More than resumes.

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Microsoft Needs LinkedIn to Conquer the Office

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Microsoft's acquisition of the social network LinkedIn is not easy to understand. Both companies' chief executives, Satya Nadella of Microsoft and Jeff Weiner, have described the $26.2 billion all-cash deal -- one of the largest in tech history -- in the blandest corporate-speak, with memos that sounded as if they were part of LinkedIn's megaboring attempt to create a commentary platform for business celebrities.

Yet this deal is a major play for a market no company has yet captured -- intracorporate communication. Evidently, Microsoft felt it had to move after Facebook made its own grab with Facebook at Work. Ceding the opportunity to a competitor with equally deep pockets, a powerful brand and nimble developers might spell the end of Microsoft's ambitions in the corporate world, which it used to own thanks to Windows and Office, but where its grip has been slipping lately. So Nadella paid an incongruously high price for a company that, on its own, doesn't seem like much of a treat.

LinkedIn makes 65 percent of its revenue as a headhunting tool: Corporate customers essentially pay for its customer base, the biggest resume resource in the world. The network has 433 million members -- a vast database of professionals no company that recruits globally can ignore. The company's two other revenue streams are advertising and member subscriptions, which essentially allow people to be more proactive in searching for jobs or in making sales pitches to people who could be hard to reach in other ways. These are not particularly reliable: Google and Facebook dominate the advertising market, and the individual subscriptions, which cost from $30 to $120 per month, yield just 11 cents per month per registered user -- or less than 50 cents per monthly active user -- meaning there aren't too many people willing to pay for LinkedIn's premium features.

Besides, LinkedIn is something of a laughingstock because of its tendency to flood users with annoying emails ("Hi, I'd like to add you to my professional network on LinkedIn"). It has even had to settle a lawsuit from users who could no longer bear the spamming. Hundreds of tweets about the deal contained jokes about the notifications: Perhaps they will now be forever pinned to your Outlook e-mail box; or maybe Nadella and Microsoft founder Bill Gates were getting so many of the notifications that they decided to put them to rest by acquiring LinkedIn.

Nadella and Weiner appeared willing to add to the comedy by telling staff the companies were merging because they had similar mission statements. Don't most of them?

Nadella, with his usual penchant for opaque communication, couldn't adequately explain what the companies would do together. He hinted vaguely at opportunities for Microsoft's cloud-based office applications and customer relationship management software: 

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.

Weiner waxed ecstatic about LinkedIn's access to Microsoft's deep pockets ("Imagine a world where we're not pressured to compromise on long-term investment"), but he also provided a more specific explanation of how the symbiosis would work. He envisions using LinkedIn as the underlying contact database for Outlook, Calendar, Skype and other Microsoft products. And he mentioned the main opportunity:

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.

Most companies still develop these functions for themselves, struggling with buggy intranet portals or trying to bend third-party offerings to their unique needs. Microsoft realized early that it wanted to be in that space: Its Windows-based dominance in the workplace has been shaky lately, threatened by the rise of mobile and by Google's browser-based technology for employee workstations. In 2012, Microsoft paid $1.2 billion for Yammer, a service that allowed companies to build their own social networks, but Microsoft customers weren't really interested.

Now, Facebook has a better product: Its new corporate offering allows companies to build their internal communications based on the Facebook interface, familiar and simple to play with for most users -- and linkable to personal accounts, making it easy to keep track of work projects without sacrificing the privacy of communicating with friends and family. Facebook at Work may be something of an obscure product now, but one can imagine it taking over "corporate social" the way it conquered out everyday interaction.

Microsoft is not paying $26 billion just for LinkedIn's existing business. It's paying for an opportunity to sell more complete systems to corporate customers. In addition to cloud services, customer relationship management software and a system that can run the same applications on desktop and mobile devices -- which no one else is offering -- Microsoft's will soon offer an internal communication platform that comes with some sales lead generation and recruitment functions. Facebook cannot offer that to corporate customers: Unlike LinkedIn, it never focused on the professional aspect of its users' lives, and it's got the wrong data about them.

Nadella wants his company to own the modern office. No investment is too large in pursuit of that goal. That he and Weiner can communicate in the language of business manuals and self-help books is just a happy cultural accident: At least they will understand each other.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net