Why LinkedIn is worth $26 billion to Microsoft
Adam Rifkin stashed this in Active Users
LinkedIn has 100 million monthly active users who are interested in business.
LinkedIn's Talent Solution business -- charging businesses to post job ads and provide other recruiting services -- accounts for two-thirds of LinkedIn's $3 billion in annual revenue.
Microsoft is reinventing itself as a business services company.
Buying LinkedIn makes good sense for Microsoft too. It represents one of the most significant steps in Nadella’s effort to reinvent Microsoft from the leading PC software maker to a company that sells business technology services more generally.
Microsoft’s initial success came from selling software for PCs — most notably the Windows operating system and Office productivity suite. During the 1990s and 2000s, Microsoft built on its dominance of the PC market by selling a growing portfolio of licensed software that runs on corporate servers — like the Exchange email server, SQL Server database, and IIS web server.
But over the past decade, Microsoft has faced two big disruptive threats. First was the online app revolution led by Google. People increasingly used online products like Gmail and Google Docs instead of desktop software like Microsoft Outlook and Microsoft Office.
Next came the mobile revolution, led by Apple. People increasingly used smartphones and tablets running Apple’s iOS — or Google’s Android — instead of Microsoft software.
In the waning years of CEO Steve Ballmer’s tenure, Microsoft made a series of increasingly desperate attempts to meet these threats head on. Microsoft responded directly to Google with products like the Bing search engine and Bing maps. It responded directly to Apple with the Windows Phone. But these products didn't catch on, and the efforts cost Microsoft hundreds of millions of dollars in losses.
Under Nadella, Microsoft's new CEO, the company finally seems to be accepting that it’s not going to play the kind of dominant role in the consumer technology market that it did in the 1990s. People are mostly going to perform Google searches on their iPhones, not Bing searches on their Windows Phones.
But while Microsoft has been bleeding market share among consumers, the company continues to be popular with business customers. So Nadella has focused on expanding and modernizing the company’s business products.
Because companies often invest millions in large, multiyear technology projects, they tend to be less fickle than consumers. If your corporate IT system is built on Microsoft software today, you’re going to be very interested in buying additional Microsoft software tomorrow. So Microsoft has been very successful at upselling existing customers on additional software products that work within the Microsoft software ecosystem.
At the moment, one of Microsoft’s fastest-growing products is its Azure cloud computing platform. This is a subscription-based service that allows businesses to run software in Microsoft’s data centers instead of on servers they run themselves. Microsoft has also been shifting customers to Office 365, an online, subscription-based version of its productivity suite.
In short, there are two big themes to Microsoft’s reinvention. First, Microsoft is deemphasizing the consumer market and focusing on business customers. Second, Microsoft is shifting from selling individual copies of software to run on customer-owned hardware to selling online services supported by subscription fees and advertising.
LinkedIn complements Microsoft’s shifting business modelIt’s obvious how Microsoft’s acquisition of LinkedIn dovetails with Microsoft’s shifting business strategy. There’s a lot of overlap between LinkedIn’s user base — corporate professionals — and Microsoft’s customers. And LinkedIn is already providing online services rather than selling software.
There are also some specific ways Microsoft and LInkedIn hope to strengthen each other’s products. For example, LinkedIn offers a Facebook-style newsfeed to its users. Microsoft plans to integrate this newsfeed into the Office 365 user interface, allowing users to keep track of developments in their professional network while they’re working on a spreadsheet or presentation.
Microsoft also hopes to integrate data from LinkedIn into Cortana, the personal assistant that is Microsoft's answer to Siri and Google Now. So a future version of Cortana may be able to look up the phone number of a LinkedIn contact or tell you about mutual friends.
Access to LinkedIn's data will be especially useful for Dynamics, Microsoft’s customer relationship management software. You probably haven't heard of CRM software, but it’s considered an essential software tool for any company that maintains long-term relationships with customers. Microsoft hopes to use data from LinkedIn to enhance Dynamics, giving customers access to more data about their customers and helping them find new ones.
The real value of LinkedIn does not lie merely in integration with Microsoft technologies. It lies in the long-term use of the data it has collected.
