Developing Dynamic Capabilities Through Acquisitions: A patent lens on M&A’s impact on Big Tech’s technological profile
Ilan Strauss and Jangho Yang, UCL Institute for Innovation and Public Purpose, Working Paper Series
Using a unique dataset covering all patents ultimately owned by Big Tech, including through M&A, this paper describes the dynamic capabilities acquired and developed by Big Tech. The authors examine the nature, evolution, and differences in the technological capabilities of the five major Big Tech companies, highlighting the vital role of M&A in this process. The analysis, combining M&A and patent data, reveals that M&A has been crucial in Big Tech developing integrated hardware- software ecosystems. Big Tech’s evolving capabilities closely track their competitive potential and market entry strategies. The analysis of patent data, including through a logit regression, reveals diverse strategies and motivations behind Big Tech’s external patent acquisitions.
The authors summarize the core findings as follows:
1. Quantitatively, M&A has been central to Big Tech developing its capabilities. At least 10.3%, 13.1%, and 10.8% of total patent counts on an unweighted, forward-citation-weighted, and forward-citation-weighted adjusted for patent-age basis, respectively, have been acquired externally by Big Tech through majority stake M&A activity. These are lower bound estimates because Big Tech also innovates internally based on external technologies. We are also unable to dissect the assignment history of each patent to know the ultimate source of every single patent (external vs. M&A). Qualitatively, acquisitions have given Big Tech essential, but often young, technology, which is not always captured in the patent data, since patenting takes time and reflects innovation ex post (Kim et al. 2016) – and because software may also be less patentable after the 2014 Alice Corp. v. CLS Bank International ruling (Saltiel 2019).
2. Patent (forward) citations show that external acquisitions provide the Big Tech firms with access to technology that is often more productive than their own internally developed technology, judged by various measures of forward citations of patents acquired through M&A compared to internally developed patents.
3. Big Tech show a diverse range of motivations in the capabilities that they have acquired. For most acquisitions, capabilities acquired tend to be extremely young (judged by low median patent counts) with few if any proven technologies (judged by few patents with citations). This makes quantitative analysis of M&A’s impact on Big Tech’s capabilities difficult, especially on a case by case basis. Many of the patents acquired by Big Tech have also expired, either due to age or product failure. However, an overall pattern emerges where Big Tech uses M&A to expand their ecosystems, notably through the acquisition of a range of hardware, location & satellite technologies. Individual, highly advanced, technological acquisitions are also evident (judged by very high median citations in key firms acquired) in technologies that have been vital to Big Tech, such as in touch screens, voice recognition, advertising technologies, and other software capabilities.
4. Descriptively, there appears to be a tight link between diversification in capabilities (including through M&A) and diversification and entry into product markets. Big Tech have pivoted notably to integrated hardware-software ecosystem by way of their capabilities after 2010, which involves a much greater emphasis on the user interface, social media, wireless networks, and to a lesser extent storage. Machine learning shows the largest jump in patents held after 2010, relative to 2010 and prior. Alphabet shows the greatest use of M&A to build out a range of capabilities across technological categories, showing the most integrated and diverse suite of ecosystem products.
