Cash Cows

I think it’s unquestionably true that firms like Microsoft and Google that have enormously profitable core businesses (Windows/Office and search advertising) tend to start wasting money on other ventures. But I’m not sure this pessimistic take on “cash cow disease” is quite right:

Both Google and Microsoft proclaim themselves innovative companies that love competition. But the net result of cash cow disease is a waste of brainpower, and a decrease in useful innovation. A mere expression of interest by one of these giants in some particular burgeoning market is enough to dry up investment funds for any small company interested in the same market. For every failed Kin, there are multiple Dangers that could have thrived if Microsoft had had the discipline to stick to their Windows/Office knitting and restrict their other ventures to simply investing (rather than ingesting). For every magnificent Google Wave flop, there are multiple innovative new apps that could have been created (by the same people working in smaller companies) if Google had the discipline to focus on its core competency rather than creating and endless parade of “beta” apps.

Maybe. But Wave is a bit of an unusual example. There are also lots of products that consumers find useful but that don’t happen to be big hits in business terms. And a whole range of startups seem to get their initial funding more or less on the “if this works out, maybe someone else will buy it” theory in which case relatively undisciplined business strategies may help spur innovation.

This is firmer ground:

The brain drain is also significant. Both Microsoft and Google would be significantly more profitable if they cut all the staff currently assigned to non-cash cow projects, but there would also be significantly more developers in the small-company milieu of software. Although lip service is paid in the U.S. to the importance of small companies, small companies are actually discriminated against in important ways. Google and Microsoft can afford H1B lobbyists, patent suites to use as weapons, high-priced legal guns, negotiate tax breaks with local governments, demand infrastructure changes, and great many other things that are impossible for small companies. The smallest companies (sole proprietors, where much true innovation begins) cannot even fully deduct their health care costs as business expenses, the most obvious example of the true (lack of) value the government places on small business.

But I’m not sure what this has to do with the putative “cash cow syndrome.” Managers of a cash-rich firm face a choice, at the margin, between investing funds in empire building and speculative ventures and investing funds into political/legal strategies designed to stifle competition and entrench the advantages of incumbency. Insofar as managers choose the former rather than the latter, the public interest is being served. The economic and political order exhibits a natural tendency toward rent-seeking, and one check on that tendency is the ego of managers. People prefer a self-image as entrepreneurs to a self-image as rent-seekers, which may lead managers to underinvest in rent-seeking and over-invest in wacky schemes. Don’t discourage them!