Tag Archives: yammer

The Yammer Factor: Network-Effect and Stickiness vs. IP

Microsoft’s acquisition of Yammer has dominated the enterprise software news in the last few weeks. Almost unanimously, people have been surprised about the astonishing $1.2B that the Redmon giant was able to pay for a startup that offered a relatively simple solution that has produced less than $20M in revenue. Arguably, Microsoft would have been able to build 10 Yammers with that amount of money. However, by thinking that way we are overlooking the most important assets that Yammer, as a product, brings to the table and that is something Microsoft couldn’t simply build: we are referring to its network-effect and stickiness.

Intellectual property (IP) differentiation has been one of the hallmarks of the growth of enterprise software startups in the last 20 years. In the enterprise world, IT organizations has been well known for acquiring software based on specific IP value that sets it apart from the competition. As an enterprise software startup, having a unique IP was the easiest way to get the attention of customers. Additionally, every single enterprise software marketing  in the late 90ts early 2000s was intended to emphasize how a specific software was the only viable solution to an enterprise problem based on the unique algorithms or techniques it provided.

Contrary to the enterprise market, the consumer technology ecosystem didn’t rely so much on unique IP as the fundamental engine of growth of startups. Other factors such as the ability of ubiquitously acquire customer and convert those customers into regular and long term users of your product were more relevant when evaluating the viability of a consumer market technology.

During recent years, the enterprise software industry has started to embraced the principles of the consumer market and drastically shifted from being and IP centric business to acquire software based on other elements such as simplicity, easy delivery etc. As a result, you can see how most widely successful modern enterprise software startups rarely focus on offering a unique IP and, instead, emphasize on factors that facilitate the easy acquisition and adoption of their software. From those elements, there are two that have been central to the core DNA of any successful software startup in the last few years: network-effect and stickiness.

By network-effect we refer to the characteristic that facilitates users or your product to acquire new users. Complimentary, successful enterprise software product have the ability of evolve into a vital piece of an organization once they are adopted by a few users: we refer to this factory as stickiness.

The reason why network-effect and stickiness are becoming increasingly more important than unique IP is because they facilitate a scalable and natural way to acquire long-term customers. In the world of the mobile, cloud and social enterprise, network-effect and stickiness are, in a lot of scenarios, better indicators of the potential success of an enterprise software product than unique IP.

If you think about the recent generation of successful software startups, you will quickly notice the network effect and stickiness elements embedded into every aspect of their products. Similarly, these companies will hardly market IP elements that make their product unique compared to the competition. In an enterprise world desperately driving towards consumerized models, the ability of transforming customers into sellers and becoming a key part of their everyday life is largely more important than providing a patented solution to a problem.

What do you think? Are network-effect and stickiness more important than unique IP in the enterprise software world?

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Posted by on July 16, 2012 in Uncategorized


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Microsoft-Yammer Deal is the Florence of Enterprise Software

Florence and Siena are the two Italian cities that had the most impact in the Italian renaissance. Even though the movement itself was originated in Tuscany, Florence is often associated with the expansion of the  renaissance movement throughout that Italian peninsula. Is we can, for a minute, trace a parallel between the rebirth of  enterprise software and the Italian renaissance then Microsoft’s Yammer acquisition can become the Florence of enterprise software.

During the last few days we’ve heard strong rumors that Microsoft will be acquiring enterprise social media pioneer Yammer for a price between $1B-1.6B. As a matter of fact, if the rumor holds true, the deal is likely to be announced in the next few hours. Yammer provide enterprise social networks capabilities to thousands of organizations across the globe and has a very strong presence within Fortune 500 companies. After a few financing rounds, Yammer’s valuation is reported around $500M but the value is far from directly correlating to revenue numbers which is reported to be around $20M.

Regardless of your opinion related to the terms of the transaction, there is no doubt that, to the day, Yammer’s acquisition represents the most important moment in the history of this new generation of enterprise software. While this new movement has already experienced outstanding successes such as Jive’s IPO or the acquisitions of Rightnow, Success Factors and Taleo for multi-billion dollar valuations, Yammer’s acquisition is set to have a more profound impact in the enterprise software industry.

Why is that?

Yammer’s influence in the new enterprise software movement goes way beyond its technology contributions and expands onto the commercialization, economics and adoption models of enterprise software technology. If you think about it,  Jive’s IPO had very little influence in the new enterprise software models and SAP’s and Oracle’s acquisitions of Taleo, Rightnow and Success Factors were strongly validated by revenue models and traditional customer acquisition processes.

Yammer, on the other hand, has established a strong enterprise customer base by challenging a large number of the traditional enterprise software concepts. Microsoft’s Yammer acquisition strongly validates that the economics and dynamics of enterprise software are changing. With this deal, Microsoft is telling the world that the old school of enterprise software might benefit from a few lessons from the new boys:

  • Market share matters as much as revenue: As in the consumer market, enterprise software valuations can be correlated to market share rather than actual revenue. While Yammer’s revenue numbers might not be impressive, their number of customers and the dependency those customers have on Yammer’s technology is a great asset for Microsoft.
  • Fremium works: Yammer was one of the pioneers of the fermium pricing model for enterprise software. Microsoft’s acquisition validates that these new type of pricing models can be very effective within enterprise customers.
  • Sexy and simple interfaces win: Yammer is not a super feature rich product and its main value proposition is a very simple one: improving the communication within the enterprise. However, Yammer accomplishes this goal by providing a super sexy, incredibly intuitive and astonishing simple interface. Compared to most enterprise software products, Yammer’s interface might look ridiculous but, as always, we should remember that in this industry simple and open tends to win.
  • Partnership matters: If you have been following the market, Microsoft acquisition of Yammer should not come exactly as a surprise. Since last year, Yammer and Microsoft have partnered to expand SharePoint’s social networking capabilities with Yammer. This acquisition is a testimony that long term partnerships can evolve into successful outcomes for both parties.
  • Mobile-First Matters: Mobile devices are one of the main channels by which people use Yammer. By acquiring Yammer, Microsoft is acknowledging that mobile-first consumers are also relevant in the enterprise.

You can probably tell I am super excited about Microsoft’s Yammer acquisition. I believe Microsoft will get an all-star team head by David Sacks and a rock solid product and Yammer directly benefits from Microsoft’s dominant presence in the enterprise software world.

What do you think? Is Microsoft-Yammer deal as important as I think it is? Is $1.2B too much? 😉


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