Why Microsoft Paid $26.2Bn for LinkedIn's "Economic Graph"

It's a BIG day in the technology world today with Microsoft's $26.2Bn acquisition of this very platform. The deal still needs to be approved by the EU later this year but there seems little reason why it will not go ahead. The first, and obvious reason, is that they bought them because they could. When you have $90Bn in cash reserves like Microsoft does, that opens up all kinds of interesting opportunities.

Upon announcement of the news,  LinkedIn shares $LNKD skyrocketed 47%, and as usually happens with deals like this, Microsoft $MSFT dropped 3.7%. Twitter was quick off the mark as always, and it wasn't long before smart folk in my newsfeed were offering their opinion on why the acquisition took place.

Microsoft CEO Satya Nadella had this to say when he spoke to Business Insider about the deal:

"Microsoft asks three questions when looking at potential acquisitions: 

• Does it help Microsoft expand the addressable market?
• Does it help “ride some new technology waves that are secular that are increasing engagement with users?”
• Is it core to Microsoft, “is it something where Microsoft can uniquely differentiate?”

If you look at those three questions, LinkedIn checks all those boxes"

So... Why Did Microsoft Really Buy LinkedIn?

My 2 cents, for what it's worth, is to access the Economic Graph - something that few business professionals still understand. Think of it this way: 

• Facebook has a "social graph" to track connections between friendship groups.
• Twitter has an "interest graph" to see the affinity between different user profiles.
• LinkedIn has an "economic graph" to measure the professional skills and attributes between users.

It's never a good idea comparing social networks, as it is very rarely comparing like for like. Depends upon the intent of the person, time of day, context etc. There's always been a clear difference demographically between each of the main players. [Insert's useful historical chart].

So, "What is the "economic graph?" I hear you cry.

Well, it's actually been around for quite a while, but it's just not been widely utilised by the tech (or marketing) community. When you realise how powerful it actually is though, you could view it as LinkedIn's secret weapon. LinkedIn CEO Jeff Weiner spoke about it in this keynote (below) a few years back, when he was sharing LinkedIn's 10 year vision with Morgan Stanley.

Imagine you are building a new product or need to expand into a new market. Traditional thinking would have you promoting people into the team who deserve it, based upon their experience and tenure at the company. The economic graph on the other hand, may not only predict that certain members of the team are X% likely to leave your company next July, but some people who weren't even considered would actually be a better fit for the team. 

Recruiting grads straight out of university could be another really powerful use case. There is so much data within LinkedIn's economics graph, that it could predict the career trajectory of certain students. Based upon their LinkedIn behaviour via likes, follows, comments, groups join and content shared.

The possibilities for using professional data to predict business outcomes is limitless, so you can see why Microsoft were so interested in getting their paws on it.

Of course, Microsoft has acquired a LOT more that an algorithm and a huge database of professional's though. They've acquired millions of professional networks.

"The value of your network is greater than the value of the product or services that you provide". (Jeff Weiner, LinkedIn CEO)

When I visualised my LinkedIn network a few years ago, it looked something like this:

Have a look at some of these 2016 stats and remind yourself why LinkedIn is probably more valuable than you thought it was:

• 433m Users
• 106 Monthly Active Users
• 2 New members per second
• 380M 'Skills' listed
• 17 Mins (Average user time on site per month)
• Most popular word: "Motivated"
• 50,000 Posts per week
• Vision to reach 3Bn professional members  globally
• Active in 200 countries (70% outside US)
• 59% of users have never worked for a company with more than 200 employees
• 39M students and recent grads active (Q2 2016)
• 20M users in UK
• 4M business pages
• 89% B2B marketers use LI for new product launches
• It takes 20 posts to reach 60% of your audience
• 33,271 corporate customers
• $861M (Q1 2016 revenue from advertising - compared to $5Bn+ on Facebook)
• 6.5M jobs listed
• 59% LinkedIn users DON'T use Twitter (making it a BIG opportunity for B2B and B2C brands).

