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Microsoft's Yammer Play: Too Much, Too Late or Too Soon?

In a deal officially announced this week, Microsoft is acquiring Yammer for $1.2 billion--a steep price that will be tough to justify any way the vendor plays it. Yammer, an enterprise-grade social networking service that brings Facebook-like features to a closed business environment, is a success story. But it's hard to see how Microsoft has done anything but paid too much for a service that most of its customers are years away from deploying--if they opt to do so at all.

Today, Yammer claims to have about 5 million users, close to 1 million of whom pay for the service. That's an excellent conversion rate, but with annual revenues estimated to be about $25 million, Microsoft paid close to 50 times revenue for the company. Obviously, the numbers alone don't warrant the $1.2-billion price tag. What would? In this case, nothing.

Clearly, Microsoft is playing catch-up in the social networking space. IBM and Cisco have had tools in this area for awhile now; along with a multitude of start-ups like Yammer, they've made it possible for companies to give their employees access to a closed, secure social media site for internal networking, information sharing, and loose collaboration.

I'm a big believer in the value of such sites for businesses with remote workers and/or geographically dispersed operations. They make it easy for employees to find information--especially the kind that resides in their co-workers' heads--and locate expertise within in the organization. But just as important is their ability to create a sense of community among remote workers, many of whom might not see each other live and in person more than once or twice a year--if ever. Just as Facebook makes it possible to stay in touch with old friends from far-away places, services like Yammer allow employees to deepen their relationships with one another--and partners and customers, should the company so desire--by sharing personal and professional information on a regular, online basis.

Microsoft does not have such capabilities within its current toolset, and that was a glaring omission. But building a social networking tool shouldn’t be difficult for a company with as many developers as work in Redmond. Selling it is. And that’s where the $1.2-billion price makes no sense.

Microsoft says Yammer will be part of its Office division, which answers the first question many observers had when the rumor of the acquisition first surfaced two weeks ago. That's not to say the vendor couldn't integrate Yammer into Dynamics, its CRM application, to better compete with (which, thanks to Chatter, is the clear leader in social CRM). But with the organizational move, Microsoft is saying it wants to make Yammer a part of its broader UC suite. That's a sound decision, although it remains to be seen how and whether Microsoft will integrate a hosted service with its on-premises applications; Yammer's immediate sweet spot is Office 365.

And it's hard to see how Microsoft couldn't have developed its own social media platform for a heck of a lot less than what it paid for this one.

Next page: A Question of Timing?

Of course, companies acquire technology for other reasons. Customer acquisition is one--but that doesn't really apply here, since, with only 5 million users, Yammer's customer base pales in comparison to Microsoft's--and presumably overlaps with it, too. And assuming Microsoft includes Yammer's capabilities in its enterprise licensing plans, the company stands to gain little, if any, immediate revenue growth from the purchase. (Microsoft CEO Steve Ballmer did hint that he expects his robust sales force to be able to boost stand-alone sales of Yammer in the near term.)

Technology leadership is another reason to acquire a start-up. But Microsoft can hardly claim to be ahead of the curve on social; this acquisition merely gets it to par with its largest competitors. And, as Ballmer said in the wake of the news, "Yammer is a tremendous success and has a bright future. One of the keys, of course, is really getting the integration right." To monetize the acquisition, Microsoft must find a way to use the social software to boost sales of its other communications and collaboration applications and services. Based on past performance, the future for that doesn't look so bright. (Anyone remember Parlano? Anyone?)

That just leaves timing. Surely, Microsoft could have developed a social platform from the inside. But it hasn't managed to do so in the past two years, when social was taking off, and by all accounts the newest version of SharePoint doesn't get it any closer to that goal. Losing even more ground was no longer an option, especially for a vendor with cash on hand. But there's a difference between market perception and user reality here, and it’s that gap that, in my opinion, will make Microsoft regret this purchase in the long run.

Because the reality is, most organizations have not deployed enterprise social tools--and they have few plans to do so over the next 12 to 36 months. That's not to say users aren't experimenting with their own applications in this space--they are, which is why Yammer saw the success it did. Individuals are introducing their co-workers to free services that make their lives easier, and some department heads and IT staff are paying for upgraded services when they see value and use. Yammer's success in this area cannot be denied. But on a wide scale--Microsoft's market--IT departments are nowhere near ready to wrap their heads around social media; many of them are still trying to standardize on the basic components of UC.

What's more, enterprise social requires a re-thinking of corporate culture, policies and processes. Unlike softphones and UC clients, which simply offer a new way to tackle old tasks, social changes the way people interact; to be successful, it requires a change in how companies enable and support collaboration. That's hard, and it's why the technology hasn’t yet taken off in the workplace. Is Microsoft the company to make its users see the light?

Maybe. But at $1.2 billion, it placed a pretty big bet.