The Search Company and the Phone Software

Learning objectives

1. Value a small acquisition as an option on an uncertain future.
2. Distinguish risk, where odds can be estimated, from uncertainty, where they cannot.
3. See how a free, open platform can change the basis of competition.

Session plan

1. 0–5 min Read the situation, what is known and unknown, and the voices in the room. No discussion yet.
2. 5–13 min Each participant chooses an option on the case page, states a confidence and writes a one-line pre-mortem: if this choice fails, the most likely reason is…
3. 13–28 min Debate by option. Ask each group to describe the phone market in five years under its option.
4. 28–33 min Reveal the outcome.
5. 33–50 min Discuss the option logic: what was the most the company could lose, and what could it gain? Then discuss the major redesign after a rival's touchscreen phone, and what it says about committing early.
6. 50–60 min Transfer: participants identify a small, cheap option their organisation could buy on an uncertain market.

The case page records each participant’s choice, confidence and pre-mortem in their own browser, and scores the confidence once the outcome is revealed. Nothing is sent anywhere, so it can be used in any classroom.

The key facts on one page

• The company bought the start-up in 2005 for a price widely estimated at around $50 million.
• The operating system was redesigned in response to a rival's touchscreen phone.
• It launched on phones in 2008, free and open, and became the most widely used operating system in the world.

Where discussions go wrong

• Treating the success as a prediction that came true. The decision was valuable because it was cheap relative to what it could become, not because the outcome was known.
• Ignoring the redesign, which shows how much of the plan changed after the purchase.

The forces at work

• A cheap option on an uncertain future: The price was small relative to the company's resources and the stakes. Buying kept a strategic option open at low cost, which is exactly when acquiring options is most valuable.
• Uncertainty, not risk: Nobody could forecast how phones would develop. A flexible, inexpensive bet suited the situation far better than a detailed forecast would have.
• Changing the basis of competition: Rather than fight incumbent platforms on their terms, the company would give its software away, so that handset makers could compete with the incumbents. Lock-in would be broken by changing who paid.
• Rivals converging: When a rival's touchscreen phone appeared in 2007, the project's design shifted towards touch. Converging with a rival's form was a pragmatic response to where customers were going.

The lesson to carry out of the room When the future is uncertain and the price is small, buy the option.

Pairs well with: The idea Risk and Uncertainty and the essay on app stores.