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In-Depth

Microsoft Buying LinkedIn Means Tension, Opportunity for Partners

If Microsoft's acquisition of LinkedIn closes as expected, partners may have new opportunities. But unique challenges add complexity to the already difficult integration inherent in big deals.

Partners are enthusiastic about the opportunities they see in Microsoft's $26.2 billion acquisition of the professional social network LinkedIn. Yet a pair of tensions close to the heart of the deal poses challenges that go beyond the usual issues you'd expect from the third-largest merger in U.S. tech history.

"Obviously, it's exciting for partners, it's exciting for customers," says Todd Schwartz, co-founder and co-CEO of SkyKick, an ISV partner with Microsoft that provides Office 365 migration and cloud management tools for other partners. Evan Richman, the other co-founder/co-CEO of SkyKick, believes the sheer size of the deal, which will bring LinkedIn's 433 million self-generated user profiles into the Microsoft fold, will have value for the Microsoft channel even before it closes toward the end of the year.

"I think it gives a big pop on overall awareness for Office 365. More innovative things will be coming. As a baseline, I think it's very helpful in customer conversations," Richman says.

Where the Magic Could Happen
Craig McQueen, the director of the Microsoft practice at Softchoice, a Microsoft Licensing Solutions Provider (LSP) with a fast-growing services business, is already looking ahead to new business opportunities in the deal.

"It's not necessarily about the [LinkedIn] application," McQueen says. "In the cloud, I find it's about the data and the information behind it. This acquisition adds all kinds of intelligence to the Microsoft productivity platform."

If the LinkedIn acquisition goes through, Jeff Weiner (left) would remain CEO of LinkedIn, reporting to Satya Nadella (center). LinkedIn Chairman Reid Hoffman (right) would sell his shares.

McQueen believes LinkedIn data could make Microsoft productivity tools stickier with customers. "They get hooked on the data that's available to them through the platform," he says. The Office 365 integration could take a while, and he expects Microsoft to deliver LinkedIn value through Dynamics CRM first. "The most obvious one is CRM Online. You're working with a customer. All of a sudden it could pull all that customer information or people-related information right into the work environment."

Just as channel partners are eager to start selling any integrations, Microsoft and LinkedIn executives are excited for Microsoft partners to get busy with LinkedIn, too. Microsoft CEO Satya Nadella positioned LinkedIn as primarily complementary to Dynamics and Office 365, two of Microsoft's businesses that are most dependent on partners.

"We are, of course, going to use the Microsoft field and distribution channel to scale the LinkedIn business, reach more audiences and customers," Nadella said in the announcement conference call in mid-June.

Although he was talking to an investor audience, Nadella might as well have been speaking directly to partners when he said: "You should think about how Dynamics, for example, gets enhanced with LinkedIn Recruiter, how Dynamics gets enhanced with Sales Navigator and social selling. How you can take some of the learning solutions of LinkedIn and then build out the full learning management solutions. The marketing solutions that LinkedIn has and our distribution." Some of those selling points help explain why Salesforce.com Inc. was also interested in acquiring LinkedIn.

Nadella detailed a few of Microsoft's deeper integration plans, several of which have implications for partners. First is taking LinkedIn profiles and making them the "social fabric" across all of Microsoft, so that when users of Outlook, Excel, Skype, PowerPoint, Word or SharePoint are looking up a contact, they see not only the Active Directory contact information, but the richer data from their LinkedIn professional network. Another is infusing the LinkedIn newsfeed with the projects an employee is working on. Also, Microsoft plans to give its Cortana digital assistant access to a user's LinkedIn network so, for example, as you walk into a meeting, Cortana could tell you what LinkedIn contacts you have in common with other participants.

Both Nadella and LinkedIn CEO Jeff Weiner were most enthusiastic about the potential for joining their "graph" projects. Microsoft Graph tracks the relationships between people, calendars, artifacts, projects, leads, prospects and other elements of business systems. LinkedIn has been working toward an economic graph for a few years. In the call, Weiner described it this way: "The economic graph envisions a profile in LinkedIn for every one of the 3 billion members of the global workforce, a digital representation for every company in the world, somewhere on the order of between 60 and 70 million companies, when you include small and [midsize] businesses." LinkedIn then wants to catalog all the job availabilities and the skill requirements and offer that skills training through its Lynda acquisition. Said Nadella, "If you connect these two graphs, that's when the magic starts to happen."

