The Real Reason Microsoft Is Buying LinkedIn (And It Is Not For Their Profitability)

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Microsoft bought LinkedIn this week which came as a surprise to practically everyone. No one leaked the story and the rumor mill was quiet as the grave. The immediate question was “Why?”

The Numbers

Financially, like my old friend Salesforce, recent years have not been kind to LinkedIn in terms of profitability. Revenue is expected to be $3.7b for 2016 and is growing but they consistently make a loss.

So, from a financial perspective, the deal is problematic. At $26.2b, even if Microsoft took 100% of the revenue as profit, it would take more than seven years to get their money back. If we are a bit more realistic and suggest a modest profit of 10% on this revenue base, we are looking at a return of the buy price in 70 years.

And yet, Microsoft paid almost a 50% premium on the share price. It is clear they were keen.

So what other numbers provide a clue?

Well, there are 433 million professionals on LinkedIn. This is a big number. However, there are 3.4 billion internet users worldwide (http://www.internetlivestats.com/internet-users/). Of these we can estimate the working population as all those between the ages of 24-54, which is about 60% of them (http://www.statista.com/statistics/272365/age-distribution-of-internet-users-worldwide/). Finally, we have the world unemployment rate of 8.4% (http://www.indexmundi.com/world/unemployment_rate.html) When we mix all this together it tells us that LinkedIn is used by approximately one quarter of the world’s working internet users.

Of the users of LinkedIn we also know that 70% of them are outside the USA, in over 200 countries and territories (http://expandedramblings.com/index.php/by-the-numbers-a-few-important-linkedin-stats/7/).

In other words, LinkedIn is a robust, global network of working professionals and the organisations they work for.

Herein lies the secret to why Microsoft wants LinkedIn.

A Real Life Example

Sydney hosts a fantastic event each year called Vivid. It is a festival of light held in the middle of our winter. Fortunately, Sydney never gets too cold. Our family went out to see it and we even ate ice cream at the end as we watched the Sydney Opera House be used for a unique projection show.

Vivid

While navigating the crowds my son found a Brazilian driver’s license on the ground. This was clearly an important document, and it was likely the owner was missing it. The trick was to track them down.

Fortunately, we had social media. I immediately went to the various channels and got a hit on the owner’s name on Facebook, Twitter, and LinkedIn. Unfortunately, the activity on Facebook and Twitter was not recent and both have restrictions on messages to people you are not linked to (Facebook effectively hides the message and Twitter only lets you message people you are following). LinkedIn also restricts messaging without a paid account but it told me where the license owner worked. A quick Bing lookup later and a message was left with the reception answering machine and a bit of smart guesswork gave me an email address. 24 hours later the driving license was back with its owner.

Better Together

Even though LinkedIn is a global network of workers and their organisations which is easy to search and retrieve important information, it may still not be obvious how Microsoft will make its money back. Let us consider the Microsoft products likely to make the best use of LinkedIn.

Outlook and Skype For Business

Arguably these are the two most popular collaboration tools in the Microsoft stable. Skype for Business lets you collaborate internally with co-workers while Outlook let’s you organise your life and collaborate with external parties.

However, both can be federated. This means you can link to other organisations and work with their employees as if they were in your organisation.

If we consider LinkedIn, as an individual, I link into people I work with, have worked with in the past or think I may work with in the future. Imagine if I could tick a box in LinkedIn and automatically federate to all my links? Or, if we had a Google Groups-like concept, a defined subset of LinkedIn contacts?

When I want to set up a meeting with a LinkedIn contact in Outlook, I would immediately see their availability without the usual tango via email. In Skype I could see if they were available for a quick chat and, with their skills, peer-confirmed and readily available, I could search to see who would be the best person to ask on a given topic. I could do the same for collaborating on a document in SharePoint or any other document store, inviting colleagues I know or reaching out to experts I do not know but who are approved from a privacy perspective.

At a company level, we could do the same thing. I could tell LinkedIn the companies I want to federate with and my employees get a list of the first and maybe second level connections in those companies automatically displayed with the ability to search for others.

Dynamics Products

Let us pretend we are building a brand new CRM or ERP system. Both of these manage a process involving customers and our activities/interactions with them.

Again, as an organisation, with LinkedIn I know all the external parties my employees interact with.

So, rather than start with a blank slate, let us start with a complete and accurate set of organisations and contacts we do business with. On this foundation, an ERP becomes a place to manage products/services and a place to link that product/service to a LinkedIn company/person via an order/invoice etc.

Similarly, a CRM system becomes a clean set of Accounts and Contacts where we associate ourselves with them through Activities, Opportunities, Cases and the like.

For existing ERP/CRM systems, LinkedIn becomes an indispensable reference system to ensure my Account and Contact information is accurate and up to date. In linking LinkedIn and CRM, for example, we no longer have to manually shift Contacts from one Account to another when they move; the Contact will self-update their information and this will flow into CRM.

For ERP system, if there is a new financial controller we need to reach, LinkedIn will be the first to know about it and if it is linked to our accounting system, this will also be automatically updated.

Back in 2012 I reviewed the popular Contact Information Sources at the time and concluded LinkedIn was the best value for money. I stand by that and assert it is difficult to find a better source of accurate worker information for contacts outside of the USA.

Why No Deal?

It could be argued that Microsoft could reap a lot of these benefits by striking a collaborative deal with LinkedIn, in much the same way as they have done with Twitter and Facebook for Microsoft Social Engagement. My assumption is the reason they have decided to buy the company, rather than just work with them, is to cut off those benefits to its rivals. In acquiring LinkedIn, they cripple a range of competitors in common markets such as Google, Salesforce and Oracle.

Conclusions

While only time will tell whether the price Microsoft has paid is too much, I genuinely believe the strategy behind the purchase is sound. LinkedIn will not bring a cash windfall overnight but it will gift Microsoft’s Office products with a unique competitive advantage which will be very difficult to replicate.

I am now counting the days to the MVP Summit in November where I hope to see if any of my predictions come to pass.

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