Well, after that title — what else is there to say?
Lots, hear me out – I’d like to tell you why I am going against all the optimists out there (although I do consider myself an optimist) and why I liken this deal to AOL acquiring Time Warner (and we all know how well that went to define the new world of media – no?).
Here is the deal from where I sit and the many, many, many conversations I had inside and outside of both vendors to define where things are and where they are going. What follows is my analysis, which I would normally put in a research note and distribute just to a select few — but when I am going down, I like to go down in flames. I trust most of you won’t agree with my reasoning, so let’s have it out and dish it out in style.
There are four reasons that have been ballyhooed around for this acquisition to happen: Microsoft wants to show it is social, Microsoft bought the talent and experience (which is the main reason cited by Steve Ballmer, CEO of Microsoft), Microsoft wanted to buy clients that would not have chosen SharePoint and convert them, and Microsoft is building a convoluted “something” using Skype, SharePoint, Office, and Yammer.
Let’s tackle the last one first, since it is almost risible.
What application can you possibly create by combining all these elements together? How would anyone, in their right mind, even tackle trying to merge all these code bases into a single solution — while keeping the enterprise-grade allure of the products? Who would use it?
It is not as if it has not been tried — Cisco created the “perfect” tablet before, remember? The Cius — the perfect combination of Webex, Quad Collaboration, a Tablet, and Telepresence. If you don’t remember it, don’t worry – it was very short lived (although it does still exist) even with a great prime-time product placement in NCIS a few seasons back when it was launched. I hope that someone at Microsoft remembers that… Frankenstein products never had any success in the enterprise – even those that can rationalize why they even exist (not something that you can do by combining all the products mentioned before).
Let’s go back to something real, something that could make more sense. Let’s examine the proposed customer acquisition myth.
There are two reasons why this would be ridiculous (well, three if you consider the purchase price). First, how many customers are we talking about? There were many numbers thrown around when it comes to Yammer customers, but I am going to focus on the latest and greatest that had been repeated over and over again: 100,000 paying customers is a commonly mentioned number (a customer is a company in this case, not a person with a log-in). Let’s assume that from those 100,000 about 15 percent were customers they won over Microsoft and SharePoint (still high by my research, but just to be generous). If we are talking about customer acquisition costs, Microsoft is paying $80,000.00 per customer. That as a customer acquisition cost is preposterous for any enterprise vendor but the worst part is not the cost, it is the assumption that the customer who bought Yammer over Microsoft even wants Microsoft to be their vendor; a tall assumption indeed.
And, let’s not forget that this is only talking about the 15% of the paying customers that even considered Microsoft a finalist in their product decision cycles – the barely minimum to even consider Microsoft as a technology going forward. The other 85% did not think that Microsoft could offer a competitive solution. The customer acquisition myth is not reasonable, also, in a deal where the acquired entity remains independent. History has shown many times that the “easy” access to the customer to upgrade them or up-sell them a new product (SharePoint in this case) is never that easy.
Even if you don’t buy the argument of the financials aspects of it and focus instead on the customer acquisition of younger, innovative, flexible startups and small companies that are apt to use social networks constantly (which makes up for the majority of Yammer customers) these are companies that are not likely to be Microsoft customers and have no intention of becoming one. Microsoft is trying to acquire customers that do not want to be acquired, and paying an amazingly ridiculous amount of money for them? Hmmm… There’s got to be another reason for this acquisition that makes sense.
Leaving the “official reason” of wanting to acquire talent and experience, let’s look at the reason most commentators and pundits think this was a good idea: Microsoft wants to become social or show it is social.
First, SharePoint’s latest version, MOSS 2011, has social components; they were the most “celebrated” new features in them. Truthfully, they have failed to get adoption as they are somewhat — lacking comparatively speaking. Alas, it was a valiant first effort by Microsoft to get into the world of social. Even if you discard that, which most users have done, there is the issue of their partners (which Yammer was until the acquisition).
Microsoft made a point for many decades not to interfere with or acquire partners. Both developer and consulting partners are the basis of Microsoft enjoying the position it has. Microsoft made this clear time and again: for every dollar that Microsoft generated in revenue, their partners generated and additional nine dollars. There is no other partner network in the world of Enterprise Software that has the quality and quantity of individuals and organizations in it. And for the longest time Microsoft ensured they would not compete with their partners.
In this aspect there is one particular partner, NewsGator (named partner of the year in 2011) who was a direct competitor to Yammer. There were also many others that I know, MangoApps is one that I certainly enjoy – but there are many others. These partners operated under the belief that Microsoft would rely on them to provide the functinality, not get into the market and compete directly with them. As it stands, Microsoft acquiring Yammer breaks the fundamental promise of not interfering with their partner network — which causes problems in more places than just the social market by shifting the operating model for Microsoft partnerships. This has very strong repercussions for them going forward – some of which are not yet known in many other areas.
Even if Microsoft would consider Social to be sufficiently promising, strategic, or necessary to break this promise, Microsoft got the wrong partner for that – let me explain why.
