#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

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)