1. Microsoft’s purchase of LinkedIn
How LinkedIn makes money and its market share
LinkedIn is a public company with a simple mission to connect the world's professionals
with one another. There are 3 main sources of revenue: talent solutions, marketing
solutions, and premium subscriptions. Specifically, the company makes money by
selling advertisements, recruitment services, subscriptions, and selling access of user
data to corporations.
1) Talent Solutions: The LinkedIn recruiter program is used by corporate clients
and organizations to find exceptional candidates for jobs. Recruiters from these
corporations or organizations also pay LinkedIn for LinkedIn Recruiter which
includes Advance Searches, Project Management, InMail, Collaboration, and
LinkedIn Talent Pipeline. Also included within Talent Solutions is Referrals, Job
Slots, Recruitment Media, Career Pages, LinkedIn Job Postings, Job Seeker,
Recruiter Lite and Lynda.com under learning and development. Any corporation
that has an account can see potential candidates who are either actively or
passively looking for a job similar or inline with what they have to offer. It is
LinkedIn’s top operating priority because it is its largest revenue producer. The
company invests a lot each year to make the system easier to use for
corporations and to gain leverage on its connection database, (The company
acquired Bright.com in 2014 to match recruiters with candidates resumes,
enhancing the Talent Solutions product). Talent Solutions is an expensive
product, costing roughly 8,200 dollars a year, therefore resulting in only profitable
corporations and recruiting agencies acquiring it. There are two plans of
recruiting: Recruiter Flagship and the Recruiter Lite (which does not include
custom workflows and team collaboration).

2. 2) Marketing Solutions: a second channel of revenue generation comes from
advertisement. Displays are 300x500 and 728x90 banners which you can see on
the website. Marketing Solutions includes Sponsored Updates, Linkedin Ads,
Sponsored InMails, Display Ads, Ads API, and Elevate. Sponsored Updates are
content-rich promoted updates that enable advertisers to share and amplify
content marketing message to a target audience, that appear on the desktop and
on the mobile stream of any targeted individual. LinkedIn Ads is the self-service
platform for clients to build and target their advertisements. Marketers can
develop their ads within LinkedIn’s self-service platform or they can pay LinkedIn
to build the advertisements for them. This allows companies to reach a target
audience at the right time with firms best articles, PDFs, images, and reports.
3) Premium Subscriptions: allows users to see who is accessing their accounts,
use InMail Messaging services, premium searching, how you rank in terms of
profile views compared with your colleagues that you are connected with, and
saved search alerts. Within Premium Subscriptions is the Sales Navigator which
allows sales professionals with the ability to quickly find, qualify and create new
opportunities, and can help sales management accelerate the social selling
capabilities of their sales organization.
Major revenue comes from the Talent Solutions division. Human resource departments
and recruiting agencies pay LinkedIn up to $8,200 a year for this program. Ten years
ago Premium Subscriptions was the leading revenue driver for LinkedIn, while this was
occurring the company was operating at a negative net income. By 2010, Talent
Solutions had become the main revenue driver and the company started operating at a
positive net income.
In 2015, LinkedIn makes on average $1.30 every hour spent on site per user. In
comparison, Facebook makes 6.2 cents per user for the same time frame. LinkedIn’s
overall revenue increased by 35% in 2015. LinkedIn got a boost in revenues from its
acquisition of Lynda.com (costing $1.5 billion), an education portal. LinkedIn has an

