Innogration and Sports (of sorts)

Here at STI the team focuses on innogration for tech companies. We did not coin the word just because it sounds nice but rather because it describes what tech companies must do to survive. They must innovate internally and integrate from externally the required technologies which they can’t build themselves.

No single company can afford to pay for all of the innovation required to compete in the tech marketplace today. Technology has become far too complex for that model to function as it did when it flourished in the 1980s and 1990s for Apple and Microsoft (NSDQ: MSFT). Back then those companies could afford to develop the killer “app” using home grown technology within their products. That is no longer the case.

That definition of ‘innogration’ may read somewhat opaquely so let’s walk through a couple of examples which are in the press right now. Microsoft purchased Nokia (NYSE: NOK) in an attempt to breathe life into its smartphone offering. Previously they tried to accomplish this with a cross-licensing deal with Nokia. The result of the cross-licensing deal produced a  fourth place product which finished behind even the lowly Blackberry.

With the purchase of Finnish smartphone maker Nokia, Microsoft is seeking a game changing entry into smartphones. As a defensive play third place could work for Microsoft in Smartphones. They would keep their hands in the technology so that their other products like Tablets remain competitive and interesting. Ironically, Microsoft used to be a software company. No longer – they make Tablets and smartphones now as they became road kill by having done nothing to innograte those technologies into their software – and it almost killed them.

Microsoft is definitely fighting back now as they not only bought Nokia, but if you read between the lines of the announcement for the layoff of 18,000 workers you will see Microsoft is trying to keep the Nokia employees and shed their own workers who now have become duplicated through the acquisition of Nokia. Of course, some of this is the impact for the US having no labor protection laws and therefore Microsoft can release US-based employees with whatever package suits Microsoft as there are virtually no specifications for US workers being laid off. In Europe most nations require two to three years pay for the severance of employees.

Financially it makes sense to layoff the US workers; however, if you are looking for a game changing product – one where you bet billions to buy an entire smartphone manufacturing company – you are focused on more than just the millions in cost you save by keeping the Nokia employees. So let’s not be this cynical and say instead that Microsoft is keeping the Nokia employees because they know that their employees did not rock the industry with their offering.

Microsoft is looking for the new Finnish employees to knock one out the park, just as Nokia had done a decade ago with cell phones which had bigger screens and more functions than the competition. That is the core of what Microsoft is seeking to do with the announcement of reducing their workforce by over 10%. Microsoft is not alone in moving into new industries in an attempt to leapfrog the competition. The speed at which technology evolves mandates either leapfrogging or being run over, as those dinosaurs which stand pat on what was once winning a winning formula soon become extinct.

Another very good example of innogration is Rupert Murdock’s bid of $80 billion for Time Warner (NYSE: TWX). Though Murdock’s 21st Century Fox media conglomerate is doing very well these days, Murdock realizes that smartphones and the Internet are transforming the media industry. He does not want to become the latest victim like the music industry was for the last decade when it refused to provide electronic music products when they technology was available to do just that.

At the core of Murdock’s bid was a desire to place his company at the top of the heap for the fastest growing segment in media – sports, of course! The deal would add college and professional basketball content from Time Warner in addition to major league baseball rights. Fox already has exclusive rights to the NFL and NASCAR racing.

ESPN has some content as well, like FIFA world soccer, but even so they would be instantly moved from the top slot to an also-ran basically featuring sports news versus more sports content than any other media outlet. The damage done to the cable companies with over-the-air broadcasting of these popular sports would remake the landscape almost overnight.

Suddenly the moves made by Netflix (NSDQ: NFLX), Amazon (NSDQ: AMZN) and others would look Lilliputian by comparison. Murdock would become the beast in the tech media sector. If you throw in HBO and other digital Time Warner media content and properties the field would tilt even more radically.  

If you have been following the story then you know that Time Warner rejected the offer. Like it or not, the bid puts Time Warner in play and don’t expect Rupert Murdock to meekly walk away. Expect him to come back and either up the ante and maybe even go for a hostile takeover. That story is far from over.

Microsoft and 21st Century Fox are executing well thought-out innogration strategies as they realize two central facts: First, technologies evolution is the never ending march of convergence. We saw this a few years ago when Apple went from computer maker to smartphone maker overnight by applying technology to their iPod products quickly running over Motorola and Nokia who had lead in the cell industry for years. Murdock and Microsoft are moving into areas they would not have touched ten years ago because they recognize convergence provides them the opportunity to potentially jump right over their competitors.

Second, by buying technology and merging it with their own, both companies can fight for leadership without years of innovation and small licensing deals. Innogration provides tech companies with competitive speed.

Murdock’s company went from a pure media company waiting to be taken down by the tech titans such as Netflix, Apple and Amazon to a very serious contender. Trust me, deals of that size were not built in a few weeks on a whim. That deal took tremendous planning and time, and it required strategic innogration thinking.        

Microsoft had tipped its hand over a year ago as they aggressively moved into the Cloud, smartphone and Tablet mobility markets. The announcement pushed Microsoft’s stock higher. Microsoft is up 21% since we first recommended it 7 months ago. It is up because STI knows innogration when we see it.       

Microsoft is a ‘buy’ in our Investments Portfolio up to $42.      

Netflix remains a ‘short sell’ recommendation in our Equity Trades Portfolio down to $360.