LinkedIn data is remarkable for a number of reasons. In the first place, it’s accurate. People lie on Facebook all the time; they don’t on LinkedIn. What’s more, they tend to keep their accounts scrupulously up to date. In the second place, it’s economic data. It’s about the education, training, career paths and professional content preferences — things we really want to know. Finally, it’s geographic and allows you to zero in on what matters where.
Taken together, the data adds up to something LinkedIn has been calling an economic graph. According to the company, this is a digital map of the global economy. It includes students, employees and upper management at schools and companies across the globe. More importantly, it shows not just who these people are and what they do, but how they are connected with one another.
Three Distinct Benefits of Using LinkedIn
The first benefit for a user is the ability to be known.
People on LInkedIn can get to know you by how you portray yourself and how you participate, whether you post articles, participate in conversations, or give answers to posted questions. How you participate, what you contribute, and the netiquette you use defines your brand — who you are — for others.
Another benefit is the ability to be found.
Starting with your profile, you can ensure the content fully reflects the message and brand you want to project. LinkedIn profiles are a top indexing tool for Google searches. A well-completed profile with appropriate keywords throughout will catapult you to the top of the search engine results.
The most amazing benefit of LinkedIn is the ability to find and connect with others.
For me, this is its untapped power; LinkedIn is the online replacement of the rolodex that used to sit on your desk. Everyone you connect to on LinkedIn becomes part of your online rolodex, and for every connection you have you can usually see their online rolodex.
The core idea is to draw on more data to boost productivity and make both LinkedIn and Microsoft more essential to the workday.
In announcing the acquisition, Microsoft and LinkedIn summarized the benefits as meshing LinkedIn’s 433 million members with the professional cloud that Microsoft CEO Satya Nadella has been building for Microsoft’s future. LinkedIn’s stock has tumbled this year as it seemed to run dry of ways to monetize its network. Microsoft has been looking for ways to get more people using cloud apps like Office 365, Skype and Cortana.
Among the examples Nadella and Weiner gave in a conference call with investors: LinkedIn could give Microsoft’s productivity software the social-network piece it’s always lacked, while Office and Outlook could make it easier to keep your LinkedIn profile updated. LinkedIn’s newsfeed could draw on, say, your Calendar schedule to become more engaging, which could in turn boost its ad revenue. Cortana could scour your LinkedIn network to create a quick brief about who’s attending your next meeting.
The core idea is to draw on more data to boost productivity and make both LinkedIn and Microsoft more essential to the workday. But whenever personal data is the lifeblood of a business plan, privacy concerns emerge. Nadella said that “nothing will get connected or linked without users opting in” but also extolled the potential of applying machine learning to user data in order to generate more recruitment leads and help sales forces drum up more business. Bosses will also have a clearer view of who employees are talking to and how they’re spending their time.
Why Microsoft bought LinkedIn for $26 billion, in one word: Cortana
Know everything about your business contact before you even walk into the room.
The Microsoft-LinkedIn deal, in one image. (Credit: Microsoft)
The image above says it all: Microsoft spent $26.1 billion to ensure that you’ll never walk into a meeting cold again.
Picture a typical business trip: meetings all day, drinks at night. A good salesperson knows their contacts before they step foot in the door. But that goes for coworkers as well: How do you make them feel comfortable? How do you make them part of a team? How do you let them know whom to approach, both inside and outside the company?
All of this usually takes some effort on your part, or at least a competent assistant. And that’s the role that Microsoft hopes to play, especially with its digital assistant, Cortana, and Office 365.
Right now, Cortana provides some basic information about your calendar, suggesting, for example, what time you’ll need to leave to arrive at your next meeting on time. In Microsoft’s digital future, Cortana will be able to sum up what you need to know about your business relationship, and what information you can use to cement a more personal connection, too. It sounds smarmy, but a good salesperson will tell you that an emotional connection helps seal the deal.
If you're bothered by the thought of Microsoft's owning more data about you—well, you probably should go delete your LinkedIn profile, now. Microsoft already knows your calendar (Outlook), your meetings (Outlook), your coworkers (Delve), your accounts (Microsoft Dynamics CRM), and some of your expertise (Delve). Microsoft calls this the Office Graph.