3. advantage over the social media sites because it makes money from user data even
when users are not actively using their website. The Talent Solution division reported
spending of 33% of its income on sales and marketing expenses, compared to Google
and Facebook, who only spent 15% and 12% on sales and marketing on their
competing divisions, with the increased spending, it has been a benefitting factor in
keep LinkedIn on top compared to Google and Facebook’s equivalent.
In 2014, total revenue of LinkedIn increased 45% from 2013, 61% of the revenue
representing $345 million came from recruitment services which were sold to both
recruiting agencies and corporations. Marketing Solutions generated 19%, $109 million,
of the total revenue. Premium Subscriptions generated the remaining 20%, $114 million.
While it is free to join for a standard membership, LinkedIn sells premium subscriptions
to job seekers, businesses, sales professionals, and recruiting agencies. Individuals
who have a premium subscription can increase their search results, send messages to
LinkedIn emails, and not just receive them. It also lets people see profiles of who
viewed their page and contact members outside their network. Membership for LinkedIn
is free and is what the majority of its users choose, however the company makes an
exceptional profit from its minority users who are paying for the premium subscription
services. In 2014 15% of their total users had premium accounts. At the end of the third
quarter of 2014, premium accounts demonstrated 60% of total revenues from the U.S
users, while 40% is from their international users. As of 2014, LinkedIn is available in 23
languages and has 200 million users coming from over 200 countries.
In 2013, total revenue increased by 47% from 2012. Also, based on LinkedIn’s quarterly
report, Talent Solutions represented 57% of total revenue. The Recruiter Corporate
package cost was $8,600 annually and if a company decides to pay month to month it
was about $10,200 on an annual basis. LinkedIn had about 22,000 corporate clients, up
57% from prior year. While it might seem like a big number, it is a relatively small base
of LinkedIn’s memberships. It is about 260 million registered users, or in other words
10,000 users for every corporate client. Each year the company receives most of its

4. revenue from Talent Solutions meaning most of its money comes from a very expensive
product targeted to a small percentage of its audience.
As of year to date, revenues have increased 31%. Estimated revenue per user is about
$0.60. Estimated revenue per active users of Facebook and Twitter are more than
LinkedIn, however the company’s content attracts users to hang out on their website
longer, and because Facebook generates significantly more revenue than LinkedIn, its
revenue per user should be higher. Talent Solutions drove more than half of the
company’s revenue in the past quarter, $161 million, about 65% of its total revenue. The
company continues making money mostly from corporations rather than from
individuals. While other social networking sites, Facebook and Twitter, make most of its
money from “advertising”, LinkedIn has other sources of revenue. Marketing Solutions
makes around 23% of company’s revenue. Premium Subscriptions accounts for about
20% of total revenue.
Competition
LinkedIn faces extreme competition from Facebook who launched “Facebook at Work”
in 2015 which is a comparable product to LinkedIn’s Talent Solutions product, because
of Facebook’s large revenue stream, anything they compete in they go at with an
aggressive hand. Another major competitor was Connectifier, until they bought it. Before
that, LinkedIn mainly competed with Xing in Germany and Viadeo in France, but they
have not faced strong challenges from these local players and still do not today. Viadeo
is mainly used in France and China and doesn’t have a strong presence in the United
States. Even though Viadeo is very popular in France, having around 20 million of
French users, those users also have an account at LinkedIn. Based on the recent 10-K
report LinkedIn has 467 million users.
Facebook’s social networking popularity creates a big threat for LinkedIn. In 2015
LinkedIn had 396 million members, Facebook had more than a billion active monthly

5. users. Facebook has a big potential for its professional networking product when used
in conjunction with its database, it can attract more corporate users and employees than
LinkedIn may potentially be able to. It is challenging for Facebook to surpass some
restrictions, such as being banned from many workplaces currently. However, if it
succeeds and is able to integrate, it will be easier for Facebook to surpass LinkedIn.
Facebook at Work is not popular like LinkedIn in terms of recruiting programs, people
see Facebook’s brand mostly as social networking rather than professional. LinkedIn is
the most popular recruiting website, which has 51,000 corporate clients. Talent
Solutions is the main product of LinkedIn and its success and profitability depends on
how many corporate customers the company can reach. By the end of 2016 LinkedIn
expects to have total 58,000 corporate clients and to continue to grow their numbers
over the years.
While LinkedIn uses different innovative ways to identify potential candidates in their
database, new startups/players are redefining the social networking space through
innovation. Connectifier uses artificial intelligence and a search software that searches
across different sources to identify potential job candidates. (Artificial intelligence-the
theory and development of computer systems able to perform tasks that normally

