June 14, 2016
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.
Microsoft announced the intent to buy LinkedIn for $196 per share today or more than $26 billion. It’s a huge deal and a great payday for the social networking company specializing in making it easier for business people to connect. But why do this deal and why now? This calls for a lot of speculation but perhaps we can make some sense of it.
Like other major software companies including Oracle and Salesforce, Microsoft sees itself as an essential platform for enterprises at all levels. The more functionality it can provide to its users, the easier it will be to keep them at home rather than roaming the Internet looking for something new. In addition, the availability of a familiar face such as LinkedIn has great appeal for many customers.
But also, we may be witnessing the consolidation of the social networking space. Brands like LinkedIn, Twitter, and Facebook, and others such as Plaxo and MySpace, all got started around the same time—about ten years ago. Since then each has found a niche and many rely on an advertising model for revenue and growth.
Those models are limited by network constraints, however. Each might be flexible and have great people working there but as Metcalf’s Law stipulates, the value of a network is directly proportional to the number of nodes on it. In our case nodes can be thought of as people and while we might all have Twitter and Facebook accounts, the number that also have a third network is smaller for the simple reason we can only track so much.
So the advertising potential of networks is similarly limited. There is a large revenue pie for ads on social networks but it isn’t infinite and as is often the case, the early participants like Google continue to capture the lion’s share of revenues. In such a situation, if LinkedIn can be relieved from the need to generate so much ad revenue growth by simply becoming a valuable addition to the overall Microsoft value proposition, so much the better. The situation is similar with other vendors that offer social and collaboration functions as part of their value propositions, like Salesforce and Oracle.
All this is to say that the age of social media is likely entering a mature phase. We can see which ones will be able to have a stand-alone future and which ones won’t. This doesn’t mean social networks and social media are becoming passé—just the opposite. They’ve become so valuable that they are becoming commodities and it’s hard for commodities to reap soaring profit growth (that’s why they’re commodities).
So, good for Microsoft and LinkedIn, I think they are better together and their association seems to signal an inflection point in social networking. The strike price of $196 per share is significantly below last year’s peak of nearly $260 but also significantly above Friday’s close of $131.08, just about right in the middle. Is everybody happy?
Fun pic, no?
Apple’s earnings disappointment thudded into view in the middle of an afternoon of briefings at Oracle’s Modern Marketing Experience conference in Las Vegas. In that context it gave me a lot to think about especially the difference between a one time earnings disappointment and something more serious. (1)
I have a feeling that Apple is only the most visible instance of the wheels beginning to wobble on the truck of tech. The legacy software vendors including Oracle, SAP, and Microsoft each have fundamental challenges ahead as they continue to march to the cloud. Each needs to move its considerable customer base to cloud solutions that have very different economic models and each will have to face the fact that success involves lower revenues as customers adjust to paying for subscriptions. In this scenario, success will look a lot like failure.
The way of the world
This is typical of end of paradigm situations and there isn’t much to help. For instance, textile manufacturing was once the heart of our economy but that’s moved to lower cost countries by and large. We backfilled with higher value products and services and the same is happening now with technology. Ironically though the issues and challenges faced by Apple and those companies moving to the cloud are different from a pure economic perspective.
Apple’s flagship consumer products are reaching barriers caused by market saturation and lower cost competition. The move for Apple is to innovate more consumer goods if it can but that’s a big if. There is likely a limit to how much personal gadgetry we can extract from chips and screens. Google Glass and Apple Watch might be hints of a ceiling though it’s still too early to call a trend.
Commoditization is another factor. Apple is experiencing headwinds in China, its second largest market after the U.S. Also, it sold fewer iPhones globally in the last quarter than expected due in part to stiff competition from Android devices that are lower cost and functionally competitive. Still Apple garners most of the profits from the sale of smartphones, a market whose margins are tightening with competition. We can expect this trend to continue as vendors cut prices while attempting to maintain market share.
Other shoes drop
Apple isn’t alone. Twitter is still losing money though less of it according to the latest numbers (2). The same saturation dynamic is operating for Twitter but at a much lower revenue run rate than Apple. Social media is a winner takes all market so though there aren’t very many competitors the value of a network is in the number of participants, which naturally limits the number of competitors. The dominant advertising model that social media relies on for revenues has been under pressure with other vendors like Google and Facebook having to adjust.
The legacy providers face a different problem that manifests in similar ways. As they become more successful at moving customers to the cloud, their revenues shrink and come in over longer time periods. So their year over year comparisons look worse much like Apple’s predicament even though they may be selling well.
Cloud computing was seen as a great leap forward because it gives customers much lower cost structures and it has kept that promise. But it is also a form of commoditization and I wonder how legacy vendors will replace the revenues they give up as they turn to the cloud. It’s not as though there is a choice, competition is forcing everyone to the cloud so it will take years, I think, for legacy vendors to grow enough to replace revenues they are losing in the shift.
