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Success of GitHub deal hinges on Azure's open source appeal

Microsoft's ongoing détente with the open source community advances with a deal to purchase GitHub, the world's largest open source code repository.

Microsoft's acquisition of GitHub represents a full embrace of the open source community, but it will take time to know how the deal will affect Microsoft's bottom line.

To convert its GitHub deal into a profitable venture, Microsoft must convince the open source community to more aggressively adopt some of its core proprietary platforms -- particularly Azure. Expansion of the cloud-based environment into new markets, even if it's a drawn-out process, is behind Microsoft's decision to purchase the open source code repository, according to analysts.

"Microsoft is of the mindset that once it gets a customer on Azure, it can expand the account from there," said Kelsey Mason, a senior analyst with Technology Business Research Inc. in Hampton, N.H. "In an ideal world, this acquisition could start developers thinking of Microsoft as a 'go-to' in terms of open source."

But that's a delicate balance to strike. If Microsoft pushes open source developers too hard to adopt Azure and other products in its vast portfolio, or if it makes it difficult for them to work with competing cloud platforms, such as AWS and Google, many developers could flee to competing code repositories. Or, worse, they could complain to the Department of Justice about Microsoft's illegal use of its monopoly position in the market.

"This [GitHub deal] will either be one of Microsoft's smartest acquisitions, or it's going to live alongside Nokia as another failed Microsoft acquisition," Mason said.

Many analysts said they believe Microsoft has reformed and learned from its past mistakes. They pointed out more large corporate customers want to build their own open source applications to live alongside Windows-based products, which represents a rich financial opportunity. So, it behooves Microsoft to behave.

"This is the new world now, and Microsoft realizes it," said Jean Bozman, principal analyst with Hurwitz & Associates in Needham, Mass. "They have worked very closely with the open source and Linux communities more than we ever thought they would. But they still have to put the work in to win the hearts and minds of the open source world."

This [GitHub deal] will either be one of Microsoft's smartest acquisitions, or it's going to live alongside Nokia as another failed Microsoft acquisition.
Kelsey Masonanalyst, Technology Business Research Inc.

Others said they believe the timing of the GitHub deal fits the evolution of Microsoft's technical strategy, as the company deemphasizes Windows and gravitates rapidly toward open source and everything cloud.

"The operating-system space was broken open when Microsoft started competing against free alternatives, like Android," said Geoff Woollacott, senior strategy consultant and principal analyst with Technology Business Research Inc. "The [GitHub] deal makes sense when you look at the continued portability of the application layer that goes across different open technology stacks."

In a blog that disclosed the deal, Microsoft CEO Satya Nadella committed to keeping GitHub an open platform, where all developers can choose their own programming tools and operating systems and deploy code on any cloud or device. Microsoft also will encourage enterprise developers' use of GitHub through its direct sales force and reseller channels, he added.

Evidence in recent years indicates Microsoft can play by those rules, from its acquisitions of open source companies to its increased software contributions to the open source community -- especially GitHub.

While Microsoft gave no indication of how it might monetize the acquisition of GitHub, some users and analysts had speculated how Microsoft might recoup some of its $7.5 billion investment. Some of that returned value may not be financial, but perhaps something less measurable that will pay off further down the road.

"I don't look at this acquisition as purely financial at all," said one source close to Microsoft. "How that [$7.5 billion] number comes back to us may not be in the way of hard, cold cash, but something more intangible ... It's a big bet, but a calculated one."

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