AOL/TimeWarner was a failure because because it valued AOL at $200B and TimeWarner at $164B. AOL was just way over-valued. It wasn't really an integration failure so much as paying too much for something. If Time Warner had bought AOL for $2B, it would have been fine. The problem is that they merged valuing AOL at 100x that when it wasn't worth it and later sold for $4.4B to Verizon.

Likewise, Yahoo/Verizon bought a lot of properties at inflated values. Tumblr wasn't worth $1.1B, but Yahoo wanted to buy one of the hot up-and-coming properties to feel relevant.

I think the big issue is the price one is paying and whether one has a plan for the purchase or if the purchase is more "but if I don't make a big move, what am I doing? I can't go wrong following trends, right?"

For example, AOL/TimeWarner was a situation of over-paying because TimeWarner was afraid that the internet was going to eat the world and they needed to stay relevant. AOL was so hot and it's easy to get swept up in the moment thinking "I need to get on board now or I'll miss it!" Likewise, Yahoo feared becoming irrelevant as Google took over the internet and thought buying Tumblr would make them the hip forward company once again.

Activision Blizard seems like a reasonable add-on for Microsoft. $69B isn't that much money for it given it would represent a P/E ratio of around 26. Apple's P/E is 30, Amazon 62, Microsoft 34, Google 26. So they aren't paying an absurd amount given Activision's profits. Even if they did no integration or strategy, Activision could simply continue doing its thing and contribute favorably to Microsoft's bottom line.

With a tiny bit of strategy, it seems clear Microsoft could get even more value out of the company. Maybe a few Xbox exclusive titles to push their console business. Maybe some stuff for their game streaming service.

If Disney has shown us something over the past few years, it's that owning IP that people like allows you to keep spinning new versions of that IP. Activision has lots of that kind of IP in the gaming space so Microsoft should be able to use that to its advantage.

I think there's a big difference between buying Activision at a price whose P/E ratio is better than your own and where there are clear strategies that could offer you even more value compared with the "omg, I'm getting left behind! I'll pay anything you want" panic purchases/mergers of other companies.

Tumblr could easily have been Instagram, Yahoo just had no idea what to do with it and completely missed the boat on mobile.

A lot of people thought Zuck was insane when he paid $1B for Instagram, and I think we'd all agree that bet paid off pretty handsomely.

Tumblr was dead the second they turned porn off. Simple as that sadly.

How did they monetize it? I've worked in digital advertising and I can't imagine the adult content would get the same CPMs as general interest.

Did Instagram avoid that fate by never allowing porn in the first place?

Instagram has porn.

It just blocks some body parts.

See also: Flickr.

AOL bought TW not the other way around.

Sure, but Time Warner shareholders accepted AOL equity at an over-valued price. THAT's the fleece - Time Warner kept being a company despite AOL's failure, but the ownership shifted dramatically toward former owners of AOL.

Also worth noting on the AOL/Time Warner comparisons everyone is making: Everyone knew dial-up was on the way out in 2000, they just assumed AOL would 'figure it out' because they were the current market leader. Not clear to me (other than maybe metaverse, controversially) what MSFT's looming problem they need to 'figure out' is.

Microsoft's "looming problem" seems to be the $130B+ in cash they're sitting on, and finding something to spend it on?

Yeah, at least in traditional financial theory, if they can invest it in a way that has NPV of <$1, then they should invest that dollar, and if not, they should just return it.

There's obvious optics to draining the cash balance, but it's not a problem per se, because worst case, they just return it to shareholders and Net Income/EV should be unaffected.

They can give the cash back to shareholders.

Or their workers.

I dont think MS employees are complaining about salaries, if they dont like it they can easily switch to FANG companies.

the same people thanks to RSUs

MSFT has to figure out how to justify a 2.7 trillion market cap when their revenue is on the order of 170-180 billion. That’s a lot of sustained profitable growth.

Conveniently ignoring the fact that on that $180bn revenue, they generate $90bn in net income, resulting in a 30x P/E multiple (the actual way companies are valued), which is only slightly elevated vs. the S&P 500's historical average.

Conversely, what's wrong with McKesson, if their revenue is $250bn and growing, but their market cap is $40bn?

The larger you get, the harder it is to justify outsized PE multiples. Plenty of theory and empirical research supports this.

Even with their recent 11-12% correction their PE is ~33.5. [0] That’s higher than today’s S and P PE, and more than double the long term median (~15) and mean (~16) PE. [1]

This means that the market is betting on some combination of margin expansion and outsize revenue growth.

McKesson is in another industry with different margin and growth, and is valued differently.