6. require human intelligence, such as visual perception, speech recognition, decision-
making, and translation between languages.) Connectifier looks through different social
media and identifies the most recent information of the users. Stale data is one of the
biggest issues LinkedIn had. For that reason in February 2016 LinkedIn acquired
Connectifier for $100,000,000. LinkedIn purchased Connectifier not just for its
technology but also for its database. In 2015, Connectifier claimed to have 30% more
data points per person and hoped to have 100 percent more by the end of the year.
In October 2016, Facebook renamed its social network for the workplace, and now calls
it “Workplace”. It is now available for any organization and is now having an eye on
enterprise market. Workplace has a free 3 months trial and then it charges per active
users. Price varies on the size of the company.
Non profit organizations and education institutions will get access at no cost. Facebook
wants to bring more capabilities from its partnerships, including Deloitte, TBWA and
Okta. More than 1000 companies tested Workplace, and Facebook tends to make
updates based on their feedback. Workplace has same basic features that Facebook
has, for example, direct messages, groups, reactions, live videos, in addition to its
corporate features like dashboard analytics and identity providers. Now Facebook’s rival
is Slack, which offers a free app with limited features, and it charges for premium
features at a rate of $15 per month per active user.

7. Slack is a collaboration tool which allows different teams to join chat rooms, without
using internet relying chats. Chat rooms offer researchable content, files, group
conversations, and social connections. The company’s major integrations include but
are not limited to Google Drive, Dropbox, Box, Trello, Crashlytics, Heroku, etc. In 2016,
LinkedIn integrated with Slack to increase collaboration and make a workplace easier.
With all these acquisitions and partnerships, LinkedIn had become a very attractive
company to purchase. LinkedIn’s market share increased over years, its Talent Solution
and Premium Subscription products make up most of their revenue and are the most
attractive tools for other CRMs to integrate them into their own products. Microsoft and
Salesforce battled against each other on the purchase, and finally Microsoft won by
making the bigger offer of $26.2 billion dollars. Both companies want LinkedIn for its
massive network of more than $433 million professional users in 200 countries and with
its artificial intelligence, which they can be used for sales, marketing, and collaboration
services.
Benefits from the acquisition
The value of social networking has risen in corporate America, that is why companies
like LinkedIn and Twitter have become so attractive to Microsoft and Salesforce. Social
networking services became an essential tool to understanding big businesses’
customers. After Microsoft announced the acquisition of LinkedIn, Salesforce has
decided to go after Twitter.
Salesforce is the number one product in the CRM space (customer relationship
management; it is an app that helps one manage relationships with current and
prospective customers/clients) and before trying to acquire LinkedIn, Microsoft wanted
to acquire Salesforce but didn’t offer enough money (they offered $50 billion roughly,
and Salesforce wanted around $70 billion). With LinkedIn, Microsoft will get more tools

8. to compete with Salesforce. Microsoft will be able to connect LinkedIn with their
Microsoft Dynamics CRM software.
The main benefits from the acquisition is gaining leverage from the CRM integration.
LinkedIn has a huge professional database that can be connected with Microsoft
Dynamics CRM or Salesforce.com. By acquiring LinkedIn, Microsoft prevents
Salesforce from purchasing the company and gaining leverage in the professional social
networking. Also, after purchasing Connectifier, LinkedIn became very attractive
because of its artificial intelligence which allows a company to have up to date user
profiles without users having to update their profiles.
Reasons of why LinkedIn sold to Microsoft
Microsoft and LinkedIn share a common mission — empowering people and
organizations to be more productive. For Microsoft, empowerment comes from the use
of cloud-based Office 365 and Dynamics CRM software. For LinkedIn, it comes from
connecting professionals in a business-based social network. Shareholders of LinkedIn
had an interest in the acquisition, for example, Jeffrey Weiner gained roughly $3.2
million after the announcement (solely from his personal stock position appreciating)
because Microsoft wants to buy them at such a large premium (49.5%). Also, LinkedIn’s
stock was struggling, losing 43% of its value as of early 2016 to the date of the
announcement of the acquisition. Business growth was slowing down as of 2012 and
each year the business as a whole still gained revenues, however at a much slower
pace. Mainly, LinkedIn sold themselves to Microsoft since they offered more than
Salesforce.
Industry Evaluation
The cloud industry is shifting towards “one solution provides all” with the big 4 (Google,
Facebook, Apple, Amazon) driving an acquisition spree that aims to integrate as much
context based information about users as possible into their respective products.

