Why is Microsoft paying $7.5bn for GitHub?

#Microsoft's eye watering acquisition of #GitHub for $7.5bn in stock (25x annual earnings) is about its strategic value not financial value

But what is GitHub ?

Founded in 2008, GitHub is a collaborative open source code sharing service, reportedly earning revenue of $300m per annum and loss making...

Open source software is code created by groups of developers collaborating online. This software is released under licence and is usually allowed to be used free of charge

Around 28 million software programmers use GitHub to power technology products around the world. Its a critical component of their daily work and they rely on the platform to store, share and collaborate on that software code

GitHub is also an active social network catering to developers' professional needs and career advancement

Microsoft's Metamorphosis

Given the share price reaction, Wall St seems happy with Microsoft's metamorphosis, in following #Apple's business strategy of 'proprietary openness'

Acquiring GitHub's version control platform could improve talent visibility for Microsoft, give it insight on competitor software code, while extending the reach of its current and next generation platforms

Why buy GitHub now ?

Both #Google and #Amazon were mooted as potential suitors, so the acquisition may have been a defensive move by Microsoft

Whilst Microsoft can easily afford to finance this through stock buy backs, with a $132bn cash pile, make no mistake this acquisition is about network effects and data on developer working practices (including competitor platforms)

Microsoft wants to grow GitHub's developer community (today it has 28m developers and 80m repositories of code) and will also look to monetise GitHub's offerings through its existing sales channels

But it will want GitHub’s developers to run their applications on Azure, its cloud platform, and integrate with its Visual Studio Code which is a Github competitor

Expensive ?

In 2016, Microsoft paid $220 for each of LinkedIn’s (MAU's) monthly active users.

By comparison, when Facebook acquired WhatsApp for $19 billion 4 years ago, it spent $40 for every user

Assuming that all GitHub's 28m developers are active, then that's a whopping $268 for each monthly active user (more than LinkedIn...)

But if its works, the rewards could be priceless

Networks and Social graphs

After Microsoft's $26bn acquisition of LinkedIn, GitHub is yet another illustration of the scale and value of graphs (underlying networks of communities) in today's platform wars

LinkedIn has the social graph and GitHub the developer graph

Track record on acquisitions

Whilst Microsoft has a sketchy record on acquisitions, aQuantive ($6.3bn) and Nokia's handset division ($7.2bn), this its third largest in history, is meant to be different

Combining one of the world’s largest software companies with the biggest open source software community, is of course inherently risky

But as with LinkedIn, it about balancing mutual self interest without destroying the value in these online communities and networks

Minecraft ($2.5bn) and LinkedIn ($26.2bn) are pointed out as more recent successful acquisitions, but then again this is open source software...

Expanding Microsoft's Developer Ecosystem

As Microsoft expands its ecosystem, it knows developers have become the most important decision maker and influencer of technology adoption, in the last decade

GitHub's global network of software developers is close to Microsoft's core business. Software developers contributing to Microsoft technology are estimated to number 30m

Crucially, Satya Nadella (Microsoft CEO) can now reach the rapidly growing number of developers employed in companies outside of the Tech industry

Given software's importance for all Digital businesses, that recruiting trend is likely to continue

Open source revolt on privacy concerns ?

Critics of the acquisition believe this move is a competitive threat, as Microsoft can peer into software under development by rivals

#GitLab and #BitBucket may yet be the beneficiaries, as Tech giants #Amazon, #Google and #Facebook balk at the acquisition

These Tech giants may become more active in supporting such GitHub competitor platforms to keep "open source, open...."

Satya Nadella though vows to keep GitHub operationally independent and retain its open source ethos

Privacy addressed

The new CEO of GitHub, Nat Friedman, has responded to privacy concerns: 

“Microsoft hosts the confidential information of more than one billion customers today, and this is a responsibility we take extremely seriously. GitHub already has policies and controls in place to limit employee access to private repos, and this will remain as tight as ever under Microsoft.”

Indeed Microsoft has used open source models on some significant cloud and developer products

And as an organisation it is a far cry from the days of Ballmer's anti open source rhetoric

Cynics still question Microsoft's ultimate motivations, given that GitHub isn’t a big revenue generator

Future of Open Source

Making Github owners billionaires is just the start...

Expect more open source businesses to be snapped up by proprietary software Enterprises in future

After all, aren't such acquisitions what Silicon Valley dreams are made of ?!