[0] https://finance.yahoo.com/quote/MSFT/

[1] https://www.multpl.com/s-p-500-pe-ratio

I think vertical integration tends to win when the floor is built atop of commodities. The new consoles have similar hardware[0] and it really comes down to allocation of those hardware resources, which makes first party studios ways to differentiate your product from the competition, as you can justify the extra cost to make sure your first party console is optimized for in its unique ways, where cross publishing houses don't always do that, for example. This can differentiate gaming experience, even for titles that are cross platform, if one is optimized for say, the Xbox ecosystem, but its PlayStation port does not have the same kind of optimizations. How much this matters may remain to be seen, for now.

Having highly optimized flagship titles though is what makes these vertical integrations so appealing in this market, in my estimation.

[0]: https://www.tomsguide.com/news/ps5-vs-xbox-series-x

FWIW I don't endorse everything in the link to toms guide, I just wanted a reliable source for hardware specs

Intel has also been feeling the pain of vertical integration. Like with most things, double edged sword.

They fabricated their chips - not sure if they still do. Initially this was great, they owned the equipment and got things 'at cost'. However, they had trouble refining their tooling to get < 14nm for several generations.

This made them less competitive for a while, while having a pile of expenses a more lean design house wouldn't have. They'll surely be fine, but it's not the same sprint they've had for quite a while.

Intel still fabricates their own chips. Though notably, their new dedicated GPUs are made by a third party.

Two years ago I would have expected this trend to continue and for Intel to stop in-house fabrication, but with their new CEO and some prodding from the US government, they are now investing many billions of dollars into new fabs.

It probably means more to keep the Blizzard catalog off of Oculus than anything else. IMO many games in their catalog would be ideal in that environment and keeping them off of it goes a long way towards buying time.

To argue in favor of your point. Big vertically integrated firms often become insulated from economic, technical, and business realities. This eventually leads to politics winning out over technical or business savvy. At the extremes you'll have companies burning 10s of billions on pet projects going nowhere, or software engineers producing 0 lines of code per year.

I wouldn't be surprised if this effect could even be mathematically quantified.

At least for Xbox, the biggest positive change in leadership has been the replacement of Don Mattrick with Phil Spencer in 2014. Xbox as a brand was in real bad shape when he took over.

Don Mattrick might as well have been a plant by Sony he was so effective at destroying all the good will Microsoft had built with gamers during the 360 era.

Introducing Xbox One as a media center with no ownership through physical media was a disaster.

Then again, Xbox branding is a total disaster anyway. The Xbox Series X vs the Xbox One X vs the Xbox 1 are all very different things but aren’t that far apart in name…

Don't forget one of the Xbox One's key innovative features: tight integration with your cable box. You know, that worthless piece of hardware tied to a $100/mo subscription that your Xbox 360 helped you replace entirely with its Netflix and Hulu apps.

When they showed that off I knew nobody at Xbox had a single clue who their audience was.

Halo 3 and Gears of War were must have games of that generation and the big hits from Sony (e.g. Last of Us) didn’t come till a bit later. These games were so successful that many looked past the RRoD and loved the 360. In this context I think buying studios makes sense.

I wonder if CoD will become XBox / Windows exclusive?

Another example right here: https://news.ycombinator.com/item?id=29980227

Intel is buying fab capacity from TSMC. Backing away from vertical integration to force their own fabs to compete on the open market.

Ballmer gets a bad rap but he was the one that got them moving towards Azure and cloud. He made MS a lot of money, they didn’t suffer under him. It was mostly just optics where he didn’t look good.

Look at the stock price under him, and then after.

Although it's plausible that had he stayed on for say another five more years, we would have seen the fruits of his early investments pay off and the stock appreciate accordingly.

The guy who had Nadella in charge of cloud the entire time? Ballmer is the one that not only placed Satya, but made the call to push and fund it.

For me your comment rings the same as saying look at the stock price of AMD under and after Lisa Su.

Nah, their model is different. They are building a Disneyland-like experience, where the public pays to "be there" and the attractions always change. Never been done before.

Exactly. They're going for quantity to ensure even if a bunch of stuff fails, they'll get a few hits. Sometimes all you need is a few hits.

That type of closed garden seems more like Apple, no?

Microsoft has been understandably eyeing that 30% on all digital goods sales Apple gets for years now. They missed the boat on the Windows store, but they'll do just about anything to keep a similar financial structure on the Xbox side.

Gasprom, Dell and Tesla may be some examples of companies that have done will with vertical integration.

Tesla is kind of vertically integrated, but mostly because they were the first to make a popular electric car, so adequate supply chains for those components didn't previously exist. It remains to be seen whether it's still an advantage when most of the industry is making electric vehicles and competitive alternate suppliers for those components are common.

