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Microsoft's telco ambitions still unclear after Affirmed purchase

Microsoft purchased a startup last week that successfully sold software for core wireless networking functions to some of the top mobile operators in the world.

However, it's still not clear whether the purchase is a first step in Microsoft's grander ambitions to challenge the likes of Huawei, Ericsson and Cisco as a vendor in the telecom industry, or if it's an effort by the software giant to reinforce some of its existing businesses by adding in new networking functions.

"The real question is, what is Microsoft going to do with this?" asked Lee Doyle, principal analyst at Doyle Research. "They're not going to tell us."

Indeed, Microsoft provided relatively vague answers to a number of questions on the transaction from Light Reading.

"This acquisition will allow Microsoft to evolve our work with the telecommunications industry, building on our secure and trusted cloud platform for operators, allowing them to deliver personalized experiences and earn customers for life, enable agile operations to increase network efficiency and scalability, and accelerate innovation and growth," the company wrote in response to a question about whether it would expand into new markets via the acquisition.

Importantly, Microsoft confirmed that it will need to partner with companies such as Huawei, Ericsson, Nokia and Samsung that provide the physical networking equipment – from base stations to antennas – that are needed to power a wireless network.

"Our intention is to partner with network equipment providers and are in discussions with them now," Microsoft wrote in response to questions about whether it plans to compete directly with the likes of Ericsson and Cisco. "We want to work together and find the best way to serve mobile operators. Network providers are also specialists in areas where we are not active, such as RAN [radio access network]."

But Microsoft declined to answer the most important question about the transaction: How much did it pay for Affirmed?

"We aren't disclosing financial details at this time," the company said.

"What's the price?" Doyle asked. "I gotta believe it's decent."

Other analysts agreed that Microsoft likely paid at least a 2-3x multiple for Affirmed. "I gotta believe it's not a fire sale," said Jennifer Pigg Clark, a principal analyst with Heavy Reading, the analyst division of Light Reading.

A massive price tag for the purchase would likely reflect Microsoft's interest in expanding more directly into the telecom industry via its purchase of Affirmed. On the other hand, a smaller price tag would indicate that Microsoft could just be swooping in to scoop up whatever valuable assets it could find inside of a faltering company.

A value for the acquisition "would tell us a lot," Clark said.

Two big options
Doyle speculated that Microsoft is probably going to do one of two things with its purchase of Affirmed: Either it's going to begin selling more Azure-based cloud computing products and services directly to mobile network operators amid their transition to edge computing and 5G, or it's going to use Affirmed's software and services to expand and improve sales of its existing productivity and collaboration offerings to enterprises.

A number of analysts agreed that Microsoft's intentions likely align with that latter option.

"I don't have a lot of confidence in Microsoft's ability to keep a network infrastructure product – even a virtual one – aloft," Clark said. "Like Oracle's various network acquisitions, this may be a one-way ticket to Palookaville for Affirmed."

"Microsoft has a pretty dismal track record when it comes to the telecom industry," Doyle added, pointing to the company's failed purchase of Nokia's cellphone business. He added: "Carriers are not strategically developing on Microsoft products."

And analyst Chris Nicoll with ACG Research believes Microsoft could use Affirmed's technology to expand the networking and collaboration features inside its Office 365 products. Indeed, the company could go an extra step to provide full-blown networking services to its enterprise customers.

"To me, that's kind of a major opportunity," Nicoll said, pointing to a growing interest among enterprises in private wireless networking services. Such interest is being driven by a growing amount of available spectrum coupled with declining costs in building and operating wide-area wireless networks.

However, Microsoft itself offered comments more in line with Doyle's first option: That it may expand sales to telecom operators directly.

When questioned whether the company plans to go "over the top" of the network in order to sell networking services to enterprises directly, Microsoft said that "we are investing to bring cloud efficiency to the telecommunications industry and help deliver more value to operators to drive efficiency and lower costs. We will follow the needs of our customers here."

More questions, few answers
But Microsoft declined to answer a number of other questions, such as what might happen to Affirmed's leadership team and headquarters, that would provide a clearer look at its intentions. "Until close, Affirmed Networks will continue to operate independently. We will share more following close," the company said in response to questions from Light Reading. "We have no additional details to share at this time."

"This is a smart move by Microsoft to beef up its presence on the edge of the cloud, which is an area of great interest to the public cloud providers," summarized Futuriom analyst Scott Raynovich. Indeed, other cloud computing companies like Amazon AWS are investing into edge computing in the telecom industry.

At the very least, a Microsoft purchase of Affirmed likely will bring to an end the relationship Amazon AWS and Affirmed inked in 2018.

"I think we'll have to take a wait-and-see approach" to Microsoft's strategy, Doyle acknowledged.

Mike Dano, Editorial Director, 5G & Mobile Strategies, Light Reading | @mikeddano

Mike Dano 3/27/2020 | 5:04:31 PM
$1.35 billion! And of course, just hours after I wrote this story, Bloomberg reported that Microsoft paid $1.35 BILLION for Affirmed Networks. This is a really big amount. Like, real big. And I think it signals that this is not just a minor acquisition for Microsoft.
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