Episode 14 LinkedIn

Summary Notes


In this episode of "Acquired," hosts Ben Gilbert and David Rosenthal, along with guest speakers, delve into the significant acquisition of LinkedIn by Microsoft just two days prior to recording. They explore the strategic implications of the $26.2 billion deal, considering how Microsoft can leverage LinkedIn's powerful network effect to enhance its cloud services and enterprise software offerings. The hosts speculate on the potential integration with Microsoft's existing products, such as Office 365 and Dynamics CRM, and the opportunities for Microsoft to execute on LinkedIn's untapped potential in areas like sales and marketing. They also touch on the importance of LinkedIn's professional data and discuss the challenges and risks associated with such a large-scale acquisition. Additionally, the episode covers the broader impact of the acquisition on the tech industry, Microsoft's shift away from being solely a Windows company, and the role of mergers and acquisitions in defending competitive advantage. The conversation is interspersed with insights into the importance of company identity, employee mobility, and the utilization of LinkedIn's API. The hosts conclude with a positive outlook on the acquisition, grading it highly while acknowledging the execution risks involved.

Summary Notes

Network Effects and Technology Acquisitions

  • Speaker A introduces the concept of network effects to Ben Gilbert.
  • Ben Gilbert acknowledges the need to cut an earlier part of the conversation.
  • The discussion transitions to the main topic of the episode: LinkedIn's acquisition by Microsoft.

"You are not yet schooled in the power of network effects, young Gilbert." "I will cut that."

The quotes highlight the importance of understanding network effects in technology and business, which often play a crucial role in the success of tech acquisitions like LinkedIn's by Microsoft.

The Nature of the "Acquired" Podcast

  • Ben Gilbert and David Rosenthal are the hosts of the "Acquired" podcast.
  • The podcast typically discusses successful technology acquisitions.
  • The episode focuses on LinkedIn's acquisition by Microsoft, which is recent and speculative at the time of recording.

"Welcome to episode of acquired, the podcast where we talk about technology acquisitions that actually went well. I'm Ben Gilbert." "This episode is not necessarily about a technology acquisition that actually went well. We have no idea how it went. It is huge and it is recent."

The quotes explain the usual theme of the podcast and set the stage for the episode's discussion about the LinkedIn acquisition, which is a deviation from their typical content due to its recent and speculative nature.

Evolution of the "Acquired" Podcast

  • The "Acquired" podcast may evolve to cover a broader range of tech acquisitions, not just the successful ones.
  • The hosts express their love for storytelling and the narratives behind tech acquisitions.

"And in fact, I think this may change the timbre of what this show is about. I think at some point here we might rename this to just a show about tech acquisitions because we're doing things that didn't go well." "We love stories. Here we do."

The quotes indicate the hosts' willingness to expand the podcast's scope to include a variety of tech acquisition stories, successful or not, due to their intrinsic interest in the stories behind these events.

Pilot's Role in Startup Accounting

  • Pilot is a company that provides accounting, tax, and bookkeeping services for startups and growth companies.
  • Pilot is recognized as the largest startup-focused accounting firm in the US.
  • The hosts of "Acquired" endorse Pilot's services and discuss the importance of startups focusing on their core product and outsourcing other functions like accounting.

"Pilot is the one team for all of your company's accounting, tax and bookkeeping needs, and in fact, now is the largest startup focused accounting firm in the US." "Pilot both sets up and operates your company's entire financial stack. So finance, accounting, tax, even CFO services like investor reporting from your general ledger all the way up to budgeting and financial sections of board decks."

These quotes describe Pilot's comprehensive services for startups, emphasizing the company's growth and the value of outsourcing non-core functions to focus on what differentiates a startup's product or service.

Encouraging Audience Engagement

  • The "Acquired" podcast hosts encourage listeners to review the podcast on iTunes and share it on social media.
  • They mention posting the podcast on Product Hunt and invite listeners to upvote it.
  • The hosts also invite listeners to join their Slack group for further interaction.

"Please review us on iTunes. It makes a huge difference and it's what makes the show grow and tick." "Share it on Twitter, Facebook or even LinkedIn. Please share it on Microsoft LinkedIn whenever you can."

