This week’s announcement by Microsoft of a $26.2 billion all cash deal for social network LinkedIn has commentators confused for a number of reasons. To name but a few concerns, firstly it’s by far the biggest deal in social media history – dwarfing the previous record of $19 billion spent by Facebook on WhatsApp in 2014. Second, at 433 million registered users it doesn’t have a massive user base compared to Twitter’s 645.7 million and Facebook’s 1.6 billion registered accounts. Third, its professional tone makes it a tepid network, good for fostering commercial relationships, job hunting and other activities left to the confines of a 9-5 or the ungodly hours put . So why would Microsoft, a company reeling from the failure of its $7.2 billion purchase of Nokia’s devices division, spend so much on a vanilla, unprofitable social network? Here are some factors I think informed the decision.
The user base
Social networks obsess over demographics and rightly so. If you don’t know your audience you can hardly monetise them. For the first quarter of 2016 it made a net loss of $46 million on revenue of $861 million (a 35% increase on the same time last year). LinkedIn is a conundrum in that, in theory, it has a moneyed user base, yet is struggling to make a profit.
At a time when marketers are struggling to find ways to get money out of under-35s with no disposable income and a mountain of personal debt, LinkedIn is a conservative choice, but one more likely to yield results.
On the upside it is growing and doesn’t have the same problems Facebook and Twitter have with trolls, bullying and censorship.In this LinkedIn is on a healthy upward trend, growing 19% in overall membership and 9% in unique visiting members per month.
As the saying goes, ‘if something is free you’re the product, not the consumer’ then Microsoft has just itself a whole lot of product to work/play – and it’s growing.
The algorithms
It’s not just the data it’s what you do with it that counts. LinkedIn uses algorithms to suggest connections its users might like to make, jobs they might to apply for, and companies they may like to follow. According to analyst Jenny Sussin from Gartner, Microsoft was after two algorithms in particular: “No. 1 was the algorithm that creates the connection graph, the social networking graph. No. 2 was the algorithm that determines the information most valuable and most actionable to you.”
Sussin goes on to argue that being able to integrate these algorithms with existing Microsoft services like Yammer and its Dynamics customer relationship management software would prove invaluable for business-to-business sales and human resources organisations. It’s about making sure what Microsoft knows about you is available across as many platforms, in as searchable a manner, as possible. Fair points.
Because Microsoft does business well
Quarter after quarter the message from OEMs is clear: if we could get out of hardware, we would. The real money is cloud services, not the servers it runs on. IBM sold its PC division to Lenovo in 2004 and hasn’t looked back; Hewlett-Packard spun off its consumer business last November; and Dell is in the process of buying cloud storage giant EMC for $67 billion. For the third quarter of the 2016 financial year, revenue from server products and cloud services grew 3%, revenue from Microsoft’s Azure platform grew 120%, and the number of enterprise mobility customers doubled. With Windows adopting a free upgrade model, the PC market still in decline and mobile devices an accident that keeps on happening it’s clear that the b2b space is where Redmond is strongest. Buying a social network for business is an example of tapping in to a base that’s already using Skype for video conferencing and Yammer for instant messaging. As an aside, the LinkedIn brand isn’t going anywhere – neither, we are assured, is CEO Jeff Weiner.
The Nadella effect
When Satya Nadella took over as Microsoft CEO in 2014 he ditched Steve Ballmer’s ‘devices and services’ strategy about putting physical objects into people hands in favour of a broader ‘cloud first, mobile first’ one focusing on technology as an enabler.
In Nadella’s world technology is about helping you improve yourself and the quality of the work you do. As he wrote in an e-mail to Microsoft staff this week: “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.”
The combination of personalised experiences accessible anywhere is pure Nadella. The trick is seeing how hands-off he is going to be in bringing his vision to fruition. For now there are no plans to downsize. All great news for its 9,200 staff (and it’s international base in Dublin) but how long Microsoft will let that situation run will be a test of his ability as a CEO to play a long game with investors.
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