You can also follow Chas on Twitter @ChasDhami

The Amazon (AWS) factor…

This is part 4 of a series of articles on: ‘Cisco, IBM, HP: still a cloud of uncertainty?’  Here are parts one, two & three

Amazon Web Services (AWS)

• Since launching a decade ago, AWS has taken the IT industry by storm. Today its a juggernaut with a $7bn run rate
• Jeff Bezos, CEO and Founder of Amazon.com has big plans for AWS, and those don’t currently include spinning it off !
• Amazon’s modus operandi is to: grab market share on its platforms using very low prices, build huge economies of scale; utilise new business models while innovating relentlessly 
• Andy Jassy, Head of AWS has a clear vision : “Our goal is to have every company run all of their businesses and all of their applications on top of our technology infrastructure platform”

AWS Financials

• In its Q3 2015, AWS generated $2.1bn in revenue, up 78% on the previous year, but with 25% operating margins
• That’s still only 8% of Amazon Group, but 52% of its operating profits 
• In Q3, Amazon Group made $79m net profit on Sales of $25.4bn (a tiny 0.3% margin)
• It hard to tell the actual net profit margins for AWS (especially after stock based compensation).
• We can see however, that Q3 stock based compensation for Technology & Content was 57% of the Amazon group total
• Since this was the first time (a normally secretive AWS) provided additional information on its financial performance, we probably won’t know more details for a while….

IaaS (Infrastructure as a Service)

• AWS dominates Infrastructure as a Service (IaaS). It invented the idea of Public Cloud infrastructure and Pay as you go pricing
• It was recently estimated that AWS, had more than 10 times the computing capacity of the next 14 largest infrastructure vendors combined
• It continues to race into multiple areas: Big data, Analytics, Databases, Business Intelligence, Artificial Intelligence, Internet of Things (IoT), Smart Homes
• Worldwide Cloud Infrastructure as a Service (IaaS) expenditure is forecast to grow 33% to $16.5bn in 2015, and at ~29% CAGR (compound annual growth rate) from 2014 to 2019
• The key players in IaaS are AWS, but also Microsoft Azure and Google Compute engine. They’re squeezing legacy tech companies like IBM & VMWare in Cloud price wars
• In July 2015, Amazon CFO commented that the race to zero is still on because it’s part of the AWS “business model.” 

Now taking on Oracle

• In fact, AWS recently focused its attention on Oracle
• Oracle is the biggest provider of traditional databases. Its a business that's been struggling to grow as more businesses move operations to the Cloud
• Larry Ellison, Executive Chairman and CTO of Oracle, recently declared at Oracle Openworld 2015: “We’re on our way to being the leader in SaaS.” 
• IaaS (infrastructure as a Service) is seen as a commodity play by Oracle.
• GE though may beg to differ, it’s planning to shift thousands of applications to AWS so that it can reduce its data centers from 34 to 4.
• Ellison isn’t used to playing second fiddle in any market. And he's got AWS firmly in his sights, especially with the launch of AWS Aurora Cloud database offerings

Future looks bright

• AWS continues to enrich is offerings adding PaaS (Platform as a Service) and SaaS (Software as a Service) capabilities.
• Its seen as a safe choice for Enterprises for their Cloud Infrastructure needs 
• Deutsche Bank believes AWS is forecast to reach $16bn in revenue by 2017, achieving a valuation of ~$160bn (based on a 10x multiple)
• This could make AWS the fastest growing Enterprise Tech company ever
• Deutsche Bank adds that AWS is forecast to hit $10bn in revenue on its 10th anniversary next year. By comparison, it took 9 years and 10 years respectively, for Google & Facebook to hit $10 billion revenues
• While Oracle and Microsoft took 23 and 22 years, respectively, to achieve that $10 billion milestone.
• Its thought the AWS business model originated from the need to utilise its spare processing capacity during low demand periods supporting e-commerce on Amazon.com
• Not a bad side line business to have (we all need one of those...)

Accenture and AWS 

• Accenture and AWS have also announced a joint venture to boost Cloud Services, which threatens IBM and HP on its traditional turf, with its more flexible terms. 
• This announcement would send a shiver up any traditional Tech company’s spine…

In part 5, we’ll be looking at How Cisco is positioned in the context of ‘Cisco, IBM, HP: still cloud of uncertainty’

What are your thoughts on Amazon Web Services ?

(All views are my own)

Defining Cloud…

 

This is part 2 of a series of articles on: ‘Cisco, IBM, HP: still a cloud of uncertainty ?'

