Google and Facebook's Fight for the Future of Tech

Google and Facebook are leveraging cash and stock valuations in a risky acquisition run to find the next profit sanctuary
Photo illustration by 731; Photographs by Getty Images

Vern Raburn’s 40-year high-tech career hasn’t lacked thrills. He opened one of the first computer stores in Los Angeles in 1976 and then became the 18th employee of a little startup called Microsoft. Enriched, he founded in the late 1990s a company, Eclipse Aviation, whose goal was to create a new kind of cheap, lightweight private jet. Backers included Bill Gates. Over the next decade, Eclipse burned through more than a billion dollars in capital and went bankrupt in 2009 amid the grip of the financial crisis. It’s now considered one of the largest financial disasters in aviation history.

Six months ago, Raburn, 64, became chief executive officer of a year-old startup called Titan Aerospace. Its young engineers are attempting to make unmanned, solar-powered airplanes that can fly for years in the upper atmosphere without landing. Raburn’s vision for the drone maker was modest: a few years of research, then selling out to an aerospace conglomerate with deep pockets. “I thought it would take three, four, or five years and would be accompanied by initials like B, L, or N, for Boeing, Lockheed, or Northrop Grumman,” he says.

Yet just a few months into Raburn’s tenure, Facebook and Google began a highly publicized mating dance for Titan. Facebook opted to buy another drone maker, the U.K.-based Ascenta, for $20 million, while Google acquired Titan for an undisclosed amount on April 14. Both Facebook and Google envision using high-altitude drones to deliver wireless Internet access to populations that aren’t yet online. “The idea that Google would come in on this had never even crossed my mind,” says Raburn.

What Raburn didn’t foresee is that the search king and social media leader would include drones in their ambitious plans to preserve their positions in the tech industry. Both are inking deals that reflect a practical interest in branching into other markets and an exuberant desire to forge a sweeping new future. In the last few months, Google has acquired startups pioneering robotics, artificial intelligence, and Internet-connected devices for homes. Meanwhile, Facebook has furthered its foray into applications for smartphones and bought a company trying to revive the idea of virtual reality, a concept that was once the province of sci-fi films. “We’re in one of those moments in time when things that seemed unthinkable and crazy suddenly become more realistic,” says Tim O’Reilly, founder of O’Reilly Media, a technology book publisher. Larry Page and Mark Zuckerberg “have a lot of confidence but also a lot of ego and pride. They are not going to let someone else pioneer the future.”

Page and Zuckerberg have embarked on a shopping spree of eight companies since last December, in part, because they can. Despite the recent dips in their share price, Google and Facebook still have mounds of cash and are among the companies with the highest market value in global techdom. “These are nontraditional businesses primarily creating software,” says Michael Cusumano, a professor of management at MIT Sloan School of Management. “It’s not like they are General Motors or even Intel, where each new product costs a billion dollars or more. They don’t have those kinds of expenses, so what else are they going to do with their cash?”

Google’s $3.2 billion acquisition of Nest, a maker of smart thermostats and smoke detectors, will allow it to take the lead in defining a long-heralded concept called the connected home, where devices collect new kinds of consumer data and can be controlled via the Internet. Facebook’s $19 billion purchase of the popular texting tool WhatsApp boggled the mind for its atmospheric price and the fact that it employed all of 32 engineers. Yet the move directly strengthens Facebook’s position on smartphones and gives it inroads to WhatsApp’s 500 million regular users who are primarily based overseas.

Behind these deals is a certain kind of youthful insouciance as well. Zuckerberg and Page (along with Google co-founder Sergey Brin) control large percentages of stock in their companies. Despite the fact that previous acquisitions haven’t worked out so well (exhibit A: Google paid $12.5 billion for Motorola’s handset business and sold it 22 months later for $2.9 billion, though it retained its patent portfolio), they don’t have to ask their boards for anything other than cursory permission to make big bets. The founders also know that moving boldly into exciting markets can inspire rank-and-file engineers who may otherwise be demoralized by the prospect of building better ways to sell ads. “Facebook buying Oculus makes it more possible to hire engineers into the ads group,” says Hunter Walk, a former Google executive turned venture capitalist. “They know that if they do a great job, there’s a chance to go work on other advanced technologies that may be even more interesting.”

Of course, any acquisition or merger between companies possesses its own distinct blend of anxiety and security, and the current acquisition spree in Silicon Valley proves no different. The tech industry is going through one of the most turbulent transitions in its history, from a world that revolved around the 350 million PCs sold each year to one that is obsessed with the billion-plus smartphones purchased annually. Unlike PCs, these devices go everywhere with their owners and are primarily used to access apps instead of websites. Old revenue models, like serving up search and display ads, hardly apply on the mobile frontier.

So a frantic search for the next big profit sanctuary is under way. “Everybody is fleeing into the future just as fast as they can,” says Paul Saffo, managing director at investment research firm Discern Analytics. “They don’t know what they are going to need in their toolkit, so they are grabbing stuff as they go.”

Facebook’s March deal for Oculus VR hinted at such impulsive straw grasping. Zuckerberg visited Oculus’s Southern California offices that month and tried on its headset, called the Oculus Rift, which allows its wearer to view and maneuver in a stunning 360-degree virtual world. “So that was probably one of the coolest things I’ve ever seen in my life, and maybe ever will see,” Zuckerberg said, according to Oculus CEO Brendan Iribe, who later recalled the moment at an industry conference. Zuckerberg then followed up with: “How can I help?”

The discussion culminated a few days later with Facebook’s announcement that it would buy the company for $2 billion. Oculus has about 100 employees. It does not yet have a widely available commercial product nor anything to demonstrate other than a few rudimentary scenes from games being developed for the headset by other companies. In a blog post, Zuckerberg said he hopes to make Oculus “a platform for many other experiences,” such as sitting in a virtual classroom with other students and teachers from around the world, or consulting with a virtual doctor from home by putting on a pair of goggles.

Spending billions for such unproven concepts is risky, if not downright wacky. Yet Zuckerberg and Page have a powerful example of what it means to not move with speed and aggression to try to lock up new technologies. Microsoft and Oracle dominated the tech scene in the ’90s, but each has struggled to keep up with changing industry dynamics and the transition to smartphones and cloud computing. “When you’ve won a category in the tech industry, you basically have 10 years to make hay of it,” says Benedict Evans, a partner at the venture capital firm Andreessen Horowitz. “So the question for [Google and Facebook] is, what happens the next time everything changes, and how can we buy important businesses that seem likely to be part of that future?” (Bloomberg LP, which owns Bloomberg Businessweek, is an investor in Andreessen Horowitz.)

That’s what led both companies to Raburn’s doorstep. Facebook wants to use drones as part of its initiative, an alliance with companies including Ericsson, Samsung, and Nokia to bring wireless Internet to the billions of people in developing nations that don’t have it. Google has the same goal and will use Titan’s drones to complement its Internet-delivering high-altitude balloons, part of an internal initiative called Project Loon. Both companies may have some other far-out ideas for drones, such as using them to collect real-time information for maps, monitor traffic, and track weather patterns.

Raburn concedes Titan drones are a ways from commercial deployment, but he thinks Google’s resources can expedite their development. “What I’m seeing from Google is a willingness to take risks without getting too carried away,” he says. “To me that’s what corporate America has always done. I love to see it being driven by the tech sector.”