It’s difficult to ignore the stream of mergers in the progressive tech space in recent months. From PDI’s acquisition of Hustle in January to EveryAction’s acquisition of Salsa, there have been quite a few transactions in the space! The trend comes up a few times in the Higher Ground Labs Political Tech Landscape report.
Higher Ground Labs’s perspective is that these mergers are “a sign that the market is becoming a healthy, thriving place”. Others view them with some suspicion - a trend away from competition and towards consolidation, an inevitable precursor to stagnation in the market. Competition drives innovation, according to this line of thinking, so mergers are a bad thing.
My view is that both of these brushes are probably too broad. A merger is a transaction, and some transactions work out well while others don’t. The real question is, what value does a merger bring to customers, and how does it shift market dynamics?
In my view, mergers that primarily act to consolidate customers or employees (“acquihires”) are very different from mergers that primarily act to purchase new feature sets or technologies. The first type of merger certainly acts to consolidate market power - the resulting company has comparatively greater power with respect to its customers and competitors, and also has an opportunity to introduce economies of scale. That may or may not work out well - there’s certainly a possibility of abuse of power in this scenario, but it doesn’t always shake out that way.
The second type of merger is what gives me pause. On paper it seems like a great thing in the short run, and in fact it may be. The customers of the parent company get some shiny new features, after all! (Though it usually takes a while to figure out how to deliver those shiny new features, and there may be billing issues to sort out, and…) But in the long run, merging through innovation can be very bad for an industry. A 2019 paper published by the National Bureau of Economic Research, The changing structure of American innovation, provides some cautionary notes; David Rosenthal has an excellent summary. The key takeaway? That as large companies outsource innovation to startups, they create an inefficient division of labor in the innovation ecosystem.
It’s reasonable to ask whether these findings really apply to the progressive tech sector. After all, this paper covers 166 years of economic history and centers on storied post-war industrial research labs like Xerox PARC and Bell Labs. Say what you will about progressive tech firms, but none of them have anything like the market power of AT&T in its heyday!
At the same time, these findings should give us all some pause as we think about the future of innovation in the progressive marketplace. One of the real bright spots in the sector has been the tremendous amount of product innovation: in the last five years, peer-to-peer texting and relational organizing in particular have emerged as major new areas of functionality that simply did not exist when Barack Obama ran for president. Some of the mergers in the past few months have in fact been exactly to script: industry incumbents achieving product innovation through mergers, effectively outsourcing risk to startups. So it’s worth asking: could we achieve more efficient product innovation in the progressive tech space?
Disclosure: I worked at NGP VAN and EveryAction from 2010 to 2019.