This Tech Giant Wants to Be Facebook

It had to happen sooner or later. Microsoft (NAS: MSFT) has become a player in the rapidly burgeoning enterprise social networking segment following its $1.2 billion purchase of Yammer. As is fairly typical for the tech giant, particularly in recent weeks, it's shelled out a lot of money for a good/service that its rivals have been offering for some time. This is a company constantly playing catch-up. Can it win in this instance?

Geeks go social
At least Microsoft is giving it a mighty swing. Yammer is one of the bigger stand-alone ESN providers in the market. It's also a veteran of the industry, opening for business in 2008 -- basically the Paleolithic Era in terms of social media. Its founder was PayPal's COO at the turn of this century, and he also begat the popular genealogy website So it's run by people who know what they're doing in the online space.

And they seem to know how to win clients. According to the company's website, more than 80% of Fortune 500 companies are using its services. All told, says the firm, Yammer's services are utilized by more than 200,000 enterprises all over the world. The company doesn't break out its financials, but according to one widely quoted estimate from Nomura, it brought in revenues of $15 million to $20 million in 2011, not bad for a company that didn't exist five years ago.

Social networking is a hot market and Facebook's (NAS: FB) klutzy IPO notwithstanding, the business is booming. Yammer's rival and fellow enterprise social media provider Jive Software (NAS: JIVE) saw a year-on-year revenue boost of more than 60% in fiscal 2011, which was more than double the growth rate it experienced in 2010. Clearly there's strong demand for corporate social media infrastructure.

It's the revenue, stupid
Is such a market profitable, though? Again, Yammer doesn't publicly disclose its results, but looking at Jive's numbers, the answer might just be "no." With higher revenue came deepening losses. In Jive's case, that nice 60%-plus top-line growth in 2011 was accompanied by a loss that almost doubled from the previous year to land at more than $50 million. Revenues are still going north, but profitability is and will remain elusive; the company's guidance doesn't foresee a profit for the coming fiscal year.

That's the inherent weakness of social media. It's not -- yet -- a service people or businesses seem willing to pay a lot of money for. Yammer's basic network is free for a company to use; if that enterprise wants some form of administrative control over that network, or other value-added features, it'll cost them. The company has three packages costing $5, $15, and $79 per month, depending on the mix of features.

Clients generally seem to be shying away from the three. If the Nomura estimates are accurate, Yammer's revenue averages out to $75-$100 in annual sales per corporate client. That shakes down to only a few dollars per month, indicating light take-up of the value-added offerings.

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Facebook has top-line growth figures similar to its business-oriented brothers, but it also posts strong profits. That's because it has the luxury of being able to sell advertising from companies with money to spend. Facebook wouldn't be what it is without ad sales, which constituted a mighty 85% of revenues in its most recent fiscal year. Few businesses would suffer ads being blasted through their private social networks, so that potentially lucrative activity is basically closed to ESN providers.

That doesn't seem to bother investors, however. The popularity currently enjoyed by enterprise social networker providers is reminiscent of the go-go years of the late 1990s when the first Internet stocks hit the market. In those crazy days the market bid stocks up (and up, and up, and up...) purely on the basis of sales growth; profit and cash flow be damned. In Jive's case, after a pullback from its April peak in the high $20s, the stock is still comfortably above its $12 IPO price at $19.75, for a total lifetime gain of around 65%.

It's also got a lofty market cap at a bit over $1.2 billion, which incidentally is what Microsoft paid for Yammer. That seems pricey at first glance, but consider: The company has a big slate of business solutions. What better way to tie them together than include them as modules of a social network? This could help drive sales of those solutions, or vice versa.

Ultimately, that's probably what Microsoft is after in the end. It's certainly well aware that it's the last big, classic tech company without a strong enterprise social networking solution. Oracle launched its Oracle Social Network last autumn, for example, while even the traditionally hardware-focused Cisco got into the act a couple of years ago.

Microsoft doesn't like being left behind in any category, least of all among its generation of tech firms. It's good that it's finally joined the party. The question is whether it'll be able to profit from the celebration.

Microsoft has a ton of money, enough to buy several Yammers if it wanted to. Cash is power, and those that wield it can make their shareholders very happy. We profile two such companies in our free research report "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail," available for download here.

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