Few acquisitions in the technology industry have caused such debate as that of GitHub by Microsoft, and understandably so. What makes the debate most interesting is that the questions raised aren’t as much financial or organizational as they are ideological in nature.
GitHub, which hosts 85 million code repositories from 28 million developers globally (98 percent of the developers worldwide), is the mecca of the open-source community, offering free hosting for open source projects. Solo developers and companies of all sizes publicly share their code on GitHub in a spirit of collaboration, openness and knowledge sharing. Understandably, news of a big tech giant, one whose former CEO Steve Ballmer called open source a ‘cancer’, acquiring GitHub drew the ire of millions of developers who have made GitHub home to their lives’ work. On the surface, it seems as bad as Exxon acquiring Greenpeace, until you look a little more closely.
— Vladimir Tasev (@TasevVladimir) June 5, 2018
The big bad Microsoft of yore is no more
Windows Lens: There is little debate that Microsoft’s bad reputation within the open source community is justified. Its maligned history with the open source ideology is evidenced by its blatant efforts to suppress Linux, the rival open-sourced operating system to its Windows. From filing malicious lawsuits to selling patents that targeted Linux, Microsoft perceived the open source community as a threat to its Windows environment. The irony that GitHub is based on Git, which was invented by Linus Torvalds, the creator of Linux, is not lost on us.
Microsoft’s view of open source was predicated by its reliance on Windows. It looked at everything through the lens of its Windows platform – new product lines, customer acquisition and competition. Through this lens, the open source community was certainly a big threat. However, times have changed. Due to missing out on the mobile revolution (in part because of a failure to build a developer community for Windows Mobile), Windows has lost its importance, both in the market, as evidenced by its declining market share across all internet-connected devices (which led to losing leverage over developers), and within Microsoft’s own strategic framework.
Departure from Windows: In the Ballmer era, every Microsoft product or service was geared towards acquiring new customers for Windows. Since the failure in the mobile era, which coincided with the appointment of the new CEO Satya Nadella, Microsoft has gradually decoupled Windows from the rest of the company’s offerings. One of the first announcements that Nadella made after taking over as CEO was to rename Windows Azure to Microsoft Azure. He also released MS Office for iOS before it was released for Windows Mobile. Perhaps most conclusively, Microsoft’s recent reorganization of the company left it without a division devoted to personal computer operating system, completing its transformation from a Windows-centric company to a productivity and cloud-first company.
In this new direction away from the burden of Windows, Microsoft wants to be the provider of tools and services to developers to build applications on the cloud, on any platform (iOS, Android, Windows, AWS, Linux, etc.) in an open-source environment. This new direction should allay the fears of those who are afraid of Microsoft’s motives and plans for GitHub.
Embracing open source: Having set course for a new strategy with ‘intelligent cloud’ at its core, Nadella spearheaded a new approach at Microsoft – one that embraced open-source development both in the tangible sense of publishing source code, recording bugs and updating edits publicly, as well as in a more philosophical sense of collaboration and community.
While the open source community was a threat to the Windows environment, it is a boon for its new productivity, cloud-first and platform agnostic approach. A big draw towards cloud is the opportunity to develop platform agnostic applications. Microsoft understood the importance of the open-source community on the cloud and started investing heavily in supporting that community.
Some reports suggest that Microsoft itself is the biggest contributor to GitHub with over 1,000 of its own developers on the service.
After trying to suppress Linux for years, Microsoft is now itself a member of the Linux Foundation. This complete reversal of Microsoft’s approach towards open source was captured well when Nadella proclaimed that “Microsoft loves Linux” at a cloud developer conference in 2014, a complete departure from Ballmer’s attitude a decade ago.
The Winning Strategy
Under the leadership of Nadella, Microsoft may have done enough to change its image within the developer community and earned its seat at the open source table. However, developers and the technology industry at large will be observing Microsoft’s next steps with the GitHub acquisition very carefully. The winning strategy for Microsoft would lie in its ability to leverage Microsoft’s vast resources and GitHub’s developer-first ethos to enable open innovation at scale, which can benefit the entire world’s developer community and thus unlock a truly collaborative and powerful innovation network.
We suspect (and hope) that GitHub will be allowed to maintain its developer-centric approach by keeping it largely independent of the Microsoft enterprise, much like the approach afforded to LinkedIn (which was acquired for $26.2B by Microsoft in 2016).
Subtle integrations with Microsoft’s suite of developer tools are expected, but integrating GitHub too closely with Azure would be risky. Rather, Microsoft should give the luxury of its scale and resources to GitHub to truly create a stack of tools and resources that developers truly love – under the umbrella of GitHub. This will allow GitHub to maintain its open, collaborative and platform-agnostic ethos while giving Microsoft some of the developer love it needs to succeed in the cloud era. Such an approach allows us to see this acquisition as a win for all stakeholders. And all early indications suggest likewise.