If you look at the large, established vendors in the world of social (both enterprise as well as consumer) they all share one trait: they never expected to become a major vendor. That means that their core infrastructure, the way it works, is not enterprise-grade. If you remember, Twitter had to redo their entire infrastructure and improve the way it worked (this was around two years ago, the network suffered while going through it but it is far more stable and capable of lots more now) as a result of not having the ability to sustain the growth they were going through at the time. Foursquare just last week launched their new infrastructure. Facebook did the same in the past two years as well.
This is the result of the vendors creating a small, single-purpose tool (in the case of Yammer, an activity stream) and later needing to shift the model of how they work, features they offer, etc. These new features are “patched” to an underperforming infrastructure with “duct tape and bailing wire” and they just work (mostly). The scalability of these features is what would make them enterprise grade, together with expandability and dynamic flexibility to be reconfigured. None of the companies mentioned above, including Yammer, could’ve been considered enterprise-grade before they changed their infrastructure.
Yammer never did this and that is their next step. This is not a simple task; it takes months to do this as a dynamic and agile startup with funding and the right set of people. As part of a larger vendor, like Microsoft, this is not something that goes that quickly or smoothly. Microsoft, even if they leave their acquirers alone, is not the best company to promote this agile, flexible work to happen – and this is if most of the engineers from Yammer who know the product well were to stick around (not the easiest feat to accomplish for a large acquirer of a small startup).
I have very serious doubts that this transition can be effectively accomplished, and without it I am certain (from the people I talked to that are using yammer or building yammer) that yammer cannot deliver an enterprise-grade product that Microsoft needs to offer as part of any model going forward.
Even if they were able to pull this off, the “home” that Yammer found in the organization (as part of the team that handles Office365 and Skype, not within the Dynamics team or the SharePoint teams) makes little sense as to why Microsoft would acquire Yammer to prove they are social — but I have a further crazy idea about that… which I am leaving for then end of this post.
Finally, talent acquisition.
Ballmer has been quoted as saying that the main reason for the acquisition was the experience and knowledge about the freemium model and how to convert free to paid accounts. Two things about this.
First, their model was flawed and beginning to show a significant problem with it: customers were not converting, they were blocking them. The sales model that Yammer had adopted was simple: offer the company free access to the platform (with restrictions) and follow that up with a meeting with IT or a Business Unit to show them the features they were missing and that they could get as part of the paid license.
This is not a bad idea, with one exception: the people that brought the tool into the enterprise were not the ones that had to make the decisions about what data could be shared, with whom and how – or the ones making the decisions about corporate data safety and legal compliance. Once Yammer met with the executives in those positions, a large number of them (my conversations say around 20%, but don’t have scientific data to back this up) instead of signing up for the paid licenses actually blocked them at the firewall to prevent information from leaving the organization via a hybrid social network.
This was a growing, and worrisome, trend.
Second point on talent acquisition I want to make is regarding the price paid. Yammer’s revenues were quite low compared to purchase price (they never released official numbers, so we are going on speculation and what most have been talking about, but the consensus seems to be less than $20 million a year if we are going to be generous). Even if you consider the “explosive growth” they had of being able to grow their paid customer base four or five times in the past 12 months (a pace that would eventually slow down) and repeat it over the next twelve months it is still less than 10 percent of the purchase price. Double the revenues even, we are still talking little compared to the purchase price. I do know that bubbles know no valuation, but the point I am making is that even if Microsoft wanted to acquire the talent — they paid too much.
Let’s assume that Yammer had around 400 people (most of whom, I would add were hired in the past few months as part of this “explosive growth”) and they were going to increase their revenues by 5x this year. Let’s even assume the stated revenues for last year were off and they were double that. Microsoft paid one cool billion dollars (roughly) for access to 400 people — or an amazing $2,500,000.00 per person. I am quite certain it would take less than that to hire talent that knows how to manage a freemium model — even in the middle of a freemium bubble in Silicon Valley.
I know I am going very long, close to 2,000 words so far (and there so many other points to make: Yammers recent acquisition of OneDrum, the extended ecosystem that Yammer could not build but needed to, the lack of enterprise DNA anywhere inside of Yammer — and so much more! contact me if you want to discuss this in more detail), but the points I make are the reasons I titled this piece as I did. Microsoft did not acquire value or talent or revenue or social or — anything worth even close to the $1.2 billion it paid. Microsoft got bamboozled in the deal, which is not a validation of the social model and a strong point in its favor but rather a shot-across-the-bow of the social bubble that we are approaching the point of explosion.
Sad, considering what could’ve been.
What says you? Am I off my rocker? Should’ve I drank the Kool-Aid and label this the deal of the century as most pundits did? Was it cheaper for MSFT to acquire Yammer than to do this (right) themselves? Talk to me, let me know…
Crazy idea of the day: I said above that I had a crazy idea of what Microsoft could do with this acquisition if they had the right people in the right place, wanted to share that as a parting note. I believe that Microsoft should build a hybrid public-private social network with all their assets, the first one in its class, and tie all of the above things as add-ons. This hybrid network would become the basis for the collaborative enterprise, not the social enterprise, and they would then be the pioneers in that world. I know… crazy- no?
Interesting points (2 and 5) in this PC World article on Microsoft (interesting because they support my crazy idea)