9. Companies in the industry are doing this by integrating different product offerings as
part of their main business in order to fulfill users’ needs without them having to use of a
third-party service. By doing so, they are maintaining strong networking effects by
making the switching costs as high as possible for users. This reverts back to the “bring
your own stack” ideology where companies, in order to make a dent into the market
share of their competitors, need to compete on the same level.
With so much information about users, it only makes sense for Microsoft to want to
leverage that and offer it as part of their CRM product (Dynamics) in order to deliver a
better product experience to the end-users.
On top of that, Microsoft wants to solidify its professional user-base stronghold by
integrating its existing CRM into Linkedin’s data (Sales Navigator) as well as pushing it
to its existing users. Potentially, it could phase out the Salesforce integration that
LinkedIn currently has in order to corner the market.
Microsoft’s Acquisitions
Microsoft has over 185 recorded acquisitions to date. Most of its acquisitions are done
in an effort to internally integrate products or technologies in order to move to market
faster. One example of such an acquisition is Genee, Microsoft’s prior acquisition which
was announced in August 2016. Genee is a virtual assistant that uses context based
information to help end-users better prioritize their tasks and schedules. It was acquired
by Microsoft as part of an effort to make their own virtual assistant, Cortana, more
relevant in a world where Artificial Intelligence is used to make our lives easier. We
have yet to know how successful will Genee integration into Cortana be.
One acquisition for which we do have enough information to judge whether or not it
was a valuable one is Skype. Microsoft bought Skype in May 2011 for $8.5 billion in an
all cash transaction. The transaction at the time was perceived quite expensive as
Skype was only reporting $860 million in revenue, which would put Microsoft as paying

10. a 10x multiple to acquire the company. Interestingly, Skype had filed to go public a year
before the deal with Microsoft went through, however, the newly appointed CEO (Tony
Bates, from Cisco), put the IPO plans on hold in order to focus on increasing Skype’s
revenue numbers.
It is reported that Microsoft acquired Skype Technologies mostly for its technical
abilities. Microsoft did not have access to Voice Over IP and Peer-to-Peer technology
back in 2011 and buying that intellectual property as part of Skype’s acquisition was a
strategic move from Microsoft. Skype’s plans at the time were focused on aggressive
growth with the optic of being available “anywhere, anytime”, especially on
smartphones, something Microsoft was hugely lacking.
More than just the technology powering Skype’s platform, Microsoft also saw an
opportunity in Skype’s active user base of 124 million monthly users. The acquisition
was also made in order to prevent others from acquiring Skype, notably Google, which
was also bidding for the company. Facebook was also thought to be interested in
acquiring it but history tells us that Zuckerberg had no interest in buying the company.
Regardless, he got access to the technology behind Skype as Microsoft is an investor in
Facebook.
Today, Skype has 300 million users with 4.9 million DAU (Daily Active Users). It has
grown substantially over the past 5 years. Microsoft integrated Skype as part of their
enterprise products as well as part of their Windows OS which drove its usage
significantly. It also allowed Microsoft users who wished to make international calls to be
able to do so for free or for a much cheaper price. Microsoft’s purchase of Skype was a
successful one as it allowed the company to compete with Google, Cisco and Apple in
the video chatting space and also allowed it to create a niche for itself in the VoIP
market, which Apple never touched and Google is barely present in.

