LinkedIn Twitter
Esteban Kolsky is the founder and principal of thinkJar, a Customer Strategy consulting and think tank organization helping vendors and user successfully become better, more open, and more collaborative organizations. More information about thinkJar

6 responses to “Microsoft Bamboozled by Yammer in $1.2 Billion Purchase”

  1. RR

    Why do you limit your analysis of potential customer acquisition to Yammer’s paying clients only? One could argue Yammer’s non-converted clients as being better targets to sell Microsoft products to, as they are likely growth companies or actively exploring Microsoft alternatives.

    I’m also trying to figure out the basis for your quoted “consensus” revenue number. Yammer touts 5MM users (end-users, not “client” companies in your analysis) with 20% of them paying for the service. At $20MM in revenue that suggests less than $2 per user per month, but the currently advertised pricing tiers are $5 or $15 per user per month, with additional paid enterprise premiums. How do you reconcile these numbers?

    1. Esteban Kolsky

      RR,

      My analysis comes from the way Enterprise Software usually works, you start with a long list of vendors (including Yammer, Microsoft and the others in the market), whittle down to two or three and then choose. If Microsoft was not on the short list, the people making the choice had reasons now to put them there and they are highly unlikely to migrate to a Microsoft-powered solution (which would be the purpose of the customer acquisition).

      Alas, if you want to include all the customers in the list (and I am getting to your other comment next) still it’s a ridiculous price to pay per company for customer acquisition – even more so when you consider the revenue you are acquiring! Do the math any way you want, but they overpaid per customer.

      If Microsoft did not have a competing product in the world of Social (MOSS 2010) then the conversation would be different and we can likely consider them all as potentials. This is standard when acquiring competing interests – you don’t end up with the entire user base you acquired, some of them (20-30% is an educated guess) leave right away, a significant number at next renewal event, and others decrease or stop using it altogether.

      As for the second question, Yammer did not sell to individuals – they sold to enterprises. I cannot count the 5MM “paid users” as their users since they were not sold individually (nor are they all active users, but that is another story that comes interesting at renewal – not right now). The revenue of $20MM for 2011 at the list price of $9/user (which I don’t believe anyone pays, another dirty secret of Enterprise Software) would yield 2.2MM users – still far from the 5MM you quote. A more likely average price paid is $4 based on my research – which puts them at around the number you cite (5MM).

      However, the consensus revenue number I quote is from my conversations with many people who know the company and their revenues and that have contributed to my research. I cannot reveal the source, but I can guarantee that any number I quote has been verified by many independent sources or would not be published.

      If we are going to agree that 2011 revenues were $20MM (and you will have to trust me on this), there is no valuation model on earth to justify 1.2BB. The core difference between Instagram and Yammer was this: Instagram had no revenues, it could produce any valuation they wanted based on whatever bogus metric or positioning they wanted. Yammer, had 20MM last year for 20% of their market. Even if you used wild valuation models at 6x TTM revenues, what did Microsoft paid for with the rest of the money? Bubble air…

  2. RR

    Thanks for following up, it’s a very interesting analysis, especially the bits about the IT barrier to freemium model success. I agree there is little to justify the acquisition price, unless you look at it from the financing side. Yammer’s last fundraising round valued them at $500MM so from that perspective, Microsoft got the “cheapest” price Yammer’s investors were willing to sell for. But that really highlights the backwards thinking of a bubble. I’m sure Yammer’s competitors are just as glad at the acquisition: Yammer is hamstrung trying to integrate into Microsoft’s systems, and there’s a comp for future valuation rounds!

    But maybe Microsoft will figure out how to turn this acquisition into a success like Powerset instead of Danger. That “something” product with Skype, Office and Yammer sounds exciting even to someone who uses zero Microsoft products!

  3. srinsesh

    There are better and cheaper products out there with a vision that matches or surpasses that of Yammer! Products that offer far more than just activity streams for a lot less! And integrated with Sharepoint, MS communicator, SFDC and other SaaS and non-SaaS applications!

    1.2 Bn is staggering and I can’t just come to terms with it!

  4. ASB

    in the words of Yoda, our Jedi friend of Star-Wars ilk: “there is another Sky…walk…er”

    Although in this case, there is another software enterprise business partner network: IBM PartnerWorld. There is also a sensible “Social Business” capability *for enterprise class collaboration* from IBM (and her business partners): http://www.ibm.com/socialbusiness

    I heave heard broadly similar partner-network value benefits from IBM. The services value for IBM software sale/resell being of the order 1:8.

    Ending with a playful attitude: “this is not the social enterprise tool that MS was looking for…” ;o)~

  5. Will the Real Innovators Please Stand Up

    [...] the other hand, you have the paranoid bubble watchers, who see a rich acquisition like this as validation that everything might be out of whack again in [...]