The office software giant Microsoft is buying business networking site LinkedIn. Why? Because it can.
The acquisition makes sense on certain levels when one considers Microsoft’s core customers are corporate organizations and businesses. LinkedIn is a sort of Facebook for business people, albeit at a much smaller scale. While some non-US business networking outfits like Xing and Viadeo have attempted emulate LinkedIn’s networking in Europe, LinkedIn owns the U.S. business networking market.
LinkedIn also owns Lynda.com, an online training and education site. LinkedIn purchased the site in 2015 for $1.5B, a seemingly inane waste of precious cash for a company that has yet to turn a profit since its inception. Yes, Lynda.com was aimed squarely at business people seeking to enhance their skills to remain competitive in the job market. But that market is already heavily served by a large number of new economy and old brick-and-mortar institutions. Still, a misguided trophy purchase for LinkedIn could become a tactical windfall for Microsoft. Microsoft’s training and education efforts for its own products have always been woefully stunted and half-hearted. Lynda.com staffers, if given the latitude to make improvements, could turn that entire sorry state of affairs around.
Let us be clear. Microsoft isn’t buying LinkedIn to acquire Lynda.com. They aren’t buying LinkedIn to compete against Facebook. They are not even buying LinkedIn to remain relevant in the modern cloud software ecosystem. No, they are buying LinkedIn to absorb them in their quest to maintain their business systems monopoly.
Microsoft has arguably never successfully developed a new product, never mind a paradigm-shifting product. But it is always better to be lucky rather than good, and Microsoft has turned being second to market into a virtue. The company was selected to develop the operating system IBM’s then-new personal computer in 1980. IBM’s engineers saw the disc operating system as a trivial element of their product, and in exchange for a bargain basement contract, IBM granted Microsoft rights in perpetuity to the OS. Microsoft successfully used that OS to seize the markets of a variety of competitors, including the biggest. Lotus and Novell, the two software giants of that era, fell to MS Office and Windows Server. Ultimately the ubiquity of IBM’s open architecture computing system meant that Microsoft became, by an order of magnitude, the largest software developer in the world.
Apple Computer, which had its own OS and software ecosystem, could have posed a danger to Microsoft. But the inability of Apple to produce a product that appealed to the business community reduced their relevance, and strategic missteps and financial troubles during the 1990s reduced their relevance even further. However the ever increasing velocity of technology meant that trouble was brewing. When search giant Google decided to launch its own operating system in the 2000s, people sat up and took notice. Android was multi-platform and freely licensed to any that wanted it. Boosted by a revolution in hand held smart device technology, the new operating system seized immense swaths of market share from Microsoft. Adding insult to injury, Apple Computer, which had reinvented itself under Steve Jobs’ tutelage, introduced another operating system (and its own super popular and revolutionary hand held devices) to the fray, and seized hundreds of millions more consumer eyeballs from Microsoft.
Microsoft tried to stem the bleeding by purchasing smart phone maker Nokia in 2013. Intent on developing a successful and persistent version of the Windows OS for smart phones, Microsoft hoped to stem the tidal wave of Android and iOS (Apple) devices in offices around the globe by licensing Windows Mobile and Windows Phone to manufacturers while offering premium handsets based on Nokia technology to the public much as Google and Apple did with their operating systems and hardware.
The Nokia purchase was a disaster. The transaction closed in 2014, but by 2015 it was obvious that Nokia could not leverage Microsoft’s technology before Nokia’s failing legacy infrastructure and product pipeline dragged the enterprise down. Microsoft’s new CEO wrote off the entire $7.9B spent in the deal.
Unfortunately the financial details of the LinkedIn acquisition makes no more sense than that of the Nokia acquisition. It is not that Microsoft cannot afford the purchase price. Microsoft will use its $10.5B in 2016 profits to defray the $26.2B all cash outlay, and raise the remainder with a stupendous $16B bond offering. The offering will, despite its size, attract an endless line of willing buyers, so the rate should not be much more than prime, or 3.5%. The resulting $560M a year in interest is basically a rounding error for Microsoft, and they could easily retire the debt well short of maturity. No, the reason the deal doesn’t make financial sense is that the profit prospects of LinkedIn cannot justify a billion dollar asking price, never mind $26B.
LinkedIn is a tool for business people, not a destination. Facebook commands billions of dollars in advertising because its subscribers spend hours every day trolling their web pages. LinkedIn probabaly gets only minutes of a typical subscriber’s day, not hours. Is a minute of eyeball time on LinkeIn worth more than an hour of eyeball time on Facebook? Maybe. So far it hasn’t been. Microsoft is betting $26B that its scale, money, and technological prowess will make that paradigm come true.
Well sort of. I prefer the siege theory rather than the profit and revenues theory when it comes to attempts in divining the true motives behind the LinkedIn acquisition. Microsoft’s business software monopoly is under siege from all sides. And like the Medieval cities that hired mercenaries to help man the walls against the onslaught of barbarians, Microsoft has hired LinkedIn to stand post.
May the best companies win. I’ll be under a shady spot on a nearby hill watching the assault.