Thursday, February 25, 2010

Why CMS Vendor Acquisitions are Bad for Customers

It just occurred to me that my recent quotes on Fierce Content Management make me sound like the Statler and Waldorf of the content management industry. I really don't mean to sound so negative but, from where I sit, software company acquisitions are nearly always bad news. My clients are software customers and my job is to help them be better software customers by making better technology decisions. Mainstream software analysts, who are mainly speaking to the vendors, spin acquisitions in terms of what it means to competitors. They talk about how the acquisition changes the landscape and competitive dynamics. Mainstream analysts get pretty excited by mergers and acquisitions. It means that there is movement that needs to be understood and explained. It means that they get to re-answer the question that their software vendor and investor customers always ask "who is the best company in the market and why."

The software customer has a different question: "which one of these products is the best for me right now and in the foreseeable future." Market dominance plays a role but customers should be more concerned about their requirements and that the vendor will stick around and continue to focus on what matters to the customer. Customers should care less about who acquired who (today and yesterday) and about more who is at risk of getting acquired tomorrow. Acquisition adds uncertainty and risk that a customer would do best to avoid.

The dirty little secret about software company acquisitions is that, in most cases, they have nothing to do with technology. When one software company buys another, it is usually buying customers. Implicit in the transaction is the understanding that the customers are worth something and the acquiring company can more effectively make a profit from them.
An acquired CMS customer is valuable because switching costs are really high. To switch to another product, a customer would need to rebuild its web site, migrate its content, and retrain its people. Unless the product is totally doomed, the customer will probably stick around and pay support and maintenance for a for a while. The acquiring company can increase profitability by cutting down on product development, support, and sales. Most of these cut-backs directly affect the customer. The vision for the product will get cloudy. Enhancements will come out slower. Technical support and professional services will be less knowledgeable. Market-share will gradually decline. In some cases, the product will be totally retired in favor of an alternative offering by the same company. If there is an option of terminating support and maintenance, it is probably a good idea to exercise that option because the value of the service is likely to decline steadily.

The sad thing is that this dynamic is practically built into the traditional software company business model. A typical software company burns through investments to first build a product and then build a customer base. At a certain point, the growth trajectory will flatten (or decline) and investors will want to move their money into another growth opportunity. Some companies will be satisfied by having achieved a sustainable business. Others will cash out by being acquired. Others will look to grow by acquiring steady (but declining) revenue streams. The scariest companies to deal with are the acquiring companies — what I call "portfolio companies" that buy up products for their customers and then decide what to do with the technology. When you are a customer of one of these companies the future of the software you bought is vulnerable to the shifting attention of the vendor. If the vendor decides to keep the product around, it means they can successfully drain revenue from you. If the vendor gives you a "migration plan," it means that they have another product that is in an earlier stage of the same destiny. Neither case is good.