve seen failures more often than I’ve seen successes.

Re: Foursquare, does anyone else find it a bit creepy to broadcast where you are at a given moment? I work at home, and my wife forbids me to put out of office messages on my business phone due to burglary concerns (the house is empty, bad guys). Foursquare seems to take that a step further by publicly letting it known precisely where you are at a given time. While this may not be a big deal if you live in a city apartment building, in more rural areas it seems foolish to let people know you are away.

Posted by Curmudgeon | Report as abusive

You missed two of my all-time favorite internet acquisitions: Netscape, by AOL, and, by Yahoo.

But I suspect there are dozens of small companies we’ve never heard of that large companies buy to quickly fill gaps in a development project or to hasten a strategic goal, because buying is faster than building. They aren’t sexy but they are also unsung.

I agree that the big company buying the not-quite-as-big company is often doomed. There’s AOL again — buying Time Warner …

Posted by johncabell | Report as abusive