Last week, Microsoft acquired Github for $7.5B. It’s a massive acquisition at a massive price relative to other software acquisitions. Why is Microsoft willing to pay so much?

1. Developer identity. Identity has been critical to Microsoft success. Active Directory (AD) forms nexus of the Microsoft enterprise ecosystem. AD contains all the users, their roles, and their rights. The Skype acquisition was also about identity, consumer identity. Github brings identity of a third important demographic: developers.
2. Hard left toward open source. Satya Nadella has pivoted Microsoft toward open source since he became CEO. These are some of the efforts. Microsoft supports Ubuntu on Windows 10. Microsoft has published Linux and FreeBSD for Azure. Microsoft bought Xamarin to help open source .NET. That’s the beginning. There are plenty more open source initiatives here. This acquisition capstones the commitment.
3. Box-out Amazon and Google in the Cloud Wars. “Every” business is moving to the cloud. They will migrate applications, data and code. Microsoft now owns the largest repository of open source software, and the most popular version control system. To migrate enterprise on-prem code to Azure is a huge competitive advantage. It will be easier than any alternative.
4. Cross-sell Github enterprise. Enterprises pay millions of dollars for Github enterprise. Microsoft has one of the largest enterprise customer bases globally. Mix the two, chill, and shake, and you have a new billion dollar revenue business unit for Microsoft.
5. Anticipate the serverless and function-as-a-Service (FaaS) wave. Serverless is a movement in the developer ecosystem. For the past 15 years, developers have shared open source applications and libraries. Today, developers have begun to publish and share individual functions. Imagine pushing a button on Github to instantiate a function or an application. Elegant on-ramp for a developer to become a paying Azure customer.
6. M**&A Intelligence.** Microsoft will observe which open source projects gain momentum. With that first party data set, they can acquire or compete with the teams building those technologies.
7. Network effects. There are very few enterprise companies with network effects. Github is one. They should enjoy winner-take-most dynamics within the developer ecosystem.

Microsoft’s acquisition of Github is a bold strategic bet that will position Microsoft at the forefront of open-source and reinforce their strength in the Cloud Wars.