<speculation kind=”rank” insider-knowledge=”0″ motive=”thought-experiment”>
So you’re Microsoft. You’ve been painted into the corner competitively by Google when it comes to mapping. It’s apparent to everyone that the product you thought would get you out of that corner, Virtual Earth, only competes with Google Maps, and is not in the same league as Google Earth. Google Earth is the next-generation browser, it has blindsided you, and you have nothing in the pipeline that delivers the same oomph or the extensibility of Google Earth. You need to recover from this situation quickly.
Pop quiz. Do you:
A) Poach the Google employees that made Google Earth?
B) Redouble your efforts in-house and develop a world-beating scalable mapping technology from scratch without infringing anyone’s patents?
C) Buy ESRI?
Answer below the fold…
Option A would be a rather hypocritical one to pursue if you are currently suing Google in court for that very course of action. Option B would entail building up expertise, and that would take far too long. It would hand Google the burgeoning geosearch market on a platter, and once that’s done, it’s gone for a generation.
Which leaves option C. Why ESRI? Because ESRI is the acknowledged world leader in GIS (geographic information system) software and technology, with the products, expertise, standards and clients that meshes the company deeply with GIS professionals in every business. The one thing ESRI lacks is the mass market, and they’ve been looking worriedly at Google’s encroaching success in that regard.
Microsoft excels at the mass market, and has the financial muscle to fight the good fight with Google. But Microsoft also needs to refocus; it needs a new big idea around which it can regroup and be ferocious, much as it did with the internet 10 years ago.
The big idea wouldn’t just be geosearching. It’d be adding a geospatial dimension to much of what Microsoft produces. ArcView is an obvious addition to Microsoft Office. Microsoft and ESRI already team up to provide business solutions. Many of ESRI’s biggest customers are also Microsoft’s biggest customers. There are obvious synergies here, opportunities to ensure that when Microsoft’s customers eventually upgrade their inventory or CRM software to incorporate geographically savvy services (RFID, customer geolocation, geographically aware inventory databases), it will be Microsoft selling it to them.
This would also allow Microsoft to engage in a blocking maneuver on Google, constraining Google’s ability to expand from the consumer GIS market that it now effectively owns into the pro and business markets.
So it makes sense for Microsoft, and it makes sense for ESRI. But is it feasible?
ESRI is a privately held company, started in 1969 by Jack and Laura Dangermond and still owned by them. It employs 2,900 staff, has no debt, and in 2003 had sales of around $500 million. A publicly traded industry competitor with similar sales, employee and debt profile, Intergraph, has a market capitalization of $1 billion on a relatively low P/E ratio of 13.5. If we assume their margins are similar, ESRI could be worth up to $5 billion if we’re more generous on P/E assumptions — or at least a valuation in that ballpark. And then there are foreign subsidiaries that may or may not be included in that valuation, and cash reserves — in 2003, ESRI bought back a stake in its Italian distributor for $780 million.
This is a far bigger company than the 29-employee Keyhole which Google bought last year (for an undisclosed amount), but Microsoft is still a much larger company than Google, and when it changes direction, it needs a much bigger impetus. Microsoft also needs to catch up, and owning the GIS services market for well under $10 billion is something it can afford to do.
So Microsoft can. Can Jack and Laura Dangermond? They’ve spent a lifetime building up the company, and now they’d have an opportunity of a lifetime to cash in and simultaneously see their life’s work wedded to the world’s most successful company ever.
And finally, read yesterday’s interview with Jack Dangermond in All Points Blog, again if you already have — this time with my scenario in mind. Interviewers Adena Schutzberg and Joe Francica sound almost puzzled by Jack Dangermond’s new tack. And he keeps on saying “The market will decide.”
So I think ESRI is up for sale, and Microsoft is going to buy it. I’m sure the idea is crazy, but I’d love to hear why from the GIS professionals who drop by here occasionally.
(On a completely unrelated matter, ESRI has an inane linking policy. The “I do not agree” button below the form at the bottom is kind of funny though).