The proposed acquisition of LinkedIn by Microsoft raises an interesting question: how much would you pay for your audience?
As I noted in an earlier blog, predictions have a habit of making you look foolish: but the $26bn valuation for a business with $3bn revenue and no discernible profit looks optimistic, at best. Given Microsoft’s earlier forays into unchartered waters (Nokia, Yammer) it would be best to view the move beyond its core competencies with caution.
LinkedIn is not dying: but a decreasing habit among its users suggests that it is not reaching the parts that other social media cannot reach.
So the question is: what are Microsoft buying? History teaches us that buying audience at a huge multiple of revenue or profit is a risky game. Audience moves quickly, particularly in social media. A timeline of FriendsReunited to MySpace to Facebook would be common in my generation: but in the four years since she was online, my daughter has gone from Facebook to Twitter to Pinterest to Instagram to Snapchat – and back again.
LinkedIn, you’ll note, does not feature in either of those lists. This is its strength and its weakness. It is currently unchallenged as a global professional social media site. And while MySpace, amongst others, was considered a ‘sell-out’ and lost its audiences as a result, LinkedIn’s consumers are by their nature less worried about the influence of filthy lucre.
Of course, LinkedIn’s data is hugely valuable; but even without that, there are synergies between the MS products and LinkedIn – and perhaps a similarity of sentiment (technologies that are not loved, but necessary). The fact that a chunk of that $3bn revenue comes from subscription also makes it a more sustainable model than other social networks.
LinkedIn made no money last quarter, so $196 per share is steep. But the valuation per user looks even steeper. According to TechCrunch, LinkedIn has 433m registered users, so each user is contributing around $7. But the $26bn price tag values them at around $60.
Twitter’s market cap of $10bn values each of its 310m users at $32 per head, about half of the value placed on each LinkedIn user by Microsoft. But Facebook’s $320bn capitalisation values each of its 1.65bn users at $193 – by which standards, the LinkedIn deal looks like a steal.
NB: A more scholarly and thorough look at this subject was made in 2014 by Appraisal Economics. Although time has overtaken some of its findings, it is still worth a read.