11. Another acquisition that is interesting to analyze is Yammer. Microsoft acquired
Yammer in 2012 for $1.2 billion in an all cash transaction. Yammer is an enterprise
social network that allows people within the same organization to collaborate with each
other in a more efficient way than the traditional emails and in-person meetings. The
acquisition by Microsoft was made in an effort to push their professional collaboration
tools but it didn’t perform quite well.
Microsoft acquired Yammer in an effort to try and compete with other players in the
enterprise collaboration and social networking space like Salesforce, Oracle or IBM.
However, with no clear path of integration and with a service that ended up drowned in
Microsoft’s other product offerings, Yammer did not integrate well.
Fast forward to 2016 and Microsoft is now putting on hold its plan to integrate Yammer
Enterprise into its Office 365 products and will instead pursue a homegrown alternative
called Office Groups.
A third acquisition to note is that of Mojang. Mojang is the creator of Minecraft, a popular
online game with young teens. Microsoft bought Mojang in September 2014, for an all
cash deal of $2.5 billion. This acquisition is interesting as it does not directly align with
Microsoft’s other acquisitions, however, there is some logic behind it. Microsoft is trying
to make its entry into the VR world with their new flagship product, Hololens, and with
that bring in younger users, shifting away from the “professionals only” mindset it had
adopted thus far.
With the acquisition of this popular online game, Microsoft intends to integrate it with its
VR product in order to push sales and drive in more younger users that would be
attracted in playing Minecraft in a virtual setting. Minecraft is played by over 100 million
users worldwide, with sales reaching as high as 56,000 copies a day in 2016. With such
a hot trend, Microsoft would be acquiring a huge user-base of young users that contrast
with its existing user-base of professional users.

12. However, Microsoft did take quite a huge risk with this acquisition as it could turn out to
be an ephemeral success (as with the Candy Crush Saga). This acquisition also differs
from others Microsoft has made in the past as the founders did not join the company as
part of acquisition, leaving Microsoft with a product that it now has to develop and
nurture, with the founders’ vision gone.
With this acquisition, Microsoft made the games available on their Windows Phone OS
to push sales of their devices to a younger audience as well as try to incorporate youth
and innovation into the company.
Microsoft’s performance to date
Year over year Microsoft’s CRM products have been performing well. Dynamics
increased their revenues from 2014 to 2015 by 12% and from 2015 to 2016, by 4%. As
growth of revenues within this space has started to slow, it was another supporting
factor for making the LinkedIn acquisition as it will help Microsoft gain more
marketshare within the CRM space and combat the industry leader, Salesforce.
Did Microsoft overpay for LinkedIn?
Microsoft paid a 49.5% premium for LinkedIn and to our belief paid this premium for the
synergies that Microsoft Dynamics has with LinkedIn and the ability to grow their
revenues within the CRM space by recognizing the synergies between the two
companies that are within the CRM industry mentioned above.
Recommendations for Microsoft going forward
Going forward, we recommend that Microsoft integrates LinkedIn’s Sales Navigator with
Microsoft Dynamics as their main priority. Additionally, we recommend that Microsoft
integrates LinkedIn’s Lynda.com to be compatible with their Office 365 product to help
their users become more versed within Microsoft’s largest revenue driver. By providing

13. a teaching software along with Office 365, it will enhance the user's experience allowing
them to benefit from all of the different facets that a program like Excel can bring them.
For example, Lynda.com could be used to give an Excel user teaching on how to use
macros (a coding program within Excel). As our last recommendation, we suggest that
Microsoft re-approach Salesforce for a possible acquisition. For all of the reasons that
LinkedIn adds benefits to Microsoft, it will also be able to add those benefits to
Salesforce, as well as Microsoft being able to add its own benefits, and vice versa.
If Microsoft buys Salesforce, it doesn’t need to have a big investment in its IT
department to improve their CRM segment. Salesforce has a strong brand and excellent
reputation for its product. Big companies like Amazon and Bluewolf rely on its services.
Microsoft Dynamics CRM is a small portion of the company’s revenue, and if the
company wants to expand this business segment, it needs to become more competitive.
Microsoft believes LinkedIn will help them to gain a competitive advantage; however
without a good platform, LinkedIn professional networking doesn’t provide much value.
Salesforce has an advantage because of its distribution channels and reliability,
switching costs are high for companies once they establish a CRM within their business
and a majority of big businesses use Salesforce.