Contrasting headlines:

• ‘Cisco, IBM, HP in Trouble, Says Credit Suisse, As Cloud Moves Past Them' is the headline we reviewed in part one
• 'HP topples Cisco to become Cloud Infrastructure equipment market leader' is also a recent headline
• But, why the contrast ? The reason depends on how you define Cloud
• Here are some simple (non technical) definitions

What is Cloud ? 

• Cloud Computing (or Cloud for short) can be defined as Computing as a service that’s delivered over the internet.
• Such computing resources can be delivered on demand, across the internet and often include Storage, Servers, Networking, Data Centers & Applications
• Payment (for such Cloud Infrastructure) is usually on a metered or pay for use basis (a bit like a utility model)

There are typically 3 Cloud Services:

1) Infrastructure as a Service (IaaS):

• You’re renting the Cloud infrastructure (Servers, Storage and Networking) from a Service Provider on demand, in a Pay As You Go (PAYG) model.
• Basically you’re using somebody’s Data Center and its sometimes called Virtual Cloud, as you don’t own the equipment and software

2) Platform as a Service (PaaS):

• Developers use Tools & Cloud services here to build Applications. These Application infrastructure services are called Middleware. Database services can also be in PaaS
• Think of PaaS as the middle layer, SaaS the layer above it and IaaS the bottom (basic foundational) layer 

3) Software as a Service (SaaS):

• Is Application software provided in a one to many model on a Pay for Use or Subscription basis e.g. Google for Work, Microsoft Office 365, Cisco Webex, Salesforce's suite of offerings
• Since you’re paying for using the software, rather than hiring the infrastructure it runs on, SaaS is not generally referred to as Cloud Computing infrastructure. 
• It’s a Hosted Software model

 

Cloud Computing can be typically be deployed in 3 ways : 

1) Public Cloud:

• Users don’t purchase the hardware, software or supporting infrastructure. It’s owned & managed by Providers, who’ll serve more than one customerusing that infrastructure
• Its a style of computing where you can be given rapid access to scalable & elastic IT capabilities, but in an affordable way

 2) Private Cloud:

• Where infrastructure is owned & operated by one organisation, which ensures users are completely isolated from others when receiving that service.
• You have more control over virtualised resources and services. You still benefit from the efficiencies of the cloud

3) Hybrid Cloud:

• Combines Private cloud and Public cloud services.
• In practice, most companies end up managing workloads across Data Centers, Private clouds and Public clouds

IaaS and AWS:

• AWS (Amazon Web Services) is market leader in public IaaS. 
• It operates at a massive scale with a multitude of innovative web services that are being expanded at a phenomenal rate
• IaaS from AWS fits the pure definition of ‘Cloud Computing as a Service’ i.e. Cloud Infrastructure that’s paid for as a utility model (where customers rent instead of having to buy the equipment & software)

 

IaaS vs Cloud Infrastructure Equipment Suppliers:

• Cloud infrastructure equipment suppliers like Cisco and HP Enterprises dominate the $120bn Data Center infrastructure
• Cisco & HP Enterprises primarily sell (rather than rent out) this Cloud infrastructure to enable Cloud Services deployment in line with customer preferences e.g. Hybrid Cloud
• Its a different business model to that of AWS
• Cisco doesn’t compete in Public cloud with the likes of AWS, Google and Microsoft Azure
• HP announced the abandonment of its Public Cloud IaaS offering, moving to a partner led model for customers who need Public Cloud services

 

'Data Center Infrastructure':

• Data Centers form the foundation of Cloud services and as such there’s been an explosion of growth in spending on Data Centre Networking, Storage & Compute
• This 'Data Center infrastructure' includes Servers, Server Operating Systems, Storage, Networking, Network security and Virtualisation software
• HP Enterprises and Cisco are dominant suppliers of Enterprise & Service Provider Data Centre Hardware respectively. 
• As demand for Public Cloud has taken off, Hyperscale Data Centers are being deployed and Service Providers are spending record amounts on Data Center equipment

Hazy Cloud Comparisons:

• Clear cut comparisons on Cloud amongst suppliers can be difficult.
• For competitive reasons, suppliers don’t report a detailed breakdown of Cloud in their financial results. Also what they classify as Cloud varies
• Amazon Web Services (a hugely secretive organisation) though has actually increased transparency in its reporting recently
• Microsoft, however, has reduced the number of segments it reports on, bundling Azure (its Cloud computing platform) into a new reporting segment. 

