Why has Microsoft paid US$26 billion for business networking platform LinkedIn?

By Mark Skilton

The Microsoft move to acquire LinkedIn is a better move than past buyouts, the infamous failure of the Microsoft purchase of Nokia mobile phone business in 2013 at $7.2 Billion is a fraction of the $26 Billion for LinkedIn. But this is a different move and a different marketplace, providing a stronger enterprise social platform to integrate Microsoft cloud and office productivity. It also gives LinkedIn a better roadmap in the long run.

 

Time ran out for LinkedIn

To some extent time had ran out for LinkedIn as it had been underperforming in the market in the eyes of stock analysts, certainly in the last 12 months and since the 2011 floatation on the stock exchange. LinkedIn in the last few years has actually started losing active customers and its share price has dramatically fallen – by over 40% in recent quarters. LinkedIn, with its user base of 106 million active users by 2016 compared – to Twitter’s 310 million active users and Facebook’s mighty 1.65 billion active monthly users – had never managed to increase its commercial services in what could have been a strong enterprise market.

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Putting the Microsoft LinkedIn acquisition size in perspective

Several stock investment analysts share the same opinion of the benefits from synergies in the Microsoft and LinkedIn acquisition, enabling Microsoft to monetise LinkedIn traffic better. This is speaking to the core value in the professional network data that LinkedIn has established. While in recent years this has seen a steady growth with China becoming a key market, it represents an opportunity for both parties to accelerate growth plans in the convergence of social networks and enterprise business models where big data is king.

Yet several other market analysts have raised questions over the ability of Microsoft to convert a very large $26 billion deal into a post-acquisition plan. Specifically, from areas in integrating LinkedIn data scientists leveraging the professional network data in Microsoft products or creating new deeper integrations using machine learning or artificial intelligence. The core recruitment business where LinkedIn makes most of its money today is also distinctly separate from the large commercial software franchise business of office productivity tools and enterprise sales systems.

Putting this in perspective, compared to Microsoft’s 2015 commercial revenue – $6.3 billion with operating income of $3.1 billion, more than the whole of LinkedIn’s turnover – from just Productivity, and Business Processes sales which posted revenue of, LinkedIn as a buy, is clearly a magnitude less in scale from the financial statement.

Productivity includes Office, both retail licensed, volume licensed, and Office 365 subscribed, related products such as Skype, Exchange, and SharePoint, and the Dynamics range. Intelligent Cloud encompasses Azure, Windows Server, SQL Server, and System Center, and Visual Studio. But it is interesting to note that Microsoft reports sales declining around 3 to 7% per year as customers move away from software ownership to subscription models. As reported in the Microsoft 2015 Annual report, they face a competitive cloud market from companies such as Amazon, Google, IBM, Oracle, Salesforce.com, VMware, and open source offerings. In the enterprise software market these platforms are also finding new entrants such as facebook and many open source software that provide alternatives for small and larger enterprises and retail consumers in a crowded market.

The move into acquiring a large social network platform is a strong strategic play into fighting against this competition where the critical issue of customers always online and connecting increasingly through email, mobile and social networks represents the “new norm” of a connected customer and connected workplace and society today.

The failure of Microsoft’s $7.2 Billion purchase of Nokia’s smartphone business in September 2013 cast a long shadow over the Microsoft brand and ability to compete in that market. It resulted in the new CEO of Microsoft, Satya Nadella – who has realigned the company towards a stronger cloud services focus – writing off $7.3 Billion in 2015. The LinkedIn deal is a completely different type of strategic move.   Whereas the mobile market requires hardware and software and market power play, the LinkedIn market is more about traffic of user data and specific value added services.

 

Realising the value of the Deal

LinkedIn makes two-thirds of its income from talent solutions in the recruiting and job market platform services that define LinkedIn and the remainder in selling marketing solutions and premium subscriptions. It has remained the website to go to for job networking and professional networking.

The other LinkedIn investments in marketing solutions may be absorbed into Microsoft’s existing portfolio of services with its Bing and advertising systems. The social business platform links to talent and recruiting will likely be preserved as they are the main revenue generators. This will retain the existing LinkedIn active user accounts but it must start to turn this round to growing the user base and convincing the Microsoft Cloud clients and infrastructure management to consider increasing its scale to become the enterprise social platform LinkedIn failed to achieve in its current pre acquisition efforts. The issue of sales leads and business development is different from career planning and talent management but the underlying core data network of professional social connections is largely the same so the trick will be if Microsoft and the merged LinkedIn team can figure out how this is integrated into a new digital work platform strategy and product offering.

