Opinion

Memo to Bill Gates

9 Comments

<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.

</speculation>

(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).

9 thoughts on “Memo to Bill Gates”

  1. Stefan Wonders if Microsoft will buy ESRI

    Link – Memo to Bill Gates Interesting thoughts, but I’d guess IBM would buy ESRI before Microsoft would. I just don’t see how ESRI fits into their business model, but IBM seems like a great fit. Seriously though there are…

  2. nice idea…but jack’s not selling.

    a better play would be for them to buy http://www.skylinesoft.com. Their terraexplorer software would give msft an instant lead over the goohole product without the headache of running the enterprise gis market. either way, somebody will buy skyline and msft would have to deal with two solid competitors. stay tuned!

  5. Linking Policies

    Down the bottom of this post Stefan Geens suggests that “ESRI has an inane linking policy”[1]. After reading that page I tend to agree. Most of it is common sense, but clause three states:

    You may not use the name “ESRI”, the …

  7. Interesting speculation.

    Like most people in the industry I have thought for years what Jack would put in his will wrt ESRI when he dies.

    From a business perspective, the lack of external capital in ESRI Inc is a weakness that didn’t overly limit it when the industry was small, but now that it has gone mass market, one can see the weaknesses in the private approach.

    However, being the biggest in the industry doesn’t mean that one is the best or that it would automatically be the best fit IF Microsoft was in the market to take over a GIS company.

    To be frank, Manifold Inc is the company with the most Microsoft-integrated GIS software in the market today. Manifold (the product) is slick, quick and very stable. No bloatware here!

    Manifold Inc also don’t have the not-made-here approach that ESRI seems to have. Though, to be fair on ESRI, ESRI are cross-platform (ie Solaris, Linux etc) whereas Manifold (the product) is not. Manifold Inc is a Microsoft-only company through and through. When you work with their technology it shows – loud and clear.

    So, I agree with Jack, let the market decide. I know which way I would go if I was Microsoft looking to buy a GIS company.

    Finally, the problem I have with ArcGlobe, Keyhole, ArcGlobe, World Wind etc as standalone products, is that few of them have any real business need driving the need to purchase them. So, in the business I currently work for, we have only identified that these products could be used in the very narrow area of tourism/broad landscape visualisation/communications which is a very small part of the business with little money or staff being available to do anything about it. Sure, the massive price difference between ArcGlobe and Google Earth makes the product more appealing but the data is not there for out of the way places like Tasmania (with no internal resources available to collate the data either). The real need is still in spatial databases and true application integration.

    S.

  8. Forget Bill & ESRI. I love NASA.

    World Wind is OPEN SOURCE!!!!

    It is free and extensible and the online community is extremely active. New plugins appear almost everyday. Google Earth is close but it’s proprietary.

    It is the first time I have seen any ESRI product blasted away by free software.

    And by the way, World Wind provides additional pre-packaged data caches that are the highest resolution global satellite imagery currently available. Once downloaded you can show school children in rural Cambodia what a beautiful planet they’re sitting on…

    What’s the poppycock about “real business need..”

    What bullshit…enjoy something beautiful…it’s just a map and almost every business needs maps!

  9. ESRI isn’t really the prime company for Microsoft to invest in. The cost for purchasing such a company would be significant, when there are much smaller companies which compete very successfully against ESRI’s product line.

    Google Earth is next-generation in that it supports 3D Acceleration and good caching and pre-rendering technologies, but it’s still limited in various areas of functionality compared to the fully-fledged GIS Products around. It gives vendors like ESRI reason to make their products have more real-time responsiveness, but doesn’t quite compete against the same set of business requirements.

    Microsoft would be better off picking up one of the smaller GIS vendors who have equally been around for more than a decade, quietly successfully competing with the likes of ESRI and MapInfo, because it could pick one of them up for peanuts compared to ESRI, pad out the existing small team with some additional developers and a shiny new sales department, and turn it into a much more significant competitor to ESRI. By bringing a couple of its own 3D or WPF developers on board, it would make the transition over to 3D accelerated drawing much smoother, and it should be able to spend much less than the market capitalisation of ESRI on turning one of their competitors from a small fish into a serious contender for the de facto standard GIS product.

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