What did I miss ? Would be interested in hearing your perspectives

(All views are my own)

In part 3, we’ll be looking at ‘Digital Disruption and Enterprise IT’ landscape

Cisco, IBM, HP: still a cloud of uncertainty ?

“Cisco, IBM, HP in Trouble, Says Credit Suisse, As Cloud Moves Past Them”: is a recent perspective that’s sparked much debate.

It’s not the first claim that Cisco, IBM and HP are being left behind in Cloud, and it probably won’t be the last…

Cloudy prospects ?

• But are sweeping statements like these, underestimating the ability of these Tech titans to adapt ?
• After all they: have a large installed customer base; extensive ecosystems; are investing in startups/partnerships/R&D; and generate significant cash flows each quarter
• Yes, faster innovation is needed in some segments (Cisco & IBM, are ahead of HP there) but refocusing billion dollar companies and retaking market share takes time
• Or does bashing the original Enterprise Tech giants make good headlines ?
• Perhaps its a simpler explanation than that: Stock market nerves

Stock market pressure

• Shareholders want early warnings and guidance from analysts to protect their investments. Analysts duly oblige. Stock buy backs are never enough
• The Tech sector is characterised by: rapid market shifts & commoditisation; hype new Tech will topple market leaders; and fear market leaders lack agility
• Transforming Tech giants involves patience and inherent uncertainty. But stock markets are fickle, short term in outlook and expect higher returns for that additional risk
• Ask Michael Dell, he knows all about that…

Relative positions of the 3 Tech titans

• Cisco is in the strongest position financially of the 3, with its: $59bn cash pile; Q1 results of $12.68bn revenue; 63.2% Gross margins and $2.5 billion of free cash flow
• Though anyone writing off IBM, when Warren Buffet is doubling down on IBM stock, maybe missing the point. IBM has a 104 year history of reinventing itself & is moving up the stack
• HP appears the most challenged of the 3. Its slashing operating costs and split on November 1st into 2 parts:
  1. HP Inc. (HPI): PC and Printing products & services; and
  2. Hewlett Packard Enterprise (HPE): essentially an IT Operations business
• As it slims down, HP is revving up its innovation engine. However, it might find itself subject to takeover bids, as businesses seek ever increasing scale in Enterprise IT.

Dell moves in

• Indeed whilst HP and IBM undergo painful restructuring, Dell has made public its intention to acquire EMC for $67bn, along with its crown jewels of VMWare.
• Assuming Dell is successful in the integration, this move will create a rival to HP, IBM and Cisco.
• However, some have recently questioned whether the deal will even close

 

Research & Development (R&D) and Innovation

• R&D expenditure in their last full financial year ends was as follows Cisco $6.2bn, IBM $5.4bn and HP $3.5bn.
• The World’s 50 Innovative companies (2015) list has just been released by Boston Consulting Group (BCG):
• The rankings place:
  • Apple 1st , Google 2nd, Microsoft 4th and Amazon 9th
  • IBM 13th, HP 23rd and Cisco 31st
• So whilst IBM, HP and Cisco are diverse businesses and at different stages of evolution, they are hardly laggards.
• Not everyone can be Apple…

Microsoft example, offers IBM, Cisco and HP hope

• Doubters on the ability of Cisco, IBM and HP to bounce back might recall that Microsoft’s future 18-24 months ago, was also shrouded in uncertainty
• But with new CEO Satya Nadella and a focus on the Cloud, its come roaring back (albeit still grappling with an aging software licensing business and a mobile unit lagging the market)
• And Microsoft is partnering like never before:
  • Its forged ahead with partnerships to bolster its Cloud computing platform called Azure (e.g Dell and HP); leveraged its installed base and huge ecosystem
  • And its even working with Red Hat to offer Linux on Azure! Linux is an open source operating system that competes with Microsoft Windows
• Microsoft shares hit a 15 year high in October 2015 and it appointed former CTO at Cisco, Padmasree Warrior, as a new board member

Future articles

• We’ll look at the more positive aspects of Cisco, IBM & HP in future articles (including financials and a more balanced view of their competitive positions)
• This is part 1 of a series of articles on: 'Cisco, IBM, HP: still a cloud of uncertainty ?’
• In part 2, we’ll be looking at ‘Defining Cloud’ in simple terms and in part 3: 'Digital Disruption and Enterprise IT'

What's your perspective ? It would be great to know...

(All views are my own)