• by Bill Nussey , February 27, 2006

The rampant merger and acquisition activity in our industry over the past 18 months has led to competing predictions about where we're headed. For instance, Forrester Research says the acquisition of ESPs by direct mail companies indicates that stand-alone vendors are losing ground to multichannel providers. On the other hand, JupiterResearch points out that the fastest growing ESPs in the market continue to be the very stand-alone firms that Forrester says are at risk.

How can marketers and vendors make sense of this? Where is the market really likely to go, and how can marketers ensure that they make smart choices amidst all the changes? As a former venture capitalist, I think it's helpful to look at the impact of consolidation on other industries. If you want to see how technology and expertise can reshape an industry, just take a look at the travel business.

Travel agencies were transformed when the passenger reservation system Sabre was introduced in 1960. Almost overnight, technology altered the industry. Booking travel was no longer an arcane process requiring highly specialized training or knowledge of the "right" people. Travel agencies were suddenly forced to compete in entirely new ways. Many of the less efficient companies that had relied purely on the profit of bookings were forced to sell out to large conglomerates entering the marketplace. Other agencies responded to the new competitive landscape by focusing on differentiated service levels or unique areas like adventure or business travel.

The next seismic event came along with the introduction of the Internet, creating a new kind of agency--one that embraced technology, and could offer such compelling value that customers bought travel services from them regardless of what else they sold. Within a few years, online agencies like Travelocity and Expedia had earned their place as equals to the biggest and oldest agencies in the world. In a sense, the upheavals resulted in as much segmentation as consolidation.

There are many lessons from the travel industry that we can apply to our own.

First, it's a mistake to believe the recent M&A activity in the e-mail industry foretells the demise of pure-plays. The entire venture capital industry owes 100 percent of its existence to believing that small companies can very successfully compete against larger incumbents. Just take a look at Microsoft--it once had a valuation one million times less than IBM's; now it's two times larger. Or look at Starbucks, Walgreens, Cisco, Dell, Southwest Airlines, Salesforce.com, Pixar or countless other companies that were once dwarfed by their competition but, through tenacious focus on their unique markets, succeeded in very big ways.

Sometimes being small, nimble and open to risk can be the biggest competitive advantage in the world. It's amazing to see just how innovative and responsive a pure-play business can be. When it has nothing else to sell and no other revenue to fall back on, pure-plays are often the very definition of innovative and responsive--anything less, and they won't survive. In fact, analysts report that highly focused companies like Silverpop, ExactTarget and e-Dialog have grown the fastest over the last two to three years. Conversely, looking at the pre-acquisition public financials of companies like DoubleClick and Digital Impact suggests that the companies with the broadest offerings have grown far more slowly.

No matter how the M&A activity in the e-mail industry affects the vendors, what it means to marketers is the more important question. Again, if you look at other industries that have undergone consolidation, we can expect to find that, while some marketers will want a one-stop shop, most will prefer the flexibility to mix and match vendors, giving them greater control over quality and costs and greater ability to create the kind of strategic advantages that come from managing their marketing architecture themselves.

The bottom line is that the ESP marketplace is maturing beyond one size fits all. The long-term winners will not be defined by size but entirely on how much value they offer clients. Smart marketers will always pick the vendor that offers the best value. In the end, the marketers will be the ultimate winners.