Why Microsoft spent $1.2B on Yammer

Trying to get to more end users, build up credibility in enterprise social collaboration, analysts say

Microsoft's $1.2 billion move to buy collaboration platform Yammer is a way for the tech giant to get more users in the increasingly important enterprise social collaboration market.

Yammer allows members of business groups to interact with other users on their team through an activity stream. In a press release announcing the deal, officials from the companies say Yammer has 5 million corporate users, including employees at 85% of Fortune 500 companies that use either a base-level free edition or a paid version with additional functionality.

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Jim Lundy, an analyst at Aragon Research, says he's seen "viral" adoption of Yammer in recent months by enterprise customers. Yammer's proven ability to convert free users into paying customers, he says, was one thing that likely attracted Microsoft to the Silicon Valley company. Overall the move is evidence of a shift by the legacy technology giants like Microsoft to embrace the cloud world, he says. Yammer being a cloud-based service will give Microsoft some ability to connect in with its Azure platform as well, Lundy suggested.

"It's a new day, and a different era in computing and Microsoft needs some wins," Lundy says. "If they're smart, they'll realize that the Redmond way is not the way of the whole world and they'll leverage some of what's going on in Silicon Valley."

Microsoft isn't the only company using M&A to get into the collaboration game though.

R. "Ray" Wang, an analyst at Constellation Research, says other major players are trying to get as close to end users also. In the past year SAP, Oracle and Salesforce.com have each purchased cloud-based human resource applications in the form of SuccessFactors, Taleo and Rypple, respectively. Salesforce continues to push its Chatter collaboration application and also recently bought Buddy Media, another social enterprise collaboration tool.

"There's a war to get to the employees," Wang says. Customer relationship management (CRM) or enterprise resource planning (ERP) systems that Salesforce and SAP have built their businesses on only touch a minority of users within the business. Social collaboration tools are used by a much wider audience, spreading the company's influence to a wider user group within the enterprise.

For Microsoft, it follows a busy month for the company, which last week announced its Surface tablet, in a move to compete with Apple. But the company needed a "strong move into the social software game," says Martin Fauscette, who tracks enterprise software for IDC. He expects Microsoft to aggressively integrate Yammer into its Office, SharePoint and Exchange products. "The exposure of the Yammer ESN [enterprise social network] to the Microsoft distribution engine should be interesting to watch, and while $1.2B is quite a lot to pay for a company that IDC estimates to have done around $22.3M in 2011, remember that Yammer operates in a freemium model and has quite a bit more users that the revenue number reflects and adds somewhere north of 250,000 new users per month," Fauscette wrote in a blog post analyzing the deal.

Network World staff writer Brandon Butler covers cloud computing and social collaboration. He can be reached at BButler@nww.com and found on Twitter at @BButlerNWW.

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Copyright © 2012 IDG Communications, Inc.

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