- Microsoft is paying $7.5 billion in stock for GitHub, a company that was on track to earn $200 million last fall and was last valued at $2 billion. That's a hefty price, any way you look at it.
- The question is: how does Microsoft plan to make its money back?
- Believe it or not, Microsoft swears it is not going to do the obvious thing and force all of those developers to start using Microsoft's cloud, instead of competitors like Amazon's or Google's.
- It's true plan is more brilliant: create an app store that makes life easier for them.
On Monday, Microsoft officially announced it was buying GitHub, shortly after Business Insider had reported that the two companies were working on a deal.
Microsoft is paying a whopping $7.5 billion in an all-stock deal. GitHub was last valued at $2 billion and late last year said it was on track to do $200 million in revenue. So, by any standard, that's a hefty premium that Microsoft is paying for GitHub.
The questions is: how does Microsoft expect to earn its money back?
The obvious and jaded answer is that Microsoft wants to push all of those developers to run their software on Microsoft's cloud, Azure. In doing this, Microsoft will earn ongoing monthly fees from millions of GitHub developers that might have otherwise have decided to run their apps on the Amazon Web Services cloud, or on Google Cloud.
But, tempting as that might sound, Microsoft swears that it is not going to do this.
Forcing users to go with Azure would be suicide for GitHub
GitHub is an online service that hosts software code and allows lots of developers to work on it together as a team. It has free version, paid cloud versions and sells old fashioned software.
While GitHub has been generating revenue from the developer community, it has also "struggled with how to monetize platform," one insider told us.
GitHub did have a grand plan for becoming a multi-billion business, insiders told us. What if, instead of just hosting everyone's apps as they developed them, the apps could run on a GitHub cloud?
The top cloud providers are making billions of dollars a year.
On the other hand, the top providers also spend billions of dollars a year building out their data centers to host everyone's apps.
And that's why GitHub was out talking to Microsoft, Google and Amazon about selling itself, multiple people said. And that's also why it might seem logical for Microsoft to simply tell GitHub users that they must now hop onto Microsoft's cloud.
But, politically speaking, forcing them to do so would anger the developer community. They will pick the cloud and technologies that will work best for their own needs. If they aren't given a choice, they will simply leave GitHub for a competitor, like Atlassian's BitBucket, or the fast-growing upstart GitLab.
And GitHub's founder knows developers are wary.
"Skepticism is totally understandable, but we're on the right path," founder Chris Wanstrath told Business Insider's Matt Weinberger about the acquisition, and developer's fears.
So, if Microsoft is promising that GitHub will remain independent, what's the master plan? It is an app store for developer tools. Microsoft's own tools will be in the apps store. Other company's tools will be, too.
"Today, developers need to find and assemble services from many locations and pay for them separately," Microsoft told investors in a prepared presentation. "In the future, developers will be able to discover, adopt, consume and pay for everything they need in one place."
Controlling an app store that already has access to 29 million developers will not only help Microsoft sell its own developer tools, but could let Microsoft profit on other people's tools, too.
Microsoft isn't saying what kind of a fee it will charge for its app store, but let's just imagine that it will follow Apple's and Google's lead and take some percentage of every transaction.
That's not to say that Microsoft won't do all it can to convince GitHub users to ditch AWS or Google and use Azure. By owning GitHub, Microsoft can add all kinds of special features to try and make its own cloud work best for them. Ultimately, though, it would be the developer's choice, not Microsoft's.
