This is nothing against cloudkick. I've never even been to their site. I'm sure their service is amazing. My question is a general question that I ask almost every time I see a company get bought.
The question is, "Why buy, when you can build?"
Let's say I'm Rackspace. I have a cloudkick account that I used when I was evaluating them to see if I wanted to buy them. I know exactly what they offer.
So, let's say I take that and I create an engineering specification. Build a service that does this, this, this, and this, duplicating cloudkick, right down to the screen layout of the dashboards, if you're so inclined.
Now, go hire 10 engineers. No, make it 20. Now hire 5 project managers. Pay each engineer $100K + benefits, say they cost me $150K per year. Pay each project manager $150K + benefits, say they cost me $200K per year. So now I have 20 engineers and 5 project managers whose combined salaries + benefits cost me $4 million a year. Let them work for two years. For $8MM, I have my own cloudkick, right?
Why would I pay more than $8MM? Perhaps they didn't, I don't know. Again, my questions isn't about cloudkick. It's about why you see companies make the buy decision, when it often seems like it would be well within their ability to build it themselves, if they are so willing to spend money.
(1) Building is more expensive than you think it is. For instance, if you're not staffed to build something, you have to recruit. Recruiting is dreadfully slow and painful. "Go hire 10 engineers" could take a year.
(2) Building (obviously) takes more time; the time you spend building is time-to-market that you're conceding to competitors. When you buy a competitor, that gap is erased; you get the benefit of their earlier time-to-market.
(3) Building comes with enormous risks. Deciding to build a cloud monitoring platform is not the same thing as executing on a cloud monitoring platform that the market will embrace. It may in fact be more likely that you will, on some important but perhaps subtle axis, fail utterly. Now you've made a huge investment in your target market and gotten negative returns.
(4) Acquirees are proven in the market. If an acquiree sucks, you buy one of their competitors (unless they suck on an axis you can readily remediate, in which case you probably get a big discount).
I think this is a fantastic post, not just in response to this question but as a response to "Why can't company G just make something like it and take you guys out?"
Fundamentally, and quite succinctly, you've explained why building a successful business/project/technology is hard. And because it's so hard, those that have made something successful and with traction have something of value.
It's a matter of risk. Think of it like a house... Renting vs buying vs building one. All strategies have their benefits.
Renting you let someone else maintain the property and can walk away at any time. This is what CloudKick's current customers all do when they consume the cloud service.
Buying means gaining control. You build equity and have total control over all the maintenance and improvements. And you have all the knowledge that hindsight offers. Is the house in a thriving neighborhood? Was it built well? Did the previous owners take good care of it?
Building means what? Total control over the entire job, from finding architects and contractors, having say in every detail of the design, the budget, bill of materials, schedule, etc.
But the amount of risk is massive here. If funding takes a hit, or budget blows up, what do you do?
Back to software, more projects die in incubation than mature to CloudKick status, no matter how mature the software companies are. Think really hard about how fragile software development practices are.
And there's further risk in the market. If you set out to build your own CloudKick style infrastructure, CloudKick is still out there furiously innovating and battle testing their software. It can be difficult or impossible to catch up.
You are proposing to spend $8MM to build the cloudkick of today in 2 years time. That might be ok if you're just worried about internal tools, but that's no good if you want to offer the service to other providers.
> Let them work for two years. For $8MM, I have my own cloudkick, right?
Assembling all the pieces that make a product does not make a product. There are lots of risks involved in creating new products and generally as companies get larger they become more risk-averse.
Even assembling the pieces involves jumping hurdles in any significantly large company (ie. various levels of approval, staffing, inertia). Acquisitions avoid product development risks and the acquirer also get a group of people that demonstrated they can create a successful product.
You do realize that two years also costs money? The other thing is that fact that there's a company with a working solution in front of you. What if you build this team and then a year later you realize that you screwed up and you can't build it the way you thought.
The other reason you sometimes pay a premium is to get them off the table for a competitor. So even if you could build this solution in two years for 8MM. What if your big competitor decided to come buy them and then starts expanding their business. In two years you come out and say, "Hey look, we have that product from a couple of years ago!"
If you have cash sitting around, you'd want to spend it to accelerate your business. Buying a company with a successful product, great team, large user base and actual revenues can be seen as a much safer investment (assuming the price isn't inflated) than spending 1 or 2 years trying to catch up with the competition, with no guarantee of success.
