It's been an interesting couple of weeks for Digital River. Its deadline to re-sign Microsoft to an extension of the Microsoft Operations Digital Distribution Agreement, which would continue Digital River provision of Microsoft Store’s e-commerce platform beyond March, 2015 came and went on Dec. 1. While only a handful of people might have noticed, the company made a bigger splash on Dec. 8 when it announced an extension of the negotiation timeframe until Dec. 19.
Digital River's stocks rose and fell with the ups and downs of the announcements, dropping almost 25 percent from its close of $25.51 on Friday, Dec. 5, to $19.71 on Monday, Dec. 8. The stock eventually bottomed at $16.58 on Dec. 11, a drop of 35 percent in less than a week. On the power of yesterday's news the stock closed at $24.08, a 45 percent jump from last week’s low.
The announcement of the extension came one day after the expiration of the 45 day shopping window Digital River and SIRIS Capital had agreed to in acquisition terms back in October. If the agreement with Microsoft were to expire by March 2015 that would suggest anywhere up to one third of Digital River’s revenue could evaporate next year, making it unlikely the company would be worth anywhere near the $26/share price agreed to in October.
Waiting to announce this extension until after the shopping window had expired and no other suitors emerged clearly put SIRIS Capital in an uncomfortable spot. Luckily for all involved, this story has a happy ending: Microsoft and Digital River announced a two year extension to their agreement yesterday morning. On top of the two years, Microsoft can exercise up to four separate six month extensions if deemed necessary. That last piece piques my curiosity, and here’s why.
A Bumpy e-Commerce Road for Microsoft
Microsoft has a long history with trying to make a go with "its own" e-commerce platform. It acquired Commerce Server in 1996 from eShop, a company established by Pierre Omidyar, who went on to found eBay. While initially named Microsoft Merchant Server, the current name emerged at the start of the dot com bust in 2000. Commerce Server never really took flight throughout the 2000's, even though Microsoft’s initial efforts on developing its own e-commerce platform in 2009 leveraged Commerce Server (full disclosure -- I worked in Microsoft’s manufacturing, supply chain and information systems group deploying Digital River from 2010 through 2012). The decision to use Digital River was made because it supported software downloads as well as internationalization, two very important points for a company like Microsoft.
It was a contentious decision inside Microsoft as the company prides itself on being able to develop its own solutions. Digital River used a competing technology stack, Java and Oracle, to Microsoft’s .Net and SQL. No software company wants to use solutions/technologies tied to its competitors -- I experienced and participated in these skirmishes many times in my years in the software industry -- but those were the marching orders and with a few minor hiccups everyone got aligned behind them.
As a result, Microsoft Store launched and expanded on Digital River. Today's extension ensures Digital River will be getting paid by Microsoft for at least two more years. But the bigger question remains: what are Microsoft’s long term plans?
After the initial launch of Microsoft Store on Commerce Server, the decision to move to Digital River was to speed time to market as Commerce Server didn’t support software downloads nor the broad internationalization capabilities. As Apple was having great success with Apple Store, time to market was key in the eyes of Microsoft's management. The decision to migrate to Digital River resulted in Commerce Server being outsourced to Cactus Commerce in 2009, which was then acquired by Ascentium in 2011.
Sitecore stepped up in late 2013 and acquired Commerce Server from Ascentium. What’s interesting here is that Sitecore has a highly regarded content management solution that Gartner recently ranked in its Magic Quadrant as being the best solution for Completeness of Vision and just a notch behind Adobe in Ability to Execute. Since e-commerce emerged on the scene in the mid 90s, there’s been a great deal of talk about the convergence of content and commerce. So it's not too big a leap to think that content convergence with commerce is where Sitecore is headed with its Commerce Server buy.
Where does this leave Microsoft and Digital River? While the two year period from April, 2015 through March, 2017 (and possibly longer) is set, one can only think that Microsoft will at some point be inclined to capitalize on a content management and e-commerce solution built on its technology stack. A look at the current e-commerce platforms shows many of Microsoft’s competitors including IBM, Oracle, SAP, etc., with Microsoft noticeably absent from the mix.
My educated guess is that Microsoft has not been able to develop this solution footprint in house so having an external company build this footprint and then have Microsoft transition over to it is not so far-fetched. And if things go exceedingly well, similar to the other large software vendors I wouldn't be surprised to see Microsoft make a move to acquire Sitecore at some point in the coming years.
Now whether or not that comes to pass can’t be predicted, but my suggestion would be for Digital River to factor that scenario into their future plans with at least a 33 percent, and likely higher, probability of it happening. While its tempting to celebrate today, and Digital River should breathe a sigh of relief, what happens a year or two from now is an unknown and having been inside of Microsoft under a different regime, let’s just say its new leadership is awakening the sleeping giant so this should be interesting to observe how this unfolds over the coming years.
Stay tuned as more to come from the Big Show where Sitecore will be sharing Microsoft’s booth.