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Why did Microsoft acquire GitHub for $7.5 billion?

June 19, 2018 | Ken Leoni

Why did Microsoft acquire GitHub for $7.5 billion?The acquisition of GitHub for some $7.5 Billion in Microsoft stock by CEO Satya Nadella is a bold move. Even by Microsoft standards, this is one of their larger acquisitions.  Why did Microsoft place such a significance on this purchase? And how will the acquisition affect the marketplace?

What is GitHub?

First, an explanation of GitHub and why it is so important. GitHub is based on the Linux based opensource version control system “Git”. The Git command line utility, authored by Linus Torvalds, came about because of the need to track and coordinate revisions to the Linux operating system itself.

Git delivers distributed source code revision management. It is software that is installed locally on your computer. In its simplest form, users house an entire development project in a repository local to their computer, Git then provides the ability for developers to collaborate by synchronizing changes to projects via push and pull between repositories on other computers. As there is no central repository, Git is synchronizing the repositories between multiple computers.

GitHub is a web-based Git, where a central repository is hosted in the cloud. The true power of GitHub rests with its cloud based centralized version control. A user can simply download the code they need to change, revise it into a branch and then “push” the changes up to GitHub. Once pushed to the cloud, a “pull" request then tells others about the changes that were uploaded. Those changes can then be approved and merged to a master branch. All versions are stored in GitHub, if there are any problem reverting back is as easy as a few clicks.


GitHub it is about collaboration and efficiency

It is about making applications faster and cheaper to build:

  1. code changes from multiple developers can be readily coordinated and pushed to a GitHub central repository

  2. a pull workflow ensures peer review of any code changes - resulting in more reliable software



GitHub is a tour de force – hosting some 28 million developers operating on 85 million code repositories. Although the technology powers the open source world, it is used for proprietary projects as well. Companies like Adobe, Twitter, PayPal, and Walmart all make extensive use of the platform.

Microsoft embraces open source

First a little history, under Steve Balmer’s leadership open source and especially Linux were viewed as a “cancer” and an existential threat to Microsoft and the Windows platform. Satya Nadella's ascendancy to CEO in 2014 was a necessary change (remember Microsoft lost 40% in stock value under Balmer's leadership).

In order to maintain relevance and especially profitability, Microsoft had to shift focus away from its reliance on Windows and instead fully embrace cloud as its future . Nadella being Executive Vice President of Microsoft's cloud and enterprise group was the right guy - at the right place - at the right time.

Since 2014 Microsoft has been on a mission to reposition itself. Part and parcel to Microsoft embracing cloud is its support for open source and open source development. Microsoft hasn’t just talked the talk, it has walked the walk.


Examples of open source support by Microsoft

 

The Economics of the GitHub Purchase

The Economics of the GitHub PurchaseThe $7.5 Billion in stock (estimated at 25 times GitHub’s $300 million revenue) represents about 6 months of Microsoft net income, not an inconsequential amount even by Microsoft standards. The purchase is certainly part of a long game strategy.

If we look a bit more closely at the level of commitment Microsoft has made to Git and GitHub over the last few years then the acquisition should come as no surprise. Much of Microsoft’s development uses Git. Microsoft even modified Git so that the technology would scale to handle the development of the Windows platforms - the changes were later adopted by GitHub.



$7.5 billion to make Azure the default for developers

Skeptics may question whether or how Microsoft will recoup its investment given the hefty price tag and GitHub’s financials.

Building profitability for the GitHub platform is certainly desirable however, it is unlikely that this is the genesis behind the purchase.

Although Microsoft has a target rich list of enterprise customer to feed into the GitHub sales channel, the bigger play is an even broader acceptance and support of Azure. Ultimately it is all about building Azure and the surrounding ecosystem into a first-class competitor to Amazon Web Services (AWS).



AWS being first to market holds a distinct advantage. However, Microsoft is betting that it can use GitHub to attract developers as well as tout strengths like its hybrid cloud strategy to chip away at AWS dominance. 

 

Own the developers and you own the cloud

Ultimately it is all about developers. If you make it easy for them to develop and deploy on the Microsoft platform, then turning them into Azure customers becomes infinitely easier.

One of Microsoft’s biggest strengths is the healthy and supportive relationship that it maintains with its developer community, we need look no further than the Microsoft Developer Network (MSDN) which is has done much to advance the Microsoft ecosystem.


The GitHub acquisition is a linchpin to Microsoft’s Azure strategy

The strategy is to engage the developers early, if done right it will build trust and commitment to both GitHub and Microsoft. The acquisition is really a logical progression given the company’s focus on developers.



Microsoft insists it will run GitHub independently and that developers will be able to use whatever tools, programming languages, and operating system they want. Although GitHub will continue to support the deployment of code on competitor cloud services, Microsoft is far from being altruistic, rather it is betting it can lure GitHub users to Azure through the use of tools like Visual Studio Code and open source .NET framework.

Microsoft is betting on snowball effect of sorts - as various Microsoft technologies become more tightly integrated it becomes an increasingly difficult proposition for developers to leave the ecosystem – Azure then becomes the de facto cloud platform.

While there has been broad support for the acquisition, it is not unanimous. It still is hard for some to reconcile using Microsoft and open source together in the same sentence, even given Nadella’s vision and execution. The Linux Foundation’s support of the GitHub acquisition may convince some to reconsider Microsoft, however the company still has much to do to earn the trust of many open source developers. 

The combined effect of GitHub and Microsoft

The combined effect of GitHub and MicrosoftIt is no secret that Amazon (AMZN) has a sizable developer and user base, putting it well ahead of everyone in the cloud marketplace.

GitHub provides Microsoft with a multi-pronged approach to combat Amazon.

Accelerating the growth of Azure
  • Attracts Enterprise Customers – Microsoft has a target rich base of Enterprise customers that they want to retain and incent to Azure. The combination of GitHub and tight integration with Microsoft’s developer tools will most certainly speed adoption.

  • Attracts GitHub Customers – There are millions of developers on the GitHub platform, many of whom aren’t using Azure. Assuming Microsoft can put together a compelling story there is an opportunity to migrate a significant number of them to the Azure. 

  • Attracts Net New Customers – As Microsoft persuades more developers to create applications for Azure, the platform becomes more appealing to an even broader audience.

 

Conclusion:

Given GitHub’s size and popularity it will most assuredly continue as a cloud agnostic platform. With that said, Microsoft is going to leverage the $7.5 billion purchase to help funnel users to Azure.

 


The whole being greater than the sum of their parts.


GitHub and Azure will likely accelerate the growth of the each other. The balancing act will be how much Microsoft incents GitHub users to use Azure while still maintaining GitHub as an open platform.


 

Operating under the premise that the quicker development can get a project up and running in Azure, the more likely it is that they’ll adopt the platform, Microsoft has a lot of motivation to tightly integrate GitHub with Azure. Assuming the integration is properly executed, Microsoft will have a formidable weapon in its arsenal to bridge the gap between it and AWS. 

 

Want to learn more?

Download our AWS vs Azure comparison matrix -  Amazon and Microsoft each offer cloud technology and services that are excellent in their own right. Which attributes and capabilities are a better fit for your organization?

Download the comparison:   AWS vs Azure

 

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