Research Brief

Two Tech Giants — and Two Very Different Acquisition Strategies

Alphabet’s M&A feeds its core business; Amazon’s more likely to push into new areas

Google’s parent company, Alphabet, and Amazon have considerable claims to innovation — developing in-house the world’s dominant search engine and the largest cloud-computing operation, respectively.

But neither built out its sprawling corporate presence of today— they have a combined market cap of nearly $3 trillion — solely with homegrown ideas or talent. They made scores of major acquisitions. Does their approach to M&A provide a road map for how a successful tech disruptor goes on to become a giant?

Two road maps, actually, because their acquisition strategies are notably different, University of Florida’s Gwendolyn K. Lee and UCLA Anderson’s Marvin B. Lieberman explain in a paper published in Industrial and Corporate Change. “There is no single right way to utilize acquisition versus internal development,” they report. Specifically:

  • Alphabet’s core Google search business, once up and running, went on an acquisition tear to build out its functions and extend its dominance. Lee and Lieberman show that Alphabet’s rate of acquisitions for new businesses was 2.6 times the rate for Amazon.
  • Amazon, once it had established its online book retailing operation, worked internally to add music and video and then, eventually, everything. It also built Amazon Web Services, its cloud-computing money machine, in-house. And it built its giant third-party seller and logistics business, Amazon Marketplace, itself, piggybacking on its own warehouse and online sales operation. Its acquisitions have been fewer and more likely to be businesses it’s not yet involved in. 
AMZN Revenue (Annual) Chart

AMZN Revenue (Annual) data by YCharts

A longstanding, if lightly documented, theory suggested that firms used acquisitions primarily to enter new businesses.

Lee and Lieberman decided to test that theory. In a 2010 paper, published in Strategic Management Journal, they analyzed more than 1,700 acquisitions made by 163 public telecom firms over a 15-year period. That led them to a more nuanced understanding of the strategy behind acquisitions. They found that firms opportunistically used acquisitions to fill in holes in their existing product line, as well as for forays into entirely new lines of business.

Filling in holes is exploitation. Entering new fields is exploration. Returning to this topic, Lee and Lieberman decided to examine the approaches of Alphabet and Amazon.

Amazon: Build It Yourself, Then Add Complementary Finishes

In 2022, 28 years after Amazon’s launch,  its annual results included $220 billion in sales from its online store; $118 billion in third-party seller services; $80 billion from highly profitable Amazon Web Services. All of these are large businesses built in-house. Amazon also stayed in-house to develop the hardware (Kindle e-reader, Kindle Fire tablet and FireTV).

Amazon used acquisitions to add complementary businesses. Rather than just be a toll taker for third-party sellers, Amazon picked up online shoe store Zappos in 2009 and diaper service Quidsi in 2010, effectively buying their way into cutting out the middleman for those two products. And while Amazon Studios was an internal project launched in 2010 to feed the Amazon Prime content beast, in 2021 the company bought MGM Studios to expand its movie and television library. The 2020 purchase of autonomous vehicle firm Zoox is an obvious complement to its core business of package delivery.

Amazon has notably bought firms to gain access to entirely new business lines. Online game streamer Twitch in 2014, Whole Foods in 2017 and One Medical in 2022 are three of its biggest purchases aimed at  gaining a new foothold.

Lee and Lieberman note that Amazon’s use of an inside-outside approach is very much in play with Amazon’s AI-related businesses. Alexa Voice Service and Amazon Web Services are home-grown, but Amazon also bought other AI services including Yap, Evi, Graphiq, Ivona and Orbeus to build out these business lines.

Alphabet Buys to Grow Its Core

After launching its search engine in 1998, Google soon adopted a growth strategy that relied on acquisitions to build out its primary business domain. Its first major acquisition was Applied Semantics in 2003, which delivered its valuable AdSense technology for serving up contextual ads on search result pages. In 2007 it scooped up DoubleClick, the master of online banner ads. The 2006 purchase of YouTube gave Google content to attract more eyeballs it could serve up ads to.

Lee and Lieberman say Google tends to go on shopping sprees to quickly build out a new business. The authors contrast this with Amazon’s more deliberative, one-at-a-time approach to acquisition.  

For instance, Google’s 2005 purchase of the Android mobile phone tech was a decidedly big step into a new field. One it seemed might have been on Google’s mind a year earlier when it purchased the tech that became Google Maps. And in the first decade after purchasing Android, Lee and Lieberman point out, Google made more than 30 acquisitions to complement the mobile phone service, including mobile ad tech firm AdMob in 2009, which facilitated Google’s core business of ad serving. 

Google Cloud has its origin in an app developed internally in 2008, but the service was then pretty much built on the acquisition of more than two dozen firms with essential tech for the cloud platform. 

The Google Skunkworks

But there’s of course the moonshot wrinkle to this. 

Though it has boatloads of money to buy up just about anything, Google has, to date, been resolute in staying in-house when pursuing entirely new fields far from its primary business domain. Google X, a separate division of internal R&D launched in 2010, is focused on big-ticket exploration that if successful pay off years down the line, not in some near quarter. Success has been muted. Google Brain is the home-grown AI initiative that is now being deployed across Alphabet products and services. The self-driving car gambit Waymo that is now on the streets in Phoenix and San Francisco started as a moonshot project as well. Still, in 2022 Google reported an operating loss of more than $6 billion in its “other bets” that includes moonshots. 

“Alphabet’s use of internal development to launch its series of moonshots is notable not only because it goes against the norm for large companies but also because it goes against Alphabet’s strong reliance on acquisitions within its primary business domain,” they write.

And yet given that Google’s growth story is no less compelling than Amazon’s, the takeaway seems to be vive la difference. “Taken together, our comparison of the two companies provides an ‘existence proof’ that different modes of entry can lead to similar levels of corporate growth,” Lee and Lieberman conclude.

Featured Faculty

  • Marvin Lieberman

    Harry and Elsa Kunin Chair in Business and Society; Professor of Strategy

About the Research

Lee, G. K. & Lieberman, M.B. (2023). Exploration, exploitation, and mode of market entry: acquisition versus internal development by Amazon and Alphabet. Industrial and Corporate Change. https://doi.org/10.1093/icc/dtad015

Related Articles

An overhead photo of two gentlemen on love seat one of whom is shaking hands with a man in an orange chair Research Brief / Mergers and Acquisitions

Face-to-Face Meetings, Before an Acquisition, Improve Outcomes for Buyers

Acquiring companies appear to get a better deal following frequent in-person meetings

3D realistic empty open and closed chrome elevator doors with buttons on White background. Research Brief / Corporate Management

CEO Succession: Execs Running a Subsidiary Offer a Balance Between Insider and Outsider

In an analysis of transitions from 1993 to 2017, they wrung more from operations facing tumult

Illustration of two arms shaking hands with skyscrapers in the middle Research Brief / Mergers and Acquisitions

In Some Industries, Are Corporate Combinations Actually Good for Consumers?

A model focuses on startups that, while developing innovative products, seek a lucrative buyout

Illustration of German rebels Research Brief / Cultural History

German Rebels Who Helped Lincoln Win the Civil War: A Natural Experiment in Leadership

Leaders of a failed 1848 revolt are followed to towns across the U.S.