Why Microsoft Really Bought Yammer

What made Microsoft want to spend more than $1 billion for the social networking company? It could be because Yammer successfully marketed its business virally, offering a basic service for free and then convincing customers to pay for additional features.

Why Microsoft Really Bought Yammer

Microsoft's purchase of Yammer is probably as much about Yammer's marketing model as it is about social networking prowess.

Microsoft's social networking capabilities are perceived as weak—and the aim of its recent $1.2 billion purchase of enterprise social networking firm Yammer is to put this right. But what may also lie behind the acquisition is Microsoft's desire to get its hands on Yammer's expertise with the "freemium" software model and the viral, member-get-member way of attracting new customers.

[Related: Yammer Acquisition Seen As Beneficial for Microsoft]

When Microsoft announced the deal at the end of June, Kurt Delbene, president of Microsoft's Office division, said that the plan is for Yammer to receive investment from Microsoft, but to continue to exist as a separate company. Yammer social networking will also be integrated (or continue to be integrated) with Microsoft's products. "Over time, you'll see more connections to your investments in SharePoint, Office 365, Dynamics, Skype and other cloud services," Delbene promised. He hinted that Yammer may be integrated with Exchange and Lync as well.

There's a good reason to keep Yammer separate: If it disappears into Microsoft's maw then there's a risk that it will never be seen again. "Microsoft has learned from what happened with its acquisitions of companies like Danger, Aquantive and Massive," says Wesley Miller, an analyst at DirectionsOnMicrosoft. (Microsoft announced in July that it has written down the value Aquantive, which it acquired for $6.3 billion in 2007, by $6.2 billion.)

Ballmer Sees Yammer Revenue in Corporate Conversions

In purely financial terms, Microsoft CEO Steve Ballmer says he believes Microsoft will benefit from owning the standalone Yammer. "As long as we continue to drive hard with Yammer as a consumer offering, and then we ramp up the Microsoft sales force to help rapidly accelerate the degree to which we get corporate conversions, I think we'll see a very, very nice revenue ramp fairly quickly," he said.

What Ballmer is talking about is getting as many people as possible—and it's people, rather than organizations that is the key here—to sign up to Yammer's free offering, and then convincing them of the value of paying for Yammer's more sophisticated premium offering and using it in the workplace.

The deal has received a positive reaction from many Microsoft watchers. "I think that acquiring Yammer is a good idea for Microsoft from a social networking perspective because it gives the company a sexier, flashier, more consumer way of doing collaboration and it fills the gaps in Microsoft's social networking offering" says Jeffrey Mann, an analyst at Gartner. "But more importantly, it introduces the freemium way of doing things into the enterprise. They are buying a culture, a way of getting things done quickly, a web way of doing things," he said.

Yammer has developed considerable skills in terms of telemetry and click tracking, which enables the company to see how customers use its service, and fine tune it.

One reason why this is needed is that Microsoft has discovered that starting a social networking system from scratch is a difficult task indeed, especially as it is rooted in the on-premise way of doing things. And while its SharePoint platform is capable of carrying out many social networking functions, it can be difficult for customers to benefit from them.

"There are a lot of mid-sized customers who take a look at SharePoint and who are excited by the social features, but getting to use them takes a lot of work," said Miller. "It's not a matter of point and click to use them, you have to code, plan and deploy. With SharePoint you have to create social networking, while with Yammer it grows organically." Many SharePoint customers were looking to Yammer to add social networking features to the product, so bringing it into the Microsoft fold instead of competing with it made sense, he adds.

Miller says he believes that the acquisition will primarily be used to bring social networking to SharePoint and Microsoft's Dynamics CRM, but other analysts see Yammer being linked to the whole gamut of Microsoft business products.

"They will integrate Yammer with absolutely all their cloud offerings, and they will also social-enable their on-premise software with web-based components," says Rob Koplowitz, a Forrester analyst. "What you have to remember is that Yammer is bringing on customers at a very fast rate, and every one of those customers is a potential Microsoft customer."

He also suggests another intriguing possibility: Bearing in mind that Microsoft can now draw on Yammer's expertise with the freemium cloud software model, it is possible that Microsoft may turn its entire Office365 service into a freemium offering which includes Yammer.

One of the first questions that many people asked when Microsoft announced the deal was whether the company would take Yammer and turn it in to an on-premise offering as well as offering a cloud-based service, in the same way that SharePoint is available to run on-premise or from the cloud. Microsoft indicated that this is unlikely in the near term, but has been far from definitive. "I don't think in a fully on-premises world we can imagine moving the cloud capabilities into the on premises" is how Microsoft's Delbene put it.

But given that Yammer's success has largely been based on the fact that as a cloud service it is available instantly to anyone and responsive to customers' needs of, it is hard to see how Microsoft could move to a cloud and on-premise hybrid model for Yammer without those benefits disappearing.

Yammer and Microsoft Customers

So what does the acquisition mean to existing Microsoft customers—whether they are users of on-premise products, or its new breed of cloud based services?

In the short term nothing much will change, although the use of Yammer though integration with products like SharePoint has certainly been legitimized: Any worries about the financial credibility of a young company like Yammer, and whether it is wise to rely it for any type of business software, have now effectively been removed. And end users that want more integration between Microsoft's products and Yammer are unlikely to be disappointed.

Conversely, it's not clear that Yammer remaining agnostic when it comes to integration with other products is in Microsoft's best interests. Yammer's integration with Salesforce.com enhances the service, which competes with Microsoft's Dynamics, and that means end users that rely on Salesforce.com may find that Yammer integration starts disappearing.

In June, Microsoft started installing Skype—which it acquired in 2011 and has kept as a standalone service - automatically onto corporate machines via Windows Server Update Service (WSUS). This strategy was reversed after complaints from corporate administrators, so it seems unlikely that Microsoft will try foist the Yammer app on to businesses in a similar fashion.

So the big question is how existing Microsoft customers will get their hands on Yammer's social features, and - more importantly - how they will be expected to pay for it. And what about Yammer integrations? Will Yammer features just appear one day as part of Dynamics, Office 365, SharePoint, or Skype? And if so, will Yammer's premium services be included as part of an enterprise license, will they be free, or will customers have to pay extra to use them?

Wes Miller from DirectionsOnMicrosoft thinks that Yammer will eventually become included in the enterprise CAL for products like SharePoint, providing an excuse for Microsoft to bump the price up. But he fails to see how Yammer functionality would be useful in Skype or Lync.

And Koplowitz believes it might be done slightly differently. "My guess is that it Yammer will end up being a part of Office365, and perhaps covered by an enterprise license as it will link with on-premise software," he said.

But at the moment it is simply too early to tell. Microsoft has owned Skype for over a year and has done very little in terms of integration with other products, so it may be many months before Microsoft customers see the tools they use every day undergo any appreciable Yammerification.

Paul Rubens is a technology journalist based in England. Contact him at paul@rubens.org. Follow everything from CIO.com on Twitter @CIOonline, on Facebook, and on Google +.

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