Bloomberg have an early opinion of why the acquisition took place (the first place I go for breaking tech news). Their initial news reaction is here, but it was basically discussing Microsoft's largest acquisitions. This is how they measure up as viewed on the Bloomberg terminal:

Acquisitions are always messy. Whenever you read an analyst report from any of the main research houses, one of the top considerations is always "what does the customer think". How easy will it be to integrate this new thing into the existing platform. Oracle, IBM, Salesforce, Microsoft and Adobe have struggled this for years.

A quick look at Microsoft's acquisitions over the last 5 years may go some way towards explaining why people always seem to accuse them of "lacking innovation". In many large scale acquisitions, most of the engineering resources are often swallowed up, trying to integrate the various new technologies together, instead of figuring out how to build and innovate something [unique / new / different]. And when engineering resources get deployed elsewhere, the first casualty is usually innovation.

This is not to say Microsoft hasn't been innovative. When I was speaking at Dreamforce last year, I had the chance to listen to Satya Nadella's keynote. It was impressive. If you've got an hour, it's worth watching the whole thing (including his live demo). In his keynote, he outlines Microsoft's focus on enterprise customers and the need to build platforms not (consumer) products, explaining in part why they flirted (unsuccessfully) with Nokia (which became Windows Mobile).

But Why Would LinkedIn Want To Join Forces With Microsoft? 

Apart from the pressure to remain an independent platform from a user perspective, it's easy to see why LinkedIn might want to sell to Microsoft from a commercial perspective. $196 per share has made founder Reid Hoffman and the other board members incredibly wealthy.  

"If it ain't broke don't fix it" doesn't apply anymore. Because it if ain't broke it's obsolete. ( Bill Gates, Co-Founder Microsoft)

I imagine that this "move fast and break things" culture that Zuckerberg likes to talk about, which was first applied by Reid Hoffman and Bill Gates, also made this a good partnership, when they sat down to talk about the future of both platforms.

"If you're not embarrassed by the first version of your product, you launched it too late". (Reid Hoffman, Co-Founder, LinkedIn)

I think there are many reasons why LinkedIn might have found a Microsoft deal attractive. Firstly, there's the FOMO (fear of missing out) on using AI or some form of VR in the workplace. LinkedIn have certainly been regularly accused of lacking innovation in their product in recent years. Having access to major engineering talent is a huge problem at the moment, not least because most of the smart new talent wants to work at shiny companies like Uber or Slack. LinkedIn haven't innovated on their platform (or changed their UI in any meaningful way) for years. They struggled heavily with the transition to mobile, but didn't have the kind of engineering resources that Facebook had to fix it. A partnership like this is Microsoft could breath all kinds of new life into LinkedIn, now that it is able to access large teams of engineering talent, like the team that build the HoloLens.

Imagine Microsoft's HoloLens in a professional environment for example, one where (with an unobtrusive device that has not been released yet), you can see everything you need to know about a person as soon as you meet them (eg. at a business conference) >>

Then consider how powerful a partnership LinkedIn + Microsoft will be when you combine their Dynamic CRM product, their video capabilities across Skype, the Office365 product (used by almost all LinkedIn users), the professional chat tool Yammer AND the economic graph.

• eg. Of LinkedIn's 433 million users, 250 million of them have never worked for a large company. the majority of LinkedIn's users are small / medium sized businesses (mostly using Office365) - EXACTLY the target audience for Microsoft Dynamics CRM.

If you're not sure what Dynamics is supposed to do, watch this short (but cheesy) overview and you'll get an idea pretty quickly of how easily it could dovetail alongside LinkedIn.

What's Next For Microsoft?

My take for what it's worth, (pointing out that while I do hold stock in Salesforce I am not privy to any insider knowledge or have been subject to any "sensitive conversations"), is that Microsoft could acquire Salesforce $CRM in an effort to dominate CRM. They are already strong in small business CRM, Salesforce is the leader in cloud based enterprise CRM, so a partnership between those two companies would be a whole different ballgame. Huge platform / massive user base etc...