It doesn't mean of course that buying a company is always the best decision.. it boils down to whether the acquired product and team ends up being a good fit.
Two years is an incredible length of time in this "industry". Look how fast Amazon are rolling out features compared to Rackspace (their current closest rival). Rackspace are losing the arms race. IMV they simply don't have the cloud engineering resources to build (hence the "tom sawyer's fence" which is OpenStack), so they buy. A good strategy if you have the cash.
I can see Rackspace extracting the monitoring features/code from cloudkick and add it to their cloud servers control panel, and leave CK going as it's own entity. That's pretty much what they did with Slicehost iirc.
Why did eBay buy PayPal, when it had spent a lot of money creating it's own alternative?
Sometimes the outside party just built a better solution, and it makes sense to get a whole company, lots of good staff, good PR and new products in one simple purchase.
As long as the return on investment is as-good or better than the ROI of building it yourself, then it's a win in terms of time factor alone.
There is also the 2 years of opportunity cost of building out that infrastructure, in which case the acquired company will probably be ahead technically, acquired by another competitor, and/or have acquired an even larger customer base.
I think your making assumptions about how easy it is to build a succesful product. It's easy to look at the winning horse and say "Well that horse only cost X, and trained for Y years. I'll just go buy a horse for the same amount and train him for the same time."
Consider how many different people/organizations were trying to accomplish what cloudkick has? You're cutting a check to get the best version of all their efforts.
Additionally, Rackspace has become fairly large, I'm sure there are sufficient politics in that organizaiton to force any in-house app right off the rails. The marketing manager would want the app to only measure all the places where rackspace wins. Any top shelf talent would be poached by the orgs core business units etc... Even starting with the winner in this area, they may still fall behind.
I would say it is for acquiring their customer base. In fact, customer base is probably the biggest factor in a lot of acquisitions. Like you, i have no idea about cloudkick, and this might or might not have been the reason for the acquisition, but would be surprised if it isn't.
So, let's say I take that and I create an engineering specification. Build a service that does this, this, this, and this, duplicating cloudkick, right down to the screen layout of the dashboards, if you're so inclined.
Because it's a war. A scrappy five year old company, Softlayer got bought out for $500m, merged with ThePlanet, and now SoftLayer is the first or second largest dedicated server company by sheer number of servers, and once all of TP is integrated with SL's automation, they'll most likely have the highest margins.
SL gets margins by being efficient whereas Rackspace gets margins by having an incredibly large and efficient sales team. SL is a hacker's hosting company which has made very solid progress selling to the enterprise.
To top that off, Salesforce just bought Heroku, telling the world that they really intend to compete in cloud hosting against Amazon, and any other clouds that matter (do any other clouds matter?). The competition is fierce, the stakes are high, and we're seeing an arms race. I wouldn't be surprised if HP got into the mix as well (there must be some reason they bought loudcloud and EDS beyond just rounding out their EYP division).
Any start-up who can help some of the big dedicated server firms (Softlayer, Rackspace, Peer1) either appear to be a sexy alternative to Amazon (to try and woo new startups, which is where all of the dedicated server companies are sort of lackluster, primarily due to a lack of advertising and a lack of a presence in the valley) has a high potential for acquisition in the next year. Look at the past three years of operations and cloud related start-ups. For example I'll be really surprised if either Puppet or Opscode are still independent entities in 2012.
We can quibble on how you use it, but in the end, the goal is to own as much of the application hosting market as they possibly can. At least, if the cloud pundits are right, and if there can be only 2 or 3 utility computing companies in the end.
The question is, "Why buy, when you can build?"
Let's say I'm Rackspace. I have a cloudkick account that I used when I was evaluating them to see if I wanted to buy them. I know exactly what they offer.
So, let's say I take that and I create an engineering specification. Build a service that does this, this, this, and this, duplicating cloudkick, right down to the screen layout of the dashboards, if you're so inclined.
Now, go hire 10 engineers. No, make it 20. Now hire 5 project managers. Pay each engineer $100K + benefits, say they cost me $150K per year. Pay each project manager $150K + benefits, say they cost me $200K per year. So now I have 20 engineers and 5 project managers whose combined salaries + benefits cost me $4 million a year. Let them work for two years. For $8MM, I have my own cloudkick, right?
Why would I pay more than $8MM? Perhaps they didn't, I don't know. Again, my questions isn't about cloudkick. It's about why you see companies make the buy decision, when it often seems like it would be well within their ability to build it themselves, if they are so willing to spend money.