The quotes are calls to action for the audience to engage with the podcast through reviews, social media sharing, and joining the podcast's online community, which helps grow the podcast's reach and impact.

Follow-up on Previous Episodes

  • The hosts introduce a new section for follow-ups on news related to topics from previous episodes.
  • They discuss Snapchat's advertising API and its potential impact.
  • A personal experience with Facebook's instant articles and native ad units is shared.

"Sometimes we'll have this, sometimes we won't. But adding a section to the show on follow-ups on previous shows." "I tapped on what looked like a Facebook instant article this week and it expanded into a native ad unit."

These quotes introduce the concept of revisiting topics from past episodes to update listeners on new developments, using Snapchat's advertising API and Facebook's instant articles as examples.

LinkedIn's Origin and Growth

  • LinkedIn was among the first companies to emerge from the "PayPal Mafia" after PayPal's acquisition by eBay.
  • LinkedIn's early growth strategy involved scraping users' address books to quickly expand its network.
  • The company raised significant funding from Sequoia and Greylock and faced a lawsuit due to its aggressive growth tactics.

"LinkedIn, I assume almost everybody listening to this episode is a member of LinkedIn, but let's go back to when it was started." "It is a social network, and social networks are hot then."

These quotes provide a brief history of LinkedIn's founding and its context within the social networking boom of the early 2000s, highlighting the company's initial strategies for growth and funding.

LinkedIn's Business Model and Monetization

  • LinkedIn's primary revenue stream is not from advertising but from monetizing recruiters through its talent solutions.
  • The platform is valued for its data and professional network, rather than user engagement metrics.
  • LinkedIn's IPO prospectus acknowledged that most members do not visit the site monthly, yet the company is able to monetize effectively.

"LinkedIn has never been primarily an advertising based network. They've advertising based business. They've had ads as part of their business line, but most of their revenue comes from monetizing recruiters." "A substantial majority of members do not visit the website on a monthly basis."

These quotes discuss LinkedIn's unique business model, which focuses on providing value to recruiters and professionals rather than relying on traditional advertising revenue based on user engagement.

LinkedIn's Recruiter Tool

  • LinkedIn Recruiter is an expensive product, costing $900 per month per seat.
  • Essential for HR and recruiting, considered a "table stakes" tool in the industry.
  • Dominates the market by creating an expectation that recruiters must have it to be effective.

And it's super. As Ben was talking about, this is a super expensive product that they sell to recruiters. The full product is $900 a month per seat.

This quote highlights the high cost of LinkedIn's Recruiter tool, emphasizing its significance and dominance in the recruiting market.

But as, like, completely, they have just knocked it out of the park in executing on this. If you are a recruiter operating in the HR world today, you need to have LinkedIn recruiter. It's like a joke if you don't.

Speaker A describes the success and industry necessity of LinkedIn Recruiter, suggesting that not having it would be detrimental to a recruiter's effectiveness.

LinkedIn Premium

  • LinkedIn Premium costs approximately $100 a month, or $1,200 a year.
  • Offers expanded network access beyond second-degree connections, beneficial for venture capitalists, business development, and sales professionals.
  • Accounts for about 20% of LinkedIn's revenue.

It's $100 a month, about $1,200 a year.

Speaker A states the cost of LinkedIn Premium, suggesting it's a significant investment for users.

And LinkedIn Premium, there are different flavors of it, but gives you access to broaden out beyond your second-degree network on LinkedIn. And that's great. I use it all the time. Basically, this tool was meant for venture capitalists, I think, and business development folks and sales folks. And that's about 20% of their revenue, too.

Speaker A explains the benefits of LinkedIn Premium and its target audience, as well as its contribution to LinkedIn's overall revenue.

LinkedIn's User Base and Growth

  • LinkedIn has 106 million active users and about 400 million registered users.
  • Growth and execution were strong as a private company.
  • Reed Hastings stepped aside as CEO in 2007, replaced by Dan Nye, who had a short tenure.

106,000,000 active users. Just about 400 million registered users on the site.

Speaker A provides statistics on LinkedIn's active and registered user base, indicating the platform's extensive reach.

Reed actually steps aside as CEO, and they bring in an outside CEO to run the company.

Speaker A mentions a significant leadership change at LinkedIn, which is a notable event in the company's history.

LinkedIn's IPO and Stock Market Performance

  • LinkedIn went public in May 2011, with shares initially priced at $45 and trading up to $94.25 on the first day.
  • The IPO was a watershed moment, signaling the financial viability of social networks.
  • LinkedIn's stock performed well for several years until a significant drop in February 2016.

In January of 2011, the company finally files for an IPO. They go public. In May of 2011, they price the IPO at $45 a share. It trades up to $94.25 by the end of the first day of trading.

Speaker A discusses LinkedIn's successful IPO and its impact on the perception of social networks in the financial market.

Until February 5, 2016? Just a few months ago was on a Friday, both LinkedIn and Tableau announced fourth quarter 2015 results and expectations for the year to Wall street. And it was like Black Friday for software companies.

Speaker A recounts a significant stock market event where LinkedIn's share price dropped dramatically, affecting the valuation of other software companies.

Microsoft's Acquisition of LinkedIn

  • Microsoft acquired LinkedIn for $26.2 billion, considered a discount compared to its value a year prior.
  • The acquisition was seen as an opportunity to integrate LinkedIn's data with Microsoft's products.
  • Speculation on whether the acquisition was a good move for Microsoft, LinkedIn, and shareholders.

So our job today is to speculate and think about was this good, was this a good move for Microsoft, for LinkedIn, for shareholders?

Speaker A prompts a discussion on the implications of Microsoft's acquisition of LinkedIn, questioning the strategic benefits for all parties involved.

In what was got to be one of the best kept secrets of major m and a of all time, Microsoft announces that they are acquiring the company for $196 per share, which comes to $26.2 billion total, which is a lot of money, but half of what LinkedIn was worth a year ago.

Speaker A reveals the acquisition price and notes the secrecy surrounding the deal, highlighting its significance in the tech industry.

Microsoft's Strategic Play with LinkedIn

  • Microsoft's previous interest in Salesforce indicates a strategy to strengthen their identity management and enterprise integration.
  • LinkedIn's acquisition is seen as a data and product acquisition to enhance Microsoft's business lines.
  • The integration is expected to extend identity management beyond the company level, reflecting the modern workforce's mobility.

So the rumors, and these are just rumors, we won't know, maybe we could do a show on this at some point. But that would be fun. The rumors were that Microsoft offered somewhere between 50 and $55 billion to acquire Salesforce a little over a year ago.

Speaker A references Microsoft's rumored bid for Salesforce, suggesting a strategic pattern in acquisitions aimed at enhancing their enterprise offerings.

You have to have a way to be able to access and leverage all that other.

Speaker B discusses the need for identity management that extends beyond a single company, which is a key consideration in Microsoft's acquisition of LinkedIn.

The company doesn't own your identity anymore. You own your identity and you lend your skills and reputation to the company while you're there.

Speaker B emphasizes a shift in the concept of employee identity, which is now owned by the individual rather than the company, a trend that Microsoft's acquisition of LinkedIn may capitalize on.

Identity in Office 365 and Dynamics CRM

  • Understanding a person's complete work history is crucial in sales.
  • Microsoft previously had limited identity view in their systems.
  • LinkedIn's accurate professional profiles provide a holistic view of identity.
  • Accurate information on LinkedIn is incentivized, as it benefits both the user and LinkedIn's revenue model.

"The magical thing that LinkedIn nailed is all the incentives are aligned for them to make money off of you wanting to make all of your information accurate."

The quote highlights LinkedIn's successful strategy in encouraging users to maintain accurate profiles, which is beneficial for sales and marketing purposes when integrated with CRM systems.

Power of Network Effects

  • LinkedIn is a prime example of network effects in a professional context.
  • The network is considered almost impossible to disrupt.
  • LinkedIn's network is underutilized for sales, biz dev, and partnerships.
  • Microsoft's acquisition could leverage LinkedIn's network more effectively than LinkedIn itself.

"The way I think about LinkedIn is it's such a canonical example of the power of a network effect and the value of the asset of LinkedIn's network that they've built."

This quote underscores the strength and value of LinkedIn's network, suggesting that its network effect creates a durable competitive advantage.

LinkedIn's Monetization and Microsoft's Opportunity

  • LinkedIn's primary monetization was through recruiting, not ads.
  • Sales Navigator is LinkedIn's product for sales and lead generation.
  • Integration with CRM systems is crucial for adding value in sales.
  • Microsoft can integrate LinkedIn with Dynamics CRM and other productivity tools.

"Should LinkedIn sales navigator, for example, sell into 100% of Microsoft Dynamic CRM user base? A good portion of this deal would be paid for."

The quote from Ben Thompson captures the potential financial benefit of integrating LinkedIn's Sales Navigator with Microsoft's Dynamics CRM user base.

Microsoft's Strategic Defense with LinkedIn Acquisition

  • Microsoft's acquisition is partly defensive, to protect their productivity mission.
  • Companies must consider M&A as a competitive strategy.
  • Speculation about other potential bidders for LinkedIn, possibly Salesforce.
  • The acquisition's cost and financing methods, including debt due to repatriated cash issues.

"You got to be thinking with the hat not of, boy, is this worth 25, $26 million, but more with the hat of what is the opportunity cost of it going to someone else."

This quote reflects on the strategic considerations Microsoft had to weigh regarding the acquisition cost versus the potential loss if a competitor like Salesforce acquired LinkedIn.

Microsoft's Transition from Windows to Cloud Services

  • Windows is no longer seen as Microsoft's future.
  • Microsoft is focusing on mobile-first, cloud-first strategies.
  • LinkedIn's business tools complement Microsoft's cloud services offering.
  • There is skepticism about Microsoft's ability to integrate large acquisitions successfully.

"So Microsoft has admitted that Windows is not the future, that they are not the windows company going forward."

This quote signifies Microsoft's strategic shift away from relying solely on Windows towards a broader cloud services approach, which the LinkedIn acquisition supports.

LinkedIn's Challenges and Alternative Futures

  • LinkedIn's increasing stock-based compensation was diluting shareholder value.
  • If independent, LinkedIn would have faced challenges in monetization and equity management.
  • The acquisition by Microsoft averts these problems and opens new strategic opportunities.

"Stock based comp at LinkedIn went from 13 million a quarter in 2012 to 222,000,000 per quarter in the first quarter of 2016."

This quote points out the significant increase in stock-based compensation at LinkedIn, illustrating a financial challenge that the company faced prior to the acquisition.

The Unassailable Position of LinkedIn's Network

  • LinkedIn's network effect creates a significant barrier to entry for competitors.
  • The network's value lies in its uniqueness and irreplaceability.
  • Microsoft's acquisition is seen as a strategic move to capitalize on this network asset.

"There is so few real, true network effects that exist in technology. And LinkedIn is so powerful."

This quote emphasizes the rarity and strength of LinkedIn's network effect, which is a key reason for Microsoft's interest in the company.

LinkedIn's Market Dominance and Network Effects

  • LinkedIn's product quality may be subpar, but its user base ensures its continued dominance.
  • Users stay on LinkedIn because it's where their professional network exists, making it difficult for competitors to draw them away.
  • Vertical platforms like GitHub and AngelList are chipping away at LinkedIn's dominance by creating specialized professional networks.
  • Behance, acquired by Adobe, is another example of a vertical platform in the creative industry.
  • Building a broad, horizontal professional network now would be futile due to LinkedIn's established network effects.

"And LinkedIn is such the classic example, it looks like crap. Let's all be honest, the product is really bad at this point." "Yeah, it's really bad, but nobody will ever beat it. I will always use it. I'll use it every day because everybody I need to interact with is on it."

These quotes highlight LinkedIn's poor product quality but emphasize the platform's entrenched position due to its extensive user base.

Strategies for Competing with LinkedIn

  • The only viable strategy to compete with LinkedIn is to build vertical networks that gain critical mass within specific industries or professions.
  • Critical mass is essential for a network's value, and once achieved, it provides a defensible position against competitors.
  • Examples include GitHub for developers and AngelList for startups and investors.
  • Adobe's acquisition of Behance is an example of a successful vertical professional network.

"If you were going to attack LinkedIn, this is the only way to do it because it's the only way where you can actually get enough critical mass."

This quote stresses the importance of achieving critical mass in a specific vertical to effectively compete with LinkedIn's broad professional network.

Microsoft's Acquisition of LinkedIn and API Potential

  • LinkedIn's acquisition by Microsoft could lead to a more open LinkedIn API, which would enable innovation and integration with other products.
  • Microsoft, being developer-focused, may leverage LinkedIn's network in various verticals and through integration with its own products.
  • Venture capital firms and other industries could benefit greatly from a more accessible LinkedIn API.
  • The discussion touches on the potential tension between maintaining LinkedIn's network effects and integrating with non-Microsoft products.

"Man, could this mean the dawn of a real LinkedIn API? Because Microsoft has a very different set of motivations than LinkedIn." "So long as they keep the network effect locked."

These quotes discuss the potential benefits of a more open LinkedIn API under Microsoft's ownership while acknowledging the importance of preserving LinkedIn's network effects.

The Role of Network Effects in Horizontal Platforms

  • Horizontal platforms with strong network effects are nearly impossible to disrupt by creating another similar platform.
  • The conversation suggests that the era of horizontal platform disruption is over once network effects are established.
  • Instead of trying to build a better LinkedIn, focusing on niche markets or verticals is a more promising strategy.

"You don't disrupt them by building another horizontal platform."

This quote encapsulates the futility of attempting to disrupt established horizontal platforms with strong network effects by creating direct competitors.

LinkedIn's Defensiveness and Microsoft's Integration Strategy

  • LinkedIn has historically been protective of its network, limiting API access to prevent data exfiltration.
  • Microsoft's acquisition might change LinkedIn's stance on API openness, benefiting various industries.
  • The integration of LinkedIn with Microsoft's products could encounter challenges if it conflicts with Microsoft's other business interests.
  • The conversation speculates on whether Microsoft will adopt a more open approach under Satya Nadella's leadership.

"LinkedIn. They're smart guys, right? And gals, they get this. So what has LinkedIn been more terrified of than anything else in its history. It's people exfiltrating the network off of LinkedIn and stealing it out and bootstrapping it and competing with them."

This quote highlights LinkedIn's historical defensiveness about its network and data, which could change with Microsoft's different approach to API access and integration.

Microsoft's Acquisition of LinkedIn: Evaluation and Future Prospects

  • The acquisition is seen as positive due to LinkedIn's unique and defensible position, despite its high cost.
  • The success of the acquisition will depend on Microsoft's execution of integration and innovation.
  • The speakers express confidence in Microsoft's new leadership and their ability to navigate the complexities of such a large acquisition.
  • The conversation includes speculation on the long-term value of LinkedIn to Microsoft and the potential risks involved.

"So I mean, I think today, sitting here, I say this is a great buy because a year ago, know LinkedIn was worth twice this much and it's this incredibly unique, incredibly defensible asset that is now part of Microsoft."

This quote reflects the speaker's positive view on Microsoft's acquisition of LinkedIn, considering the platform's defensible market position and the potential for successful integration.

The Code Conference and Industry Visionaries

  • Elon Musk and Jeff Bezos's talks at the Code Conference are highlighted for their insights into the future and technology.
  • Musk's interview is praised for making complex topics like SpaceX's operations approachable and understandable.
  • Bezos's discussion on focusing on what won't change for customers is linked to LinkedIn's enduring value proposition.
  • The speakers appreciate the visionary perspectives shared at the conference and recommend the talks to listeners.

"So go watch the Elon Musk interview at the code conf. He just has this incredible way of dancing back and forth between total dude in a space suit that is talking about the future in a way where."

This quote recommends watching Elon Musk's interview for his ability to articulate complex ideas in an engaging and accessible manner.

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