In the past few years, a number of technology companies have veered into new lines of business, either through acquisitions or startup divisions, that seem like an irrationally exuberant way to capitalize on their existing name recognition or ride the latest trend in technology.

You build a company and sell it to an existing company that overvalues it.

Not that this kind of diversification is always a terrible idea. It often works well during transition periods in technology, when there are gaps and unserved market needs. For example, the acoustic architecture firm Bolt, Beranek and Newman, now BBN Technologies and best known for its work on Avery Fisher Hall at Lincoln Center, became a powerful player in networking and timesharing in 1970—when the market was wide open. Similarly, Boeing’s computer services division flourished at the same time.

Today consumers have no particular need for another player in computer services, and Amazon does not appear to have a competitive advantage in this area. It makes about as much sense as Ben & Jerry’s saying: "Everyone knows our name and loves our ice cream, so let’s sell books and compete with Amazon."

Becoming Google-Eyed
Highly compatible offshoots have also emerged in more recent years. Apple iTunes has interacted wonderfully with its iPod and its computer line more generally, and many expect the new iPhone to be a best seller in consumer electronics. The company builds on this so effectively that it has even changed its name, removing the word "computer."

But, just as in the late 1990s when we suffered IPO commerce masquerading as e-commerce—count the eyeballs, make up a projected five-year cash flow, then flip the company at an incredible price-hallucination ratio—today we have what I call "acquisition commerce." In this case, you build a company and sell it to an existing company that overvalues it, again using price-hallucination ratios, based on future synergies with the acquirer’s core business.

Google’s $1.7 billion acquisition of YouTube is the most expensive example. Although it’s too early to see any financial returns, YouTube has already run into difficulty involving content and litigation and, more dire, shows no serious prospects for revenue. Similarly, Rupert Murdoch’s News Corp. got into the hottest new technology with its $580 million acquisition of the social-networking site MySpace. This could still turn out to be a lucky lottery ticket, but, more likely, both acquirers will find that they cannot easily turn social-networking sites into ad-revenue producers.

The realization that large media companies must find alternatives to traditional advertising served as the basis for both the YouTube and MySpace transactions. But the traditional advertising community is almost delusional in the way it has embraced the rationale offered for the acquisition of MySpace. A survey by the American Marketing Association posited that the popular social-networking websites were leaving billions of dollars on the table because although the age groups that visit Facebook, MySpace and YouTube frequently make purchases online, those websites do not offer shopping. Much of the basis for the survey’s influence seems to be that just more than half of the respondents said they would be willing to consider shopping tips from these sites. But so far the track record of online advertising indicates that users are not interested in having paid messages pushed at them—regardless of the medium.

I cannot buy stuff online when I check stock prices at the New York Stock Exchange’s site, yet many of us who buy stocks also make purchases online. Does this suggest that the NYSE should attempt to sell me golf clubs on its website? How many investors would be naïve enough to see that as an obvious extension of a powerful brand?

Eric Clemons is a professor of operations and information management at the Wharton School at the University of Pennsylvania.