Microsoft: That this is a great acquisition for Microsoft in the long-term is a no-brainer. Even though a $7.5 bn price tag for a company with around $300 mn in revenue, which has also never turned a profit, might raise a few eyebrows on Wall Street, it is easy to see that this acquisition is based not on financial, but on strategic grounds. With GitHub, Microsoft is buying the most engaged developer community with built-in network effects.
With its new strategy to provide the ultimate developer stack across platforms, being so close to the prospective user will allow Microsoft to learn, develop and iterate based on the user’s needs. If it can do this within the open-source environment of GitHub, then it surely will find many takers. Through GitHub, Microsoft is not only likely to capture new developers who could turn into long-term customers of its developer services but also has the opportunity to gain brand acceptance from developers as a shepherd of their beloved GitHub.
GitHub: As loved by developers as it is, GitHub was going through its share of troubles. It was struck by allegations of sexism and harassment, was without a CEO for the last seven months and was expected to burn through its cash within the next year. Moreover, the company was letting down its most important stakeholders — the developers. It had failed to provide enough improvements to its platform for many years, leading many of the top developers to write an open letter to GitHub regarding its developer apathy.
It was clear that GitHub was in severe need of funding and focus. The acquisition by Microsoft gives it both. With Microsoft’s resources, GitHub has at its disposal an enterprise sales team which will drive up GitHub’s paid accounts usage by bundling GitHub into its existing stack of enterprise resources. It may even be able to offer private repositories for free, earning even more developer love.
GitHub even got a new CEO in the bargain — former Xamarin CEO Nat Friedman (and now Microsoft corporate vice president), who will report to Microsoft’s Cloud and AI chief, further strengthening our belief of GitHub’s strategic value in the cloud and AI for Microsoft. Most importantly, GitHub can now focus on what it knows best, i.e. creating tools and services that developers love.
Developers: With Microsoft’s backing, GitHub now has an unlimited runway to devote all its attention to creating more tools and services for developers. Popular productivity tools such as Microsoft Visual Code will likely benefit from feeding the GitHub repositories into AI. We expect more advancements in such developer tools and services, especially in the AI domain, which will eventually allow developers to code better. Given that GitHub was in need of an acquisition, Microsoft is perhaps the most preferred acquirer amongst the other big tech companies. It is unlikely to impose any lock-ins with its own platform — because of its new cloud-first, platform agnostic strategy. This incentivizes Microsoft to win on merit, by creating the best tools and services for developers.
Open source community: GitHub was acquired at close to 30x its annual recurring revenue in one of the most profitable exits ever for both the founding team and investors. The astronomical success of this open source platform will likely bolster more open-source initiatives and investments – a key in driving towards a more decentralized technology industry. To make this acquisition successful, Microsoft itself is likely to support more decentralization, where developer tools and cloud win on merit and dissuade lock-in on platforms which leverage the pull of end users.
Strategically, our hope is that this acquisition manifests more into GitHub expanding its services with the support of Microsoft and not vice-versa, wherein GitHub is seen purely as the top of the funnel for Microsoft’s services. If Microsoft plays this right, which all evidence points towards, we could certainly see a win for every stakeholder.
If not, let’s not forget that Git itself is a decentralized file storage system, allowing developers to move their repositories elsewhere.
About the authors
Dr Srikanth Sundararajan has 25+ years of international experience in the software product and services space. He has worked at HP, Informix in the US, and was part of the executive leadership team at HCL, the world-wide CTO at Cognizant and the COO at Persistent through its successful IPO.
In the US he had also successfully founded his own start-up, Pretzel Logic Software Inc., which was acquired by BEA spinoff WebGain. BEA was later acquired by Oracle.
He is currently a Venture Partner with Helion Advisors, an India focused fund to help technology-focused start-ups looking to go global from India.
He is also a visiting faculty of computer science at IIT Bhubaneswar and has taught at several US universities. He also serves on national committees on technical education, an initiative of MHRD, India.
He holds a B Tech degree from Indian Institute of Technology, Madras, and an MS/PhD in Computer and Information Sciences from the University of Illinois, Urbana Champaign. He has several publications and is the holder of patents, jointly with HP and BEA.
Abhimanyu Lamba is a tech marketer with experience in diverse Asian markets. A graduate of Indian Institute of Technology Roorkee, he started his career in Dubai where he worked on brand building and marketing for companies across industries with a focus on growth through digital platforms. He currently heads marketing and ad sales at Indus OS, India’s operating system, growing products made for the next billion smartphone users.