Microsoft Corporation (NASDAQ:MSFT) continues its comeback with the purchase of software development platform GitHub, Inc. This acquisition, along with the LinkedIn purchase and the creation of Azure before it, has turned Microsoft into a new company and should shore up Microsoft stock.
Once an inward company dependent on declining PCs, the firm has remade itself as a leader in today’s tech industry. However, its true path could involve a strategy that allows Microsoft Corporation to thrive while retaining most of its proprietary nature.
GitHub and Microsoft Stock
Microsoft’s purchase of GitHub stands as its 3rd largest purchase in history. However, this $7.5 billion purchase has sent shockwaves through the developer community.
Given the company’s history, Microsoft and “open source” have become oxymorons. CEO Satya Nadella has worked to shed MSFT’s reputation of closing itself off. Still, mistrust of the motives of Microsoft Corporation remains strong. When rumors of a takeover of GitHub began to circulate, some left the platform.
Mr. Nadella stressed that GitHub will remain independent and open source. However, it plans to use GitHub to integrate its tools into the platform and extend the reach of Microsoft developer tools.
Why GitHub?
Still, understanding Microsoft’s motives is key to understanding this deal. Some may say the company wants to put more of its massive cash hoard to work. The company held over $132 billion in cash as of the end of the 1Q 2018. However, the company paid for the purchase with Microsoft stock.
Moreover, GitHub has never turned a profit during its existence. GitHub supported public and open source projects free of charge. Although it charged for private storage and other features, it did not generate enough revenue to sustain itself.
It appears, then, that Microsoft did not buy a new source of cash flow. However, both the cash hoard and the newly-bought platform amount to one likely end, control.
To understand this point, one only needs to look at its LinkedIn purchase. In 2016, Microsoft acquired the social media platform for $26.4 billion. After the purchase, LinkedIn founder Reid Hoffman joined the board. This gave Nadella a vital connection in Silicon Valley.
Microsoft shunned the outside tech world for most its history, now it has an insider in the key tech region. One has to imagine GitHub co-founder Chris Wanstrath will soon join the board and perform this same role.
However, due to their data, the platforms also hold value. With control of these platforms, investors in Microsoft stock should ask how much has actually changed?
Microsoft Corporation and Apple’s Strategy
Apple Inc. (NASDAQ:AAPL) took the go it alone approach to an even greater extreme than did Microsoft in the 1980s. This strategy led to the firing of Steve Jobs and the near destruction of Apple itself.
Jobs’ return to Apple led to a hugely successful company built on “proprietary openness.” In other words, though Apple created products that allowed for some compatibility outside of its ecosystem, many functions remained proprietary.
I think Microsoft wants to take the same approach of opening up without opening up too much. So far, its strategy has paid off.
Azure has put MSFT back on the map as it competes with the likes of Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG), and IBM Common Stock (NYSE:IBM) in the cloud. Now with the purchase of GitHub, Microsoft enjoys the use of a popular open source platform.
But how “open source” will it remain? While I doubt it will close off on the surface, I think skeptical developers are correct to stay wary. Control of such a platform means considerable power.
Buying LinkedIn gave Microsoft control of almost every resumé in the country. In the same manner, owning the GitHub platform gives MSFT over a large volume of code. Given this reality, one has to question how open Microsoft has truly become?
The Bottom Line on Microsoft Stock
Microsoft’s purchase of GitHub enhances a likely goal of “proprietary openness.” Most in the tech industry have viewed “Microsoft openness” as an oxymoron. The hiring of Mr. Nadella changed that perception as he built a new, more profitable company that both innovates and works with the outside tech world.
Microsoft witnessed Apple rise and surpass it with a “proprietary openness” strategy. I believe the acquisitions of LinkedIn, and now GitHub will lead Microsoft Corporation to the same approach to openness.
Now it has become more deeply connected to Silicon Valley. It also controls key information sources such as resumés and a large repository of developer code.
By taking a page from Apple, Microsoft now opens up without truly opening up.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
