Why Big Companies Are Slow on New Media

While writing my recent article for Newsweek Japan, I had an extensive conversation with Robert Scoble, who used to be with Microsoft and wrote a popular blog about the company, until he left in the fall of 2006 for a start-up. He had always been pretty balanced in his views, and the blog was credited with putting a more human face on the business. He explained how in 2005, the folks in Redmond passed on one opportunity after another - and it's something that applies to many companies these days.

“Kevin Johnson came to our group when I was at Microsoft and said most of our growth will come fromadvertising,” he said. “What he was trying to get us to understand is that the growth of the company will come from advertising, not from selling another copy of Windows or another copy of Office.”

So far that makes perfect sense, as Microsoft is running into a mature market. There's a lot of potential room in such countries as India and China, but that is going to take time to get the volume that would really drive company growth, and Wall Street is addicted to that economic expansion.

“I laid out 13 things that Microsoft should buy or start building, and the answer that came back ... was a couple of thousand words and had the term business value 13 times," he explains. "It was too small a value to get. I was telling thim to pay attention to something that hadn’t yet sold for $20 million." The companies he was recommending included such ones as MySpace, Flickr, and Skype.

But that makes perfect sense if you know anything about large corporations. There's actually method behind it all. A corporation, particularly a public company, has a legal responsibility to make more money for the shareholders. Buying something that doesn't even have $20 million in revenue is like asking a venture capital investor to kick in $1 million. It takes them as much time to invest that amount as to invest something ten times larger, so the larger one becomes a more cost effective deal as there's a chance for return on more capital. If you do a bunch of small deals, then you don't have enough resources to do enough deals to soak up all the money you have.

Now comes the problem - what Scoble calls the doubling effect. Ever hear about the person offered either $1 million or else a value, starting with a penny, that doubled every day for a month? The schnook takes the million, not realizing that at the end of the 30 days, the total will be $5,368,709.12.

If you knew what you'd get at the end, you'd take the larger amount. "I told them on day 15, 'I see a doubling penny. Will you go buy these things?' They said, 'We don’t believe you because that penny’s only kicked out $50 so far.' It doesn’t look interesting until day 28, and then all of a sudden it looks real interesting and everbody wants it." And by then it's pretty unlikely that you're going to get it.

As he observes, Microsoft doesn't have any doubling pennies and yet that's what the company needs to really grow based on advertising. It may be too late. Yet this isn't just a lesson for Microsoft, as all large companies have this blindness. They don't see future success because when they can afford it, the opportunity doesn't look good.