Here’s what Microsoft and LinkedIn see the data they know about you.
For his part, Jeff Weiner, the chief executive of LinkedIn, said his company envisions a so-called Economic Graph, a digital representation of every employee and their resume, a digital record of every job that’s available, as well as every job and even every digital skill necessary to win those jobs. LinkedIn also owns Lynda.com, a training network where you can take classes to learn those skills. Then there's the LinkedIn news feed, where you can keep tabs on your coworkers from a social perspective as well.
Buying LinkedIn brings those two graphs together and gives Microsoft more data to feed into its machine learning and business intelligence processes. “If you connect these two graphs, this is where the magic happens, where digital work is concerned,” Microsoft chief executive Satya Nadella said during a conference call.
Microsoft will use the LinkedIn information to empower applications like Delve—which is already part of Office 365. By making Office 365 a more potent application, Microsoft sells more Office 365 subscriptions, specifically to enterprises and small businesses—and possibly sells Lynda training subscriptions right alongside. There are already 1.2 billion Office users, and 70 million Office 365 monthly users in business, Microsoft said. Add to that the 433 million users who have already signed up for LinkedIn (though only 105 million actively use it per month) and Microsoft feels like it can make the two networks, together, indispensable.
Forbes and Barron's are skeptical that this deal is worthwhile:
HBR thinks Microsoft-LinkedIn should Create more data products.
Many of these new services I’ve described here might be called “data products” — new products and services derived from data and analytics that can be sold to customers. LinkedIn was an early creator of these, with “People You May Know,” “Jobs You May Be Interested In,” and “Groups You May Like.” But the company could go much further and develop, for example, People in Your Profession You Could Learn From, How to Make Your Resume More Successful, The Credential You Need Most, and so forth. The company could also go beyond the “matching” approach it has used for its data products and create some scores — your Employability Score, Predicted Compensation Score, or Thought Leader Score, for example.
Taking these steps would require that LinkedIn and Microsoft bulk up on their analytics, data science, and cognitive technology capabilities. LinkedIn used to have great data scientists (DJ Patil, Jonathan Goldman, and Monica Rogati, for three examples), but many, including these three, have moved on to other organizations. The rejuvenation of LinkedIn under Microsoft will require adopting some of the strategies above to lure them back.
Much of the money that Microsoft has ponied up for acquisitions has been written off a few years later. The company wrote off $6.2 billion from its aQuantive acquisition and $7.6 billion from the Nokia phone business. Adding some value (and investing more money) in making LinkedIn really hum is probably the only way to avoid overpaying in this instance as well.
Jeff Weiner on the acquisition:
"Massively scaling the reach and engagement of LinkedIn by using the network to power the social and identity layers of Microsoft's ecosystem of over one billion customers. Think about things like LinkedIn's graph interwoven throughout Outlook, Calendar, Active Directory, Office, Windows, Skype, Dynamics, Cortana, Bing and more."
"Realizing LinkedIn’s full potential to truly change the way the world works by partnering with Microsoft to innovate on solutions within the enterprise that are ripest for disruption, e.g., the corporate directory, company news dissemination, collaboration, productivity tools, distribution of business intelligence and employee voice, etc."
$300 billion total addressable market:
They defined LinkedIn's addressable market as $115 billion, where Microsoft is already at $200 billion.
Salesforce is worried Microsoft will hoard the data:
"Microsoft's proposed acquisition of LinkedIn threatens the future of innovation and competition," Burke Norton, chief legal officer at Salesforce, said in a statement. "By gaining ownership of LinkedIn's unique dataset of over 450 million professionals in more than 200 countries, Microsoft will be able to deny competitors access to that data, and in doing so obtain an unfair competitive advantage."
On Microsoft Dynamics CRM:
With data spread among a variety of services and apps, one of Microsoft’s objectives is to become the central hub for users’ professional profiles by consolidating information in its Dynamics CRM solution. Professional hubs are likely to include highly relevant news feeds, information on contacts, past collaborations and industry trends.
