The news that Microsoft is buying Yammer points to the state of the CRM market and how social is becoming a core function in the architecture of modern, mission critical applications.

It’s a scary scenario for Microsoft and a host of legacy vendors that still seem bent on protecting their mainstream solutions. This is not just about the power of real-time activity streams. It’s more about the unquestioned value of Web oriented technologies, rapid app development, the API economy, the importance of platforms, frameworks, high-level scripting languages and the myriad of other factors that define the new state of the way we work and live. And yet, Microsoft still lags well behind in activity stream development.

Activity stream technology is a must for any enterprise provider.  It’s the norm now to have a smartphone in hand before breakfast and just before bed when you charge it for the night. It’s a love affair with beautiful interfaces, apps for posting photos, taking notes and reading contracts.

But most of all, it shows how activity streams, thanks to Twitter, have became a catalyst for a new generation of apps that empower communities to communicate and get things done….outside of the email vortex.

Yammer is the freemium activity stream technology that the company morphed into an enterprise social networking offering,  The company reports it has an estimated 4 million users. Yammer does not report its revenues. It has about $85 million in venture capital funding.

For Microsoft, the challenge comes in how to integrate Yammer. It faces steep competition from Salesforce.com and VMware, the two companies with the most robust activity stream technology and capability to flexibly integrate with new platform environments. IBM, Jive Software, Oracle, SAP, Google and a host of other companies are also vying for the market.

In the outer sphere of influence comes the ones that target Microsoft on a daily basis. These are companies like Box (formerly Box.net) that see the opportunity to become the future giants of the enterprise.

So you can sense what’s at stake here for Microsoft, a company which has strangely ignored the fast adoption of activity stream technology.

How to fit Yammer in without taking an eternity represents Microsoft’s biggest challenge. Alan Lepofsky of Constellation Research said this in an e-mail interview this morning:

Yammer would need to be an integrated part of Office 365, since it does not have an on-premises offering.  That means it would fragment MS customers, since on-premises SharePoint customers would not be able to use it, or they would need to open their firewall to it as a cloud based offering.  Where I think Yammer would benefit would be much tighter Office integration, which is an area Jive currently blows them away.  Also Yammer lacks any integrated IM/web conferencing, so Lync integration would be key.  A big issue would be the difference in delivery methodologies.  Yammer releases small rapid improvements, MS releases every 3 years.   On the app from MS Dynamics (ERP, CRM) this would help MS compete with the plans SAP has for adding social to their core-business application platform.

Last September, Microsoft began making its Office Talk microblogging technology available to its product groups. Klint Finley reported on ServicesAngle at the time that instead of adopting OfficeTalk, the company added Facebook-like social interface to cloud-hosted version of its Microsoft Dynamics product. The new feature, called Activity Feeds, was reported by CRM Buyer earlier this month, and pointed out today by Mary Jo Foley.

Microsoft Dynamics now offers a cloud-hosted platform in direct competition with Salesforce.com and the addition of social features did bring it further in line with Salesforce.com’s service.

For Salesforce.com, social is more of a mantra than a bolt-on. It is heads down focused on building social into its software-as-a-service (SaaS), through its own development and a series of acquisitions. In 2009, Salesforce.com launched Chatter, its answer to Yammer and Socialcast (now owned by VMware). The two were early  activity stream providers in the enterprise space and Chatter looked like it was copying the rest of the pack. But that is really of no matter.

Chatter gave customers a reason to dip into social as a means of productivity. Earlier this week,  Salesforce.com announced a deal with Twitter to use the Twitter fire hose inside Radian6. That comes on the heels of its acquisition of Buddy Media last week and Rypple in December. Buddy Media allows for content be be placed on social media sites and then tracked to determine the effectiveness of the campaign.

Rypple provides  a social experience for employee reviews that have traditionally been boring, almost torturous processes. Salesforce.com also appears to have a deep respect for the coming cyclone that is platform-as-a-service (PaaS), which heralds a new era of  fast application development and data-as-a-service (DaaS). It acquired Heroku  and has since launched database.com. PaaS as a disruptive trend  is a topic for another post but a development to watch as the app juggernaut continues unabated.

Salesforce.com historically competed with SuccssFactors, RightNow and SugarCRM in the SaaS space. SAP acquired Success Factors last year. Oracle followed with its purchase of RightNow. IBM and SugarCRM are strategic partners. IBM announced earlier this spring that it would use Sugar for its company wide CRM environment. SuccessFactors combines workforce management technology with activity streams.

Before joining SAP, SucessFactors acquired CubeTree, an activity stream technology. Tibco tibbr is another activity stream technology to watch closely. It has more than one million people using it. Of the group, it has some of the most advanced features and is widely applauded by the analyst community. I’d recommend Dennis Howlett’s post for background.

It’s still too early to determine the success of the SAP and Oracle acquisitions. The real challenge to Microsoft may come from the likes of SugarCRM. It has grown steadily over the past few years with its open-source CRM environment and its backing from IBM. Tibco tibbr is of a different variety but shows how deep activity streams are getting embedded.

VMware acquired Socialcast last year as part of its move to offer a suite of front-end tools that include SlideRocket, Zimbra and VMware Horizon App Manager. Last week, VMware announced Socialcast would be offered for free, with limited features, for up to 50 users, a sign of its focus on the small business market and groups or divisions within large businesses. That news dovetails with Horizon App Manager, which VMware made generally available this week. It puts IT in control of a management platform that manages SaaS, Web and Windows applications. VMware is creating a center of “data gravity,” with Horizon that has the potential to suit it well, especially with services such as Project Octopus, the syncing technology that allows for sharing and collaborating from desktops and mobile devices. As more apps integrate into Horizon, the potential for deeper data integration will come, too.

Activity streams now enjoy such mainstream adoption that customers need to look at the deeper integrations that can be done with CRM, ERP, HCM and Business Intelligence environments.

Microsoft’s challenge is to find the way it can integrate Yammer while competing with the likes of Salesforce.com, VMware and a host of other competitors.