Microsoft has already tried to buy Salesforce for $55Bn but CEO Marc Benioff wasn't willing to sell for less than $70Bn. LinkedIn at $26.2Bn is a much cheaper option by comparison, but I wouldn't be surprised if we see that acquisition happen over the next year or two, once the dust has settled on this deal. From what I have seen, this is not the most unlikely of partnerships.

• Bill Gates has a similar passion towards philanthropy (and especially healthcare) that Marc Benioff does. 
• Microsoft CEO Satya Nadella and Marc Benioff are great admirers of each others management style.
• Microsoft is a HUGE user of Salesforce products.
• Microsoft is strong in SME CRM. Salesforce is strong in enterprise CRM. Both want to remain competitive against other software companies Oracle, SAP and Apple.
• Salesforce product innovations (eg. SalesCloud and Salesforce IQ) have prioritised Microsoft product integrations.

I could go on but you get the point. 

• [Interbrand's Top 100 global brands. Microsoft's brand valued at $67.67Bn]

In the meantime, it's imperative that Microsoft handles the LinkedIn acquisition carefully and respectfully, after all, they don't want another Nokia ~ the $7.6Bn acquisition that has since been written off. 

So What's The Takeaway For YOUR Business?

I don't think there's ever been a more exciting time to work in technology. Big data is getting even bigger and increasing harder to manage. Customers are moving fast, and across more channels than ever before. Social networks are not growing. Messaging apps are exploding. Everybody wants to connect everything (even if there is little reason to do so). Really, we're all just trying our best to keep up and not drown, as the digital universe expands.

So, as much as we all like to predict what might happen next, it's abundantly clear that we are all speculating and trying to make the best (and most educated) guesses that we can. My best advice to any executive, looking at this speed of change and wondering how on earth they can possibly keep up, is to not get distracted. Business has always been (and always will be) about the customer.

Jeff Bezos has a good saying, which he shares when people ask why he doesn't focus on competitive analysis,

"If we can keep our competitors focused on us while we stay focused on the customer, ultimately we'll turn out all right".

Research company Forrester were asked to make their usual list of predictions towards the end of 2015, much like I am speculating now. But Forrester had a really solid piece of advice that any business professional (especially one from an established or traditional company), should pin on their wall. It's one worth remembering, especially when we read about the hype surrounding large acquisitions or the pace of change in the marketplace.

Want to know what it was?

"2016 is the year that traditional businesses will fight back". 

Traditional businesses will win when they realise that they don't have to innovate faster than everyone else, they just need to focus on what they already have.

1. Market Footprint
2. Capital Assets
3. Huge Amounts of Customer Data

When you consider that only 1% of useful data is every analysed and only 20% of businesses use more than 50% of their customers data, this is the real battle ground for most businesses. Accessing customer data in a way that is valuable (and meaningful) for both parties. And LinkedIn is a goldmine of data, which is why Microsoft wants it. But by the same token, your own business is probably sat on it's own goldmine of data that you've not properly mined and filtered yet.

• Read the full Forrester report here [PDF]

Unlike Microsoft who need the data, Forrester's view is probably more relevant to your business. In my experience of working with large enterprise companies, getting customer data is not usually the problem. Making sense of the data that you already have is usually the problem. But too many companies seem to spend their time trying to acquire more customer data, in order to find more ways to extract any kind of value from it (in order to sell more stuff). It reminds me of a line I once heard entrepreneur Tim O'Reilly say,

"We need to create more value than we capture".

So take heart, don't delete your LinkedIn profile just yet (!) ~ and do what you have hopefully been doing all along. Putting your customers first and listening to what they really want.

ps. I love this graphic by Hugh MacLeod from Gapingvoid. Only difference being that these days, you can't create something out of nothing. You have to pay $26 billion for it.

Want more?

How about this post I wrote a while back (inspired by LinkedIn CEO Jeff Weiner) ~ "Invest in Your Network"