Within Dynamics, users could access highly detailed information on prospects as well as current customers to help develop proposals, product pitches and presentations customized to address client-specific needs. In his presentation on the acquisition, Nadella emphasized the expansion of capabilities within the Dynamics platform to include management of human resources and accounting apps in addition to CRM, which would compete directly with the products of Salesforce.com.
Tech has become a 5-horse race: Google, Apple, Facebook, Amazon, and Microsoft being the five horses fighting for dominance of Techdom. Google dominates Search and Mobile; Apple dominates mobile; Amazon dominates Commerce and Cloud; Facebook dominates Social; and Microsoft, despite its size, dominates nothing.
That can’t go on, if Microsoft wants to be in that 5-horse race, and win.
So, they have decided to acquire LinkedIn and get a key strategic position in Social.
However, their endgame is not Social, it is Cloud. Here’s why.
LinkedIn’s social network is of a professional nature. Most of this universe fits into the bucket of being enterprise cloud services users. I am using the word enterprise broadly, to include all businesses and organizations, including small businesses. I have long been of the opinion that LinkedIn’s asset – it’s incredible network – would monetize much better if they became a cloud services vendor, especially with an anchor position in CRM and related products. Imagine how powerful a combination Salesforce and LinkedIn would make with all the data in CRM being integrated fully with LinkedIn? The latter could charge a huge premium for that kind of CRM system.
Well, LinkedIn went in a different direction. Very interesting directions, including Media and Education, beyond its recruiting and marketing solutions. However, this move by Microsoft tells me that the Cloud Services strategy is something they do see, and it is the core idea behind this acquisition.
Why did LinkedIn sell?
LinkedIn has monetized largely with a freemium strategy. The problem is, today’s Internet is such a bastion of free riders, that any company banking on freemium has a hard time scaling. I think, LinkedIn came to realize this limitation, and when Microsoft came knocking, they chose to do the cloud services strategy within Microsoft, as opposed to independently. Culturally, LinkedIn is a media company. Cloud Services would be a significant cultural shift. For Microsoft, it will be a natural.
Watch what happens in CRM. Microsoft needs to fortify its CRM position and deeply integrate LinkedIn into it. Marketo recently was acquired by a private equity firm. That company would be a natural one to bolt onto the LinkedIn acquisition. I had thought that LinkedIn could start down the Cloud Services path by acquiring Marketo, and still stand by that recommendation.
Why Microsoft bought LinkedIn: Adding social selling to CRM.
Total addressable market is $115 billion:
What Satya Nadella said in his memo:
We are in pursuit of a common mission centered on empowering people and organizations. Along with the new growth in our Office 365 commercial and Dynamics businesses this deal is key to our bold ambition to reinvent productivity and business processes. Think about it: How people find jobs, build skills, sell, market and get work done and ultimately find success requires a connected professional world. It requires a vibrant network that brings together a professional’s information in LinkedIn’s public network with the information in Office 365 and Dynamics. This combination will make it possible for new experiences such as a LinkedIn newsfeed that serves up articles based on the project you are working on and Office suggesting an expert to connect with via LinkedIn to help with a task you’re trying to complete. As these experiences get more intelligent and delightful, the LinkedIn and Office 365 engagement will grow. And in turn, new opportunities will be created for monetization through individual and organization subscriptions and targeted advertising.
Jeff and I both believe we have a significant opportunity to accelerate LinkedIn’s growth and the value it brings to its members with Microsoft’s assets and scale. In fact, when Reid Hoffman, the founder of LinkedIn, and I spoke about the opportunity for us to come together, he called it a “re-founding” moment for LinkedIn and an opportunity to reach the mission the company set out on 13 years ago.
The opportunity for Office 365 and Dynamics is just as profound. Over the past decade we have moved Office from a set of productivity tools to a cloud service across any platform and device. This deal is the next step forward for Office 365 and Dynamics as they connect to the world’s largest and most valuable professional network. In essence, we can reinvent ways to make professionals more productive while at the same time reinventing selling, marketing and talent management business processes. I can’t wait to see what our teams dream up when we can begin working together once the deal closes, which we expect will happen this calendar year.