Dell installs a Microsoft operating system on SSDs from the lowest bidder and puts them in a Foxconn motherboard with a CPU from AMD or Intel.

Gasprom is a majority state-owned company in Russia. This can't really be an example of anything to do with a free market.

The typical example is Apple, because they're currently very profitable. But they've been doing vertical integration for decades and their history is full of instances of almost going out of business. The previous "see how well vertical integration works" example was IBM.

Tesla also makes components like seats internally.

A lot of companies just outsource that and lose out on the profits, it is one of the reasons tesla has such high margins.

> Tesla also makes components like seats internally.

For the same reason. Vehicle seat are, for better or for worse, typically model-specific. Before there was Tesla there was nobody making Tesla seats. Would anybody be surprised if they start outsourcing that soon, given that they now have enough volume to attract third party suppliers and seat manufacturing is certainly not their competitive edge?

> A lot of companies just outsource that and lose out on the profits, it is one of the reasons tesla has such high margins.

Vertical integration increasing margins is just an accounting trick.

It costs $5 to make a widget, the widget maker sells it to the car maker for $6, the car maker sells it to the customer for $8. The non-vertical car company has a $2 unit margin, the vertical car company has a $3 unit margin. But to get it they take on all the risks and expenses of the widget maker.

If making widgets is a commodity market then the $1/unit is going entirely to fixed overhead (otherwise someone would charge less and gain market share). Taking on the fixed overhead in exchange for the $1 is breakeven and increases systemic risk by reducing supply diversification. But on paper your margins increase by $1.

>For the same reason. Vehicle seat are, for better or for worse, typically model-specific. Before there was Tesla there was nobody making Tesla seats. Would anybody be surprised if they start outsourcing that soon, given that they now have enough volume to attract third party suppliers and seat manufacturing is certainly not their competitive edge?

I doubt this will happen. Here is the reason they started making seats themselves as explained by the big cheese himself: https://youtu.be/YAtLTLiqNwg?t=357

Given what happened when they worked with supplier last time, I doubt they would want to give up the ability to innovate by going back to a supplier even if they are big.

Furthermore, I think suppliers might not be chomping at the bit to work with Tesla anymore. When the Model 3 was being developed, that insanely large preorder volumes caused some suppliers to do whatever it took to get the order from Tesla because of FOMO. Some even stripped their margin to the bone in the hopes of establishing a long term relationship with Tesla. In the end Tesla did not deliver on the numbers they promised and this lower volume caused massive financial problems for some suppliers, especially the smaller guys. I think there were even some bankruptcies of smaller outfits. Given Tesla's reputation as difficult to work with, I don't fully think they will get preferential treatment compared to someone like Toyota or Honda (which I hear suppliers love to work with).

FUN FACT: The largest Tesla skeptic subreddit /r/realTesla was started by someone who was supposedly a liaison between Tesla and the seat supplier during the Model X days. In fact he watched the whole Model X train wreck from start to finish and his banning from /r/teslamotors when he detailed all the disasters happening during Model X led to the creation of /r/Realtesla.

> I doubt this will happen. Here is the reason they started making seats themselves as explained by the big cheese himself

This is an explanation for why they designed their own seats, and basically amounts to "existing seats were uncomfortable." That makes sense when the status quo is junk, but now they've got a good seat, what does it matter who manufactures it?

Are they expecting to do a lot of further seat innovating in the future? Does seat technology have a rapid rate of change?

> Given Tesla's reputation as difficult to work with, I don't fully think they will get preferential treatment compared to someone like Toyota or Honda (which I hear suppliers love to work with).

People care more about what you're doing right now than what you did when you were just starting out. Tomorrow's reputation is based more on today than it is on yesterday.

>This is an explanation for why they designed their own seats, and basically amounts to "existing seats were uncomfortable." That makes sense when the status quo is junk, but now they've got a good seat, what does it matter who manufactures it?

>Are they expecting to do a lot of further seat innovating in the future? Does seat technology have a rapid rate of change?

Well maybe for other manufacturers that rely on these suppliers no but I think the real point that Elon and Sandy were getting at was that anything a user touches should be made in house as that is what you can craft carefully to perfect the customer experience. Will their seats change? Well so far they have gone though 4 or 5 revisions so it seems like they continue to make changes and iterate.

>People care more about what you're doing right now than what you did when you were just starting out. Tomorrow's reputation is based more on today than it is on yesterday.

Suppliers will happily give a quote, its just that the quote will likely be higher to account for the added expense of working with Tesla. People go from supplier to supplier and since this field is very much relationship based, I can see Tesla losing out to other manufacturers especially when supply is crunched like right now. For a lot of parts(for example seats) there are only 2-3 companies to choose from. If they burned bridges with all three then what?