Losing money in exchange for control

Summary: "Now, if Azure revenue has increased 72%, but the gross revenue in this category has only increased 25%, that means that the other components, primary GitHub, are actually a substantial negative."

L

et’s call it “GitHug”, because Microsoft Loves Linux. And Microsoft loves Linux so very much that they have systematically gone about obtaining a grip on almost all of the myriad threads that support the Linux-based software ecosystem. It’s taken years, and billions of dollars, but Linux is worth the investment. A recent article by figosdev: GitHub is Moving the Free Software Movement Into “Check” has detailed the vast and deep dependency that GNU/Linux distributions, development software, and applications software already have upon Github. What is going on here?

First, let's take a quick look at the investments we are talking about:

From the Microsoft Annual Report, 2019, https://www.microsoft.com/investor/reports/ar19/index.html

GitHub, Inc.

On October 25, 2018, we acquired GitHub, Inc. (“GitHub”), a software development platform, in a $7.5 billion stock transaction (inclusive of total cash payments of $1.3 billion in respect of vested GitHub equity awards and an indemnity escrow). ...

The allocation of the purchase price to goodwill was completed as of June 30, 2019. The major classes of assets and liabilities to which we allocated the purchase price were as follows:

(In millions)
Cash, cash equivalents, and short-term investments	$ 234
Goodwill	5,497
Intangible assets	1,267
Other assets	143
Other liabilities	(217)
Total	$ 6,924

Note this amazing fact – Microsoft credits only 143 Million dollars to “other”, presumably tangible assets, and 5.5 Billion Dollars to “Goodwill”. That is indeed quite a lot of “Goodwill” - but where is real value derived from the Goodwilling? I’ll take a look at that later. First, here are a few more very interesting facts from the same Annual Report:

First, the note that “Server products and cloud services revenue, including GitHub, increased 25%, driven by Azure growth of 72%.” Now, if Azure revenue has increased 72%, but the gross revenue in this category has only increased 25%, that means that the other components, primary GitHub, are actually a substantial negative. Here are some of the negatives, costs, which are listed:

• “Research and development expenses increased $2.2 billion or 15%, driven by investments in cloud and artificial intelligence (“AI”) engineering, Gaming, LinkedIn, and GitHub.”
• “Sales and marketing expenses increased $744 million or 4%, driven by investments in commercial sales capacity, LinkedIn, and GitHub,”
• “Operating expenses increased $2.4 billion or 22%, driven by investments in cloud and AI engineering, GitHub, and commercial sales capacity.”
  
  

Clearly, Microsoft is carrying very substantial annual costs associated with the promotion and maintenance of GitHub.

Just one other note regarding the great Love that Microsoft has for Linux: The amount that Microsoft pays annually for Platinum membership in the Linux Foundation is $500,000. per year.

Therefore, we are talking hundreds of thousands, no millions, no Billions of dollars that Microsoft is spending in the arena of Linux and Free and Open Source Software, primarily upon GitHub. This is absolutely not charity. Microsoft is a profit-making corporation, and is legally responsible for maximizing shareholder value and shorter-term financial returns. So, what is their rational to justify these tremendous expenses?

"This kind of positive feedback loop, the “Network Effect”, is notorious for creating vendor lock-in. Microsoft is of course a master in this tactic."Microsoft explains: “In a world where every company is a digital company, developers will play an increasingly vital role in value creation and growth across every industry, and GitHub is their home. Since our acquisition of GitHub last fall, growth has accelerated. Today it’s used by more than 40 million developers.”

Now we have a glimpse of what Microsoft is after: 40 million developers, and growing. As more people increasingly turn to Github for development and code resources, the value to Microsoft of each GitHub user (and secondarily to each user) increases in a geometric function as each new user joins in. This kind of positive feedback loop, the “Network Effect”, is notorious for creating vendor lock-in. Microsoft is of course a master in this tactic.

Further, more specifically, where is the value derived? Microsoft is investing heavily in expanding it’s control over the myriad threads that support the Linux-based software ecosystem, and it is a truism that functional control is tantamount to ownership. But what monetary gain can they then wring out of this control, this partial ownership?

"Also importantly, the source code and other content itself physically resides on Microsoft’s servers."Perhaps most importantly, Microsoft gains a real-time handle on the activities and relative activities of tens of millions of identifiable developers along with the many more interested parties who frequent their GitHub site. This surveillance and intelligence-gathering is invaluable in the creation and assessment of their corporate strategies.

Also importantly, the source code and other content itself physically resides on Microsoft’s servers. These materials are then open to easy and extensive analysis for technical and strategic information.

There are a number of other real and potential benefits emerging from having the source code and other content itself physically reside on Microsoft’s servers which Microsoft can use at its discretion:

1. Censorship power (the implicit threat thereof).

2. Blackmail - the implicit or explicit threat of loss of service or censorship.

3. Manipulatively granting some projects preferential treatment or services.

4. Behavior manipulation and opinion modification – through GitHub site messaging and marketing.

5. Outright (direct) monetization.

The surveillance aspect is probably of the most valuable to Microsoft right now; and it is also the most difficult us to get a handle on. We do not know how they are using what information to develop and adjust their corporate strategies. This is the realm of business secrets.

Censorship will be a tricky one for them. Currently there are incidents where they just pass the responsibility right back to the originator of the request. Potentially they can use the threat strategically, perhaps though proxies - which leads us to "blackmail".

"Censorship will be a tricky one for them. Currently there are incidents where they just pass the responsibility right back to the originator of the request."As for "preferred services", that’s already part of the deal - you have to register your personal information with GitHub in order to get the full service. And they also sell a range of services to businesses. And in fact it is documented that there are areas of functionality where, if you have not registered with them, you can run into obscure "technical" difficulties (I have).

Directly charging people for more basic services on GitHub is probably a ways off, since they are now focused on roping people in. But when GiHub has a solid monopoly in its domain this becomes a distinct possibility.

Because Microsoft loves Linux so very much, they have taken a hug on the entire GNU/Linux ecosystem, and on us. As the hug becomes tighter, it will likely become a more abusive relationship. We will be shaken. ⬆

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Authored by Thomas Grzybowski | Attribution-ShareAlike, CC BY-SA