Is It Waste, or Investment?

3/28/2012 3:05:05 PM
By PSN Staff

by Danny Maland

On March 13, 2012, the site called Internet Evolution published a piece by Mary Jander. It was called, “Google's Mounting Trash Pile,” and you can read it here.

The article included a laundry list of the more expensive propositions that Google has undertaken, all of them having either failed outright or yet to bear fruit. Also included were some direct jabs at Google for not adopting conventional wisdom as they've grown into a superstar company. Here are my “favorite” three, quoted verbatim:

“The question in many minds is whether these projects will actually pay off for Google. There’s a growing sense that an addiction to “science projects” might be subtly eroding Google’s credibility – and its bottom line.”

“It's a market axiom that as competition increases, the need to focus usually grows as well. But Google seems stubbornly deaf to the message. How long can Google afford to ignore the rules and indulge its appetite for engineering?”

“Forget intensive market studies, demand analytics, or any of the other techniques used by square, establishment corporations prior to investing in development. No, Google apparently sees itself as an exception to rules that govern ordinary organizations.”

(All italicized text: Jander 2012)

Now, if you've been following my writing for a while, I'm sure you can anticipate my reaction. I'm the opinionated fellow who rants about curiosity and flexibility. I'm “that guy” who insists that experiments are inherently valuable, and that you sometimes have to break something to find out how it works. It makes sense, then, that I would take Google's side. Since that's no big surprise, the real question is: How does this relate to AV? The answer to that question is that it relates to AV because the arguments can be generalized. This isn't just about Google.

Let's start with a tautology. The core business you are engaged in is your central focus. I would be much more likely to agree with Mary Jander's conclusions if Google was intent on breaking the circle of my circular statement. They're not abandoning the activities that made them over $9 billion last year. (That's not just revenue, by the way. That's net income. It's in the tables here.) I certainly have a great deal of respect for folks that “bet the company” on a venture, especially if they end up winning. I think risk is necessary, but I also think that a healthy core operation reduces experimental risk to an effective null. You get a chance to discover something, or an opportunity to be the first to do something nifty, and if it all blows up in the lab? Your only waste is additional profit. You haven't lost any money at all, in practical reality. Your business is still running in the black, and what's more, you have most definitely learned something.

A concrete example of this is that software-based mix rig that I wrote about awhile back. It certainly carried the risk of expensive failure, and yet it wouldn't have been a fatal risk. The reason why is because the core business, that of providing pro-audio and entertainment lighting support to a local venue, had not been neglected. I have enough in the way of traditional mixing consoles and associated outboard that, had the thing totally flopped, my core business would have continued without interruption. Sure, I would have been on the hook for the bill, but I still made a profit last year even with the bill. What's more, the project didn't flop, and I can now say that the venue and I are running an incredibly powerful mix rig that has only a handful of comparable “sisters” in our city. (There are only two in the immediate area that I know of, counting mine, but it's not like I've done extensive research on who is running what.)

If your core business is running nicely, you can then embrace a second idea, which is that a short-term drop in profits is necessary for long-term leadership. Please refrain from extrapolating this to mean that a short-term drop in profits is a guarantee of long-term leadership! There is no guarantee. Even without that guarantee, though, you've got to be comfortable with expending resources in the pursuit of development. Industry-altering developments require greater resource expenditure, and it may be that the expenditure curve is non-linear. I can't say for sure.

To the folks who obsess over quarter-to-quarter profit and growth, this looks wasteful. Obscenely wasteful, even. Their counter-argument is that the long-term concern of an organization is fed by being very careful in the short-term. However, the counter-counter-argument is this: Without truly embracing innovative effort in the short-term, the organization may be gravely damaged in the long-term. Kodak, for instance, effectively sunk itself when it apparently bailed out of innovation in favor of just looking five feet down the road. As far as I can determine, they had an honest-to-goodness (if very impractical) digital camera in 1975. It seems that the real problem was a desire to exclusively feed their film-based business. They didn't want to take too much away from their core business, and this may have led to their bankruptcy in the end. What's even more painfully ironic is that Kodak holds a large number of patents related to digital cameras. They actually spent money on innovative research, but they just couldn't handle the idea of the additional short-term profit drop from pursuing commercialization of that research. (Again, this is “as far as I can tell.”)

You can see how this might shake out in our world via a hypothetical scenario. Let's say that you're a manufacturer of projectors. Your core business is generating a predictable profit of about $10 million. One day, the senior human in charge of R&D comes to you with great excitement.

“We went to this show last week, and the venue was using LED lighting for everything. They were running a pretty impressive display on a single 15-amp circuit, and those emitters can last for ages. I think we could adapt that technology for the light sources in our projectors.”

“That's a pretty nifty idea,” you say. “How much do you think it would cost to make all that happen?”

The R&D human thinks for a few moments, and then responds, “I think it would take $9 million over three years to make it commercially viable. That's not including manufacturing costs, of course – just the research and prototyping.”

At this point, a business and accounting human pipes up. This one tends to focus on the short-term. “I don't know about this. You're going to knock our profits down by a third, for three years in a row, for something that's not proven yet? If it actually works, what's it going to do to our lamp sales? If these new ones last forever, that revenue stream is going to drop down. I don't know about this...”

Of course, if I was in the driver's seat, I would tell the R&D human to get cracking. Why? Because the core business is making plenty of money to fund the research. Even if the research ends in total failure, the company will still be profitable. Furthermore, if it is a total failure, then we would at least have a good handle on what doesn't work. I also have to put aside my fear of cutting into an existing revenue stream. If I'm honest with myself, I know that the industry is always changing and updating. If I do nothing but protect my immediate core business, then I am running a different risk – that of having to catch up to a competitor who did spend the money to develop a new light-source.

Science projects aren't a waste of money. If you're Google, you can afford to spend money on things that are barely connected, if at all, to your usual revenue streams. You remain profitable, and stand a chance of busting open a door to something that's unexpectedly brilliant. If you're not Google, then you can't afford to go so far afield. Even so, reducing profit to potentially create something new is not a bad bet by any means. It's not a waste. It's an investment.

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