"Why has Microsoft paid US$26 billion for business networking platform LinkedIn?"
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 on the last 12 months and since 2011 floatation on the stock exchange. LinkedIn in the last few years has actually starting losing active customers and its share price had dramatically fallen over 40% in recent quarters. LinkedIn user base of 106 million active users by 2016 compared to 310 million twitter active user and the mighty 1.65 billion active facebook monthly users had never managed to increasing its commercial services in what could have been a strong enterprise market.
Putting the Microsoft LinkedIN acquisition size in perspective
Several stock investment analyst are all saying a similar story of the benefits from synergies in the Microsoft and LinkedIN acquisition enabling Microsoft to monetize LinkedIn traffic better. This is speaking to the core value in the profession network data that LinkedIn has established. While in recent years this has seen a steady growth in 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 commercial revenue in 2015 from just Productivity and Business Processes sales which posted revenue of $6.3 billion with operating income of $3.1 billion, more than the whole of LinkedIn turnover, 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 are in decline of 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 area 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 Microsoft righting off $7.3 Billion in 2015 by the new CEO Satya Nadella who has realigned the company towards a stronger cloud services focus. The LinkedIn deal is a completely different type of strategic move. Whereas the mobile market requires a hardware and software and market power play, the LinkedIn market is more about traffic of user data and specific value added services.
Realizing 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 job networking and professional networking.
The LinkedIn other investments in marketing solutions may be absorbed into the Microsoft existing portfolio of services with its Bing and advertising systems. The social business platform links to talent and recruiting will likely be preserved as it’s the main revenue generator. This will retain the existing linkedIn active accounts but it must start to turn this round to growing the user base leverage 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 to career planning and talent management but the underlying core data network of professional social connections are 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 productive. In both areas Microsoft with its Dynamic CRM system and its huge Office 365 suite are core commercial services. When we look at competitors such as Salesforce.com in CRM and Workaday in HRM then these products have used social networks to integrated 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 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 organization 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 if 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 that the LinkedIn code would be retained and made Microsoft proprietary code by the deal. It has been noticeable in the past few years Microsoft has made strides to embrace open source with its .Net and embracing Linux what 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 analyze 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 activity user base but more in is the professional networking the LinkedIn site manages that could be integrated with Microsoft office productivity tools and in Microsoft CRM products to grow its enterprise portfolio of services.
It will be interesting to see if Microsoft will integrate this into their Office products or to extend its earlier smaller business social network Yammer platform acquisition and over the internet video and voice calls of skype 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 realized the importance and 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 that 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.