A few things stand in the way of that magic, beyond the regulatory approvals, however.

Roger McNamee, a co-founder of venture capital firm Elevation Partners, summed up the challenges in a CNBC interview as news of the deal broke in June. "It's really simple. Big deals don't work," he said. "These things are sold, not bought. It's not to say they can't do it. ... It will take real work, and I think quite a lot of time."

There's the corporate culture issue, which Nadella and Weiner seem to have a good handle on. The plan is to keep LinkedIn as its own unit, which Weiner will run. Nadella suggested that some of the problems with Microsoft's previous big mergers stemmed from integrating them too quickly into Microsoft's corporate structure and allowing the essence of the acquired unit to dissipate. Nadella has said continuing top-line growth of LinkedIn's core business is
important for Microsoft.

Then, even if the corporate culture survives, LinkedIn was a business with some problems. Unique visitor growth has been slowing and was completely flat over a few sequential quarters in 2015. Growth in ad sales has been slowing. Critics have called out LinkedIn's stock-based compensation for contributing to a $165 million loss on $3 billion in revenues in 2015. Even after a 50 percent bump due to the Microsoft offer, LinkedIn's stock price was still nearly 30 percent below its intraday high from February 2015.

All of these are relatively standard business-merger issues. The types of business that LinkedIn and Microsoft run are very different in ways that create special tensions, however. Some of the things that Microsoft and its partners want to do with LinkedIn's assets will be tricky for Microsoft to execute -- in one case without upsetting Microsoft customers and in the other case without upsetting LinkedIn customers.

The Recruiting Tension
Nadella is telling the world that LinkedIn and Microsoft share a mission. "When we talk about Microsoft's mission, we talk about empowering every person and every organization on the planet to achieve more. There is no better way to really realize that mission than to connect the world's professionals to make them more productive and successful. That's really what this merger and this acquisition is about," Nadella said.

Yet what's emerging for casual observers of LinkedIn is that its business is increasingly dependent on recruiters.

McNamee alluded to the recruiting business in his CNBC appearance. "From Microsoft's point of view, they have to pay attention to the fact that LinkedIn has never been a particularly profitable company, and their focus on job boards and hiring and all of that has shifted the value proposition in a way that I do think limits their ability to integrate it [with] Microsoft's enterprise suite," McNamee said.

Yes, the mission statement Nadella recited involves empowering individuals, but for now Microsoft's business remains substantially dependent on selling to corporate customers. Microsoft has to be extremely careful about the way it introduces LinkedIn to the product set. LinkedIn users don't pay for the most part, so having a recruiter get special access to their profiles is both expected and a feature, not a bug. For a CIO to pay Microsoft for enterprise products and to then have his or her employees become targets of LinkedIn recruiters, or have the employees get feature-rich access to job-hunting tools within their Microsoft applications, would be a serious bug, not a feature. Microsoft will have to be very careful about the way it introduces LinkedIn-based functionality to its products.

The User Trust Tension
Moving in the other direction, part of LinkedIn's popularity is based on trust in the platform. "Whether users knew it or not, LinkedIn was a fairly closed off social network," Gartner Inc. analyst Jenny Sussin said in a blog post. "If organizations wanted access to spins of LinkedIn data, they needed to purchase one of LinkedIn's enterprise solutions. This is a lot different than what it's like to work with Facebook's free page API or Twitter's public API that limits data volume but not access to specific types of metadata."

Should Microsoft start spraying this data all through Office applications everywhere, users are going to start pulling out. Handled poorly, LinkedIn will go from a valuable asset heading from 433 million profiles toward 3 billion to a worthless one headed for zero.

In his comments, Nadella twice used variations on the word "taste," describing "tasteful integrations" and "done tastefully." Clearly Microsoft is aware that it's important to use LinkedIn's treasure trove of data in a way that doesn't offend LinkedIn's user base.

Like much about this deal, that doesn't mean it will be easy. The business opportunities for partners are clear, but to actually happen they will depend on Microsoft and its LinkedIn unit successfully executing on a delicate balancing act.

Jeffrey Schwartz contributed to this report.