 

What information about professionals will they be interesting in?

It is the personal professional network messaging and company groups that will benefit from integrating with the Microsoft Office software and its business applications. This information value could be leveraged when connected to business enterprise systems that manage critical operations such as customer relations management and workforce productivity. In both areas Microsoft with its Dynamic CRM system and its huge Office 365 suite are core commercial services. Competitors such as Salesforce.com in CRM and Workaday in HRM have used social networks to integrate with their sales and workforce to provide what is called “enterprise social“ platform services. That is, being able to collaborate and share relationship services with potential customers and partners.

So the goals for Microsoft are predominately to get the enterprise network of million’s of active users in LinkedIn and the business network services, to extend the Microsoft range of enterprises services – a market that is a core strength.

 

What are the risks in the deal and any issues over privacy and usage of personal data?

The deal risks are predominately in the organisation and integration of the LinkedIn social network with a consistent experience for the users. It is likely to go the same way as the Skype acquisition that has preserved its brand name and has successfully maintained its market position.    

Another area raised by industry observers has been the threat to the open source community. A little known fact outside the developer community is that LinkedIn has contributed a significant amount of its own developed code for the LinkedIn platform related as open source to the community. A risk has been if this would be continued by Microsoft or if the LinkedIn code would be retained and made Microsoft proprietary code by the deal. It has been noticeable in the past few years that Microsoft has made strides to embrace open source with its .Net and embracing Linux – something that was thought unthinkable years ago with its Windows core.

The other topic has been the access by Microsoft to personal data held in LinkedIn databases. In deals of this nature the user agreements and terms and conditions of opt in and out clauses will govern the legal consent to make sure that the use of this personal profile data is managed in accordance with the contract terms of service. Microsoft have probably a better reputation in brand image for secure access management but it still requires that the LinkedIn users’ data is protected and their data is used within the terms of use in the LinkedIn user agreement. If this is changed by Microsoft, for example if it starts to analyse and market this data beyond the LinkedIn services, then it may require something more than just a transfer of user agreement rights in the acquisition, but a confirmation of new terms of use by the existing LinkedIn user and Microsoft. I suspect this will be managed to keep this as seamless as possible.

 

The future with Microsoft expanding its cloud services

Microsoft can exploit this acquisition in several ways. It is not just the 106 million active user base but more so the professional networking the LinkedIn site manages that could be integrated with Microsoft office productivity tools and in Microsoft CRM products in order to grow its enterprise portfolio of services.

It will be interesting to see if Microsoft will integrate this into their Office products or use it to extend its earlier acquisition of Skype and Yammer (a smaller business social network platform) that it purchased for $8.5 billion in 2011. A more significant strategy is to bring LinkedIn into the Microsoft Dynamics CRM to provide a strong enterprise selling and social integration with its customer management. This is a logical response to competitors such as Salesforce.com and workaday in human resource management, who have realised the importance of the rise of social network collaboration in modern connected enterprises.

What is the more likely driver is the growing use of social media and digital tools. These are increasingly shaping the “digital workforce” that will be defined by always-connected employees and subcontractors with company and on-the-go services on the mobile apps. The role of “talent management” is becoming increasingly critical to enterprises as employees and perspective new staff productivity will be through human resources platforms that can bridge the commercial world of work activities and the knowledge sharing and collaboration that defines the modern digital economy.

Featured image courtesy of: European Pressphoto Agency

About the Author

Professor Mark Skilton is a 30-year experienced professional business and IT consultant. He is currently also a part-time Professor of Practice in Information Systems Management and Innovation at Warwick Business School, UK. Mark is currently engaged in business development and thought leadership in digital business focused on digital transformation, company digital strategy, Telecoms, Digital markets and M&A strategies, and CxO practices. He is a recognised International thought leader and author of several books and international papers that have appeared in the FT, NYT, WSJ, Washington Post, Bloomberg, AP, Mail, NewScientist, Nature, Scientific American. He has also appeared on TV and Radio including BBC, Sky, ITV, Al Jazeera and many other channels around the world.

 

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