Microsoft Acquires LinkedIn for $26.2B - My Analysis

In a singularly brilliant move, Microsoft just announced the acquisition of LinkedIn for $26.2 billion. Two questions are swirling in people's minds: why, and why did LinkedIn sell?

Why?

Let's do the why first.

Tech has become a 5-horse race: Google, Apple, Facebook, Amazon, and Microsoft being the five horses fighting for dominance of Techdom. Google dominates Search and Mobile; Apple dominates mobile; Amazon dominates Commerce and Cloud; Facebook dominates Social; and Microsoft, despite its size, dominates nothing.

That can't go on, if Microsoft wants to be in that 5-horse race, and win.

So, they have decided to acquire LinkedIn and get a key strategic position in Social.

However, their endgame is not Social, it is Cloud. Here's why.

LinkedIn's social network is of a professional nature. Most of this universe fits into the bucket of being enterprise cloud services users. I am using the word enterprise broadly, to include all businesses and organizations, including small businesses. I have long been of the opinion that LinkedIn's asset - it's incredible network - would monetize much better if they became a cloud services vendor, especially with an anchor position in CRM and related products. Imagine how powerful a combination Salesforce and LinkedIn would make with all the data in CRM being integrated fully with LinkedIn? The latter could charge a huge premium for that kind of CRM system.

Well, LinkedIn went in a different direction. Very interesting directions, including Media and Education, beyond its recruiting and marketing solutions. However, this move by Microsoft tells me that the Cloud Services strategy is something they do see, and it is the core idea behind this acquisition.

Why did LinkedIn sell?

LinkedIn has monetized largely with a freemium strategy. The problem is, today's Internet is such a bastion of free riders, that any company banking on freemium has a hard time scaling. I think, LinkedIn came to realize this limitation, and when Microsoft came knocking, they chose to do the cloud services strategy within Microsoft, as opposed to independently. Culturally, LinkedIn is a media company. Cloud Services would be a significant cultural shift. For Microsoft, it will be a natural.

What next?

Watch what happens in CRM. Microsoft needs to fortify its CRM position and deeply integrate LinkedIn into it. Marketo recently was acquired by a private equity firm. That company would be a natural one to bolt onto the LinkedIn acquisition. I had thought that LinkedIn could start down the Cloud Services path by acquiring Marketo, and still stand by that recommendation.

Conclusion

Nothing hugely exciting has happened in Tech in a while. This deal injects energy into Microsoft, the weakest of the five top horses thus far. Let us see what they do with it.

Note: NYT has an interesting analysis on LinkedIn's compensation structure that is noteworthy. The issue, as I point out, is that LinkedIn's freemium business model isn't scaling. All the other issues emanate from that core trend.

Photo courtesy: Aidan Jones