RIM and Cisco Pursue Lateral Expansion

One of the more fascinating things I like to watch is large, established technology companies attempting to branch out into lines of business in which they have no history. I prefer to do this as a spectator, at some remove, since it so often goes so spectacularly wrong. Acquiring or merging with a company is never for the faint of heart even when both operate in the same space and have truly complementary products and services. I still remember how Nortel stumbled from one ill-conceived acquisition to another in management's attempt to transform Nortel into an "IP company".

There are two recent, though still rumoured and unconfirmed examples that caught my attention: RIM is allegedly in talks to acquire a mobile advertising firm, Millenial Media, and Cisco may be pursuing Skype. The former rumour is better substantiated in the press, and the story also passes the credibility test since RIM's key competitors -- Apple and Google -- are moving aggressively into mobile ads as a potential future revenue source. It is a stretch for Apple, but perhaps even more so for RIM which does not yet have much consumer sector success in either its products or services, especially expertise in consumer marketing and design. I was nevertheless amused to hear this rumour the day after posting my article describing RIM's challenge to finding a new recurring revenue source.

In Cisco's case the driver behind their move is less clear to me. It is no secret that they've wanted to get into people's homes for some time now, and that supposedly drove their acquisition of Linksys several years ago. Regardless of how successful that move may have been to revenue growth or profitability, it would be a stretch to claim that their brand awareness in the consumer space is much improved. Skype would change that situation dramatically. Of course Cisco has had a presence in consumer VoIP services for some time, starting years ago when their ATA products were distributed by Vonage and others to couple analogue phones to home broadband services, but Skype would be a big, big step up from that.

Unlike RIM, Cisco has a track record of making many successful acquisitions, and doing so at a rapid pace. They seem to have the practice down to a fine art. However, integrating Skype into their operations will be less routine because of its size and, most importantly, Skype's business being so very different from what Cisco now does. This is no small matter since it is one that has ground down many companies. Can Cisco do better? Perhaps. They should at least be able to do better at it than Ebay managed.

The reasons why many companies fail at this sort of lateral expansion into new businesses and market sectors are many. Unless there is a good strategic vision to justify the acquisition that is also executed exceptionally well, the acquisition usually just disrupts the operations and successes of both parties. In the end the company may once again be sold, passed onto a hopefully better parent, or kept and operated at arm's length as a separate subsidiary. The latter is fine if that is the original intent, but if not then it can be a distraction to senior management and confusing to shareholders even if the acquired company continues to grow and be profitable.

I would very much like to hear what Cisco would propose to do with Skype if they are really interested in the company, to somehow integrate it into their operations for some synergies (that was Ebay's stated reason, though they failed to even convince anyone that it made any sense), or simple as a marketing tool to raise their profile with consumers and drive sales of their current and future consumer products. That's the best justification I can come up with right now, and it is one that I do not find compelling. I eagerly await further news regarding this rumour.