Yahoo's acquisition of Zimbra: The value of open ecosystems

Monday's official announcement that Yahoo! would be acquiring Zimbra, a leading open source collaboration and messaging provider, for $350M was (to me) quasi-inevitable and part surprising. I had been keyed off about talks between the two companies sometime back but nothing terribly specific. So when news hit the wire and I scoped the purchase price for Zimbra, my eyebrows raised. Matt Asay already produced commentary on Zimbra's valuation, and I'll only add that I had the company's 2006 revenue pegged at a shade under the $3M mark he has. However, I will attempt to provide some a picture of how Yahoo is going to recoup its $350M as a microcosm of the overall strategic value to be found in purchasing commercial open source software vendors.

The overlying key point that I think characterizes the Zimbra acquisition is that Yahoo didn't just snap up a popular product/service with a robust user audience a la del.icio.us, rather it bought into the company's ecosystem. Yahoo is in a position to funnel their strategy flow through an ecosystem that currently boasts 350 partners and growing. In my eyes, Zimbra stands out as an example of how to rapidly scale with open source as well as the monetary value of doing so. I like Zimbra's potential for even more growth if only because of the forward moving momentum that its On-Demand delivery model will continue to supply. The company's collaboration suite is a natural fit to be hosted off-site through a traditional or usage driven subscription model.

In the other corner, Yahoo made it clear some time back that it wanted to be a media company for the web and took some slack for it. However, as of late its strategic moves have hinted at an emerging identity as a web platform (is anyone really surprised?). Over the long term, Zimbra's ecosystem provides multiple channel entry points for Yahoo to roll traditional messaging and collaboration functions that business currently rely upon into a richer experience that is fully integrated with newer forms of Internet communications and content...think a complete portfolio of supported and maintained Zimlets that covers the gamut of Yahoo information and content systems. In the short term, they will be able to step in and provide the reliability and performance guarantees necessary to push Zimbra Collaboration Suite (ZCS) out as a hosted service atop its own back-end infrastructure. It's possible that eventually SMBs will be able to sign up for hosting, domain registration and hosted ZCS all in one place...not a bad proposition when you think about it.

From a financial standpoint, we're witnessing how two near buzz words, transparency and community pay off not just in terms of winning customers and partners but in terms of shareholder returns. Last year, Zimbra hinted that they would consider going public sometime in 2008 so obviously the Yahoo acquisition was largely as good if not better than the prospect of having to soar through the FY 2007 and into 2008 before even putting an IPO on the discussion table. And Yahoo was evidently confident in, not only the management team, but also the technology, a fact that must have been influenced somewhat by Zimbra's commitment to transparency through open source.

Perhaps I'm reaching here, but its hard to phantom an internet company pouring $350 million in cash into a software vendor without taking advantage of open access to the innards of the product. Have similar closed source vendors been bought at comparable prices by others? Yes, but if you look back to the last software company that Yahoo purchased (Meedio, back in April 2006) as well as its antecedent account of buying software companies it's safe to assume they're not in the business of gobbling up the latest and greatest product company of the minute at premium prices. Therefore, I'm inclined to hypothesize that Yahoo recognized the value of being able to tap into and stimulate the growth of Zimbra's already lively community built on the principles of openness. A variety of community that reduces the risk in establishing the type of great brand extension through which larger companies, like Yahoo, can tie-in already strong recognition with a standalone identity, like Zimbra.

Realistically, I see this acquisition as a hedge against the growing compulsion to at least consider Google's web productivity suite and as a ready-made entry point into a strong channel ecosystem that Yahoo has lacked until now. The question remains, not if, but, will Yahoo capitalize on the potential avenues of augmentation to be realized through Zimbra? Or will they keep it as a competitive wild card to be used against Google and Microsoft?

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