|Jun 10, 2018|
A review of Microsoft and GitHub is the focus of this weekend’s edition of “Layer 2”. In summary, Microsoft is being changed for its own good — and this latest deal is consistent with this “acquire and be transformed” process. If you think about it, right or wrong, its acquisition of an OS from another computer well over a generation ago set it on a path to outlast its competitors and thrive in the original PC era. Perhaps the same thing has been happening again.
My initial thoughts shared a few days ago: just as was the case with the storied Library at Alexandria, busy and big minds were able to gather in one place. Today we recognize that as “community” and perhaps even as “platform” (Come work here, we’ve got all the books and all your colleagues are here too). GitHub, is functionally a host but it’s one with 28 million developers and billions of line of open-source code stored in about 80+ million source code repositories. What revenue it makes comes from charging for privacy (with recent figures from last year at 200M USD for subscriptions, including 100M for enterprise accounts). It’s a modern-day Alexandria.
Some worry about the pairing (guess who’s coming to dinner), with GitHub seated at Microsoft’s table and Azure as its dining companion. Microsoft has had mixed results with past acquisitions. The tepid results post-Nokia were due to an older corporate culture’s focus on a battle already lost in devices. The LinkedIn merger, however, was a tightly lipped affair reflecting a focus on reorganizing the company away from a decades old Windows culture. GitHub, for its size, is but another milestone in Microsoft’s evolution into an open-source platform (perhaps going back to the .NET and Linux foundations).
Ben Thompson has framed the big picture in a way which helps me to understand why the GitHub acquisition is significant, and that’s why I wanted to write this post. The bulk of this note is my attempt to learn and understand from Thompson, his colleague HBS Prof. James Allworth and a few other sources about what could be happening. (Links included with this piece.)
Thompson sees Microsoft embracing its truest self: a company which is based on user experiences and services. It tried a device focus but nobody does Apple better than Apple. Microsoft’s losses from Nokia and retreat from Windows Phone is an example of what Microsoft is being reminded of — where its strengths are (Xbox OK but good-bye Zune and Groove, we hardly knew ‘ye).
Microsoft is a “platform”. This is a collaborative setting for developers, and allows for third parties to build on top of the platform. One successful example is from 15 years ago: Valve’s Steam gaming products. A third party built Steam, and much of the economic value was harvested by that third party.
Thompson quoted Chamath Palihaptiya, who was quoting Bill Gates, in answer to the idea of Facebook as a “platform”: “A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it. Then it’s a platform.” Microsoft used to boast that it had harvested but a fraction of the total economic value of the ecosystem built on top of Windows.
And Microsoft had a great platform in Windows with lots of third party developers working and building on top of it. This in fact continues at GitHub with thousands of affiliated developers, in addition to the company’s thousand employees, contributing to GitHub.
In contrast, Apple’s business was different. Its devices ecosystem and app store was designed to capture most of the value in its ecosystem, and Facebook and Google both did likewise. All of these companies, are in Thompson’s parlance, “aggregators”. Thompson put it so well: “platforms are powerful because they facilitate a relationship between 3rd-party suppliers and end users; aggregators, on the other hand, intermediate and control it.”
But Microsoft and Apple, both “born” in the same era, had some commonalities: “Apple and Microsoft, meanwhile, have the most differentiated suppliers on their platforms, which makes sense given that both depend on largely externalized network effects. “Must-have” apps ultimately accrue to the platform’s benefit.”
The “must-haves” have changed and so must Microsoft.
A chart from Thompson, with Allworth’s input, on network effects helps.
(Chart from Stratechery.com by Ben Thompson)
This chart might also be a clue to the value of GitHub, with its community of outsiders, all differentiated and external, producing its own network effect.
Back to Thompson first to help describe GitHub’s value:
“Microsoft, befitting the point I made above about the expansiveness of its ecosystem, has the most “externalized” network effect of all: there is very little about Windows, for example, that produces a network effect (Office is another story), but the ecosystem on top of Windows produced one of the greatest network effects ever.”
Another great chart from Thompson which cleanly explains the power of a platform friendly to third parties building on top of it ala Microsoft:
(Chart: Stratechery.com by Ben Thompson)
In Nadella’s recent memo to employees, there has been a marked shift away from Windows, including the departure of one executive from the company. The old ecosystem has thrived for decades but that was the past for a decade.
What will help Microsoft both build a future ecosystem and answer the question of how to continue its existence in the age of the Cloud? Azure is a part of that but it’s not a complete answer. Over the last few years Microsoft affiliated developers have become among the top contributors to GitHub, outpacing companies we have associated with open-source.
GitHub may have been hard-pressed to be economically viable outside of the warm embrace of deep venture capital resources. Yes it makes money from making some repositories private but that’s not where the value lies. While there might have been potential suitors, like IBM or Oracle, they may have been the sort to wring as much out of the platform as possible. Microsoft however appears to have both the resources to invest in and a desire to continue fostering a developer friendly environment — and in the process benefit from the network effects of owning a community of millions of developers. It already has Windows developers working on it. It would align with Nadella’s reorganization of the company into a cloud and A.I.-centric platform.
Fears about what happens to a Microsoft owned GitHub have prompted the migrations to an alternative like GitLab but it could be misplaced even if understandable. Clues may be found in CEO Nadella’s thoughts about Microsoft’s role from his keynote speech at a recent Build conference and how he saw technology:
“We have the responsibility to ensure that these technologies are empowering everyone, these technologies are creating equitable growth by ensuring that every industry is able to grow and create employment. But we also have a responsibility as a tech industry to build trust in technology…This opportunity and responsibility is what grounds us in our mission to empower every person and every organization on the planet to achieve more. We’re focused on building technology so that we can empower others to build more technology. We’ve aligned our mission, the products we build, our business model, so that your success is what leads to our success. There’s got to be complete alignment.”
Thompson observed that Microsoft, whether it articulated it or not, was governed by a “Bicycle of The Mind” ethos just like Apple — of computing as a tool in service to people and not their surrogate. These two former rivals were born about the same time, like a generational cohort with overlapping values.
This focus on people and their experiences is the key. And Dries Buytaert has succinctly explained the value to Microsoft in business terms:
“In the future, it won’t really matter whether you use Amazon, Google or
Microsoft to deploy most applications. When that happens, platform differentiators will shift from functional capabilities, such as multi-region databases or serverless application support, to an increased emphasis on ease of use, the out-of-the-box experience, price, and performance.
“Given multiple functionally equivalent cloud platforms at roughly the same price, the simplest one will win. Therefore, ease of use and out-of-the-box experience will become significant differentiators.
“This is where Microsoft’s GitHub acquisition comes in. Microsoft will most likely integrate its cloud services with GitHub; each code repository will get a button to easily test, deploy, and run the project in Microsoft’s cloud. A deep and seamless integration between Microsoft Azure and GitHub could result in Microsoft’s cloud being perceived as simpler to use. And when there are no other critical differentiators, ease of use drives adoption.”
Nadella’s memo to employees focused on “experiences” and that sounds right. Just as an OS purchase defined Microsoft in the 1970/80s, the age of Cloud and A.I., as embodied in GitHub, may define the platform in the 2010s/20s. It may be GitHub and other similar business units which redefines Microsoft, instead of the other way around.
Sources include the following links: