Microsoft’s acquisition of LinkedIn for more than $26 billion raised a lot of eyebrows for good reason. True, the acquired company is valuable and generating revenue but like most of the social networking space, it is far from healthy and one wonders if Microsoft could have gotten a better deal.
According to a colleague at the Enterprise Irregulars, Ross Mayfield, Ellen Levy reported that the deal can boast a number of superlatives if you look at it right, among them,
- The largest sale of a consumer Internet company in history;
- The largest sale of an enterprise software/cloud company in history;
- The third largest sale of a technology company since 2001; and
- The largest acquisition ever made by Microsoft.
With those attributes you might expect that LinkedIn is in a really hot sector and everybody wants to get it at any price. It looks like a regular feeding frenzy. Well, hold on big guy, here are some other numbers to consider.
Facebook announced revenue in Q1 2016 at $5.2 billion and profit of $1.51 billion tripling its year over year comparison according to a BBC News article that you can read here. Good for them.
But now consider Twitter, which according to CNN Money has lost a cool $2 billion since 2011. I wonder if this can be construed as an illegal campaign contribution to The Donald. At any rate, Twitter has never turned a profit. Yikes!
Then there’s LinkedIn. According to a Reuters article from February 4 of this year that you can find here, “LinkedIn Corp forecast first-quarter revenue and profit below Wall Street estimates as growth slows in its ads business and its hiring services face pressure outside North America, dragging its shares down 28 percent after the bell.”
The article goes on to say that, “Online ad revenue growth slowed to 20 percent in the fourth quarter from 56 percent a year earlier as automated ads offered by Alphabet Inc’s Google make its traditional ad displays less attractive to advertisers.” Finally there was this, “Its revenue forecast of about $820 million also missed analysts’ expectations of $866.9 million by a wide margin.”
Suddenly it looks like social media has become a winner take all market accentuated by Metcalf’s Law which states that the value of a network is directly proportional to the number of nodes i.e. users in this case. Why use anything but the biggest network unless it’s specialized as LinkedIn is because of its sales and HR focus.
This is happening despite the high acceptance of social media in everyday life, just ask The Donald. Social has rapidly become the thing everybody loves to use and no one wants to pay for. The advertising business model that most companies rely on doesn’t help.
Advertising has its limitations. There is a huge pool of money available for online ads but huge is not infinite. Just as there is lots of music available, people only want to pay for hits. If you combine Metcalf’s Law, which tends to limit the number of viable networks in this space and add in the reality of the fickle consumer you have an instant recipe for a declining market, which is what we see.
Don’t worry, social media is too important to go away. It’s so important that it has commoditized its market into a virtual singularity. That’s the bad news too. The social market looks like it can support 2 styles; say Facebook’s and Twitter’s. There might be additional vendors in the space for a long time especially if larger companies buy them and they function as loss leaders. That’s ultimately the vision I see for any social company not named Twitter or Facebook.
(Cross-posted @ Beagle Research Group)