Then, too, demand growth is reverting from an exponential growth curve to one that resembles organic population growth and this means any vendor seeking to grow will need to do it by taking share from others in a zero sum game.
What about CRM?
What happens next for CRM is speculative. The new technologies that Salesforce, Oracle and everybody else are bringing to market foretell a time when the front office employs fewer people as commoditization heats up, but that might not be a problem. The IoT is a hot idea right now with little to show of any real substance but it’s possible that the IoT will be the next bit of infrastructure that will spark exponential growth. As a communications layer it could spawn a lot of jobs as people, relieved of more mundane occupations leverage the information boiling out of the IoT to perform services that only people can do.
In some respects this is a scary time. Apple missing its number can’t be fun and neither can watching a legacy company’s earnings evaporate even as it does most things right. We’re in a transition period and if we keep our wits about us and continue to innovate in a few years we might find ourselves in an era that resembles the late 1980s.
The headline in today’s New York Times is to the point and dripping with déjà vu—“Twitter’s Market Valuation Suggests Wall St. Sees Huge Growth Potential.“ For those who’ve been around a while or who just remember the Facebook implosion there’s a sense of here we go again in the news. You will recall that Facebook had a staggering IPO that raised billions and gave the company billions more in valuation but then the stock promptly tanked unable to generate revenues and profits commensurate with the valuation.
I am not so sanguine about Twitter’s chances. Could we be heading for a repeat with Twitter or possibly something worse? I am not a financial guy and I don’t dispense financial advice so don’t sue me, but the stock looks like a kite on a windy day. It will come back to earth when the wind eases or your mother calls you home for dinner.
Beyond Twitter there’s a bigger thing happening. Google and all of the job sites and Craig’s List-like sites erupted on the scene during the first Internet Era and gobbled up the job listings and display ads that had been the life blood of the print industry for many years. The result has been a nuclear winter in print and journalism to the point that we are seeing magazines and newspapers shutting down or going electronic to save costs and stay afloat.
If you go further back, TV’s emergence in the 1950’s reduced radio’s impact for similar reasons. The entertainment experience was better or at least different and with the audience went ad revenue so that some of the biggest stars of radio had to transition to TV with their shows intact. Early quiz shows and even Groucho were things you could close your eyes to and not miss anything. Before TV, radio was the mass medium everybody talked about around the water cooler and though the era was also one of the movie industry’s golden ages, movies didn’t sell ads so the movies are a different discussion.
What all of this shows is the transition of media going hand in hand with the migration of ad revenue. Today we’re witnessing a great migration and transition from broadcast media to social media but I wonder how long it will last. Print dominated for centuries, Radio, barely fifty years before collapsing into a semi-homogenized stew of music.
TV has had about a fifty-year run too and it is collapsing into reality-and-sitcom-mediocrity or fleeing into the margins of low budget high concept cable. TV’s collapse is partly its own making as a shrinking revenue pie is being shared by hundreds of cable channels where there had once been only three networks. TV was surprising in another way because the technology-cost of production curve has favored lower cost technologies that reached the same or greater sized audiences.
Bucking the trend TV shows are expensive to make, hence the latter day reliance on “reality” themes that employ average people, little script writing or directing, and much more editing and post-production, which is computer-cheap to do these days. TV was saved from the tyranny of the technology-cost of production curve by the cost per impression curve which was an artifact of a population boom.
But the technology-cost of production curve came roaring back with social media and the advertising it hopes to generate and in some cases already is generating. This explains the popularity of Google, and now Facebook and Twitter advertising models. Social beats everything on the cost per impression curve because the technology is ubiquitous and nearly free and the content is free and often compelling. Everyman is a producer and consumer and the advertisers need only stand back and regard the analytics.
However the thing nobody talks about which therefore worries me is audience or market saturation. We already routinely filter out TV ads in numerous ways, so how long before we do the same with content linked ads? Can’t be done? Ha! Get creative. Or consider this: the Internet stream is still free and analytics are getting better and better so how long before conventional advertising, regardless of form, is completely bypassed by vendors?
A vendor buys an ad because it needs to reach an audience that it can’t reach in any other way or as inexpensively. But in a big data utopia it’s possible to know enough about the entire market to simply segment it and take a direct approach. That’s why I am not so sanguine about the Twitter IPO. Sure, there’s time for the social vendors to make some big bucks but in the longer term I think I can already see their demise. It was written in print, and broadcast on radio, and then TV and Cable.
Social networks won’t go away just as print, radio, and TV have not, but it’s a matter of time before some enterprising people figure out how to do social marketing or something like it better, faster, and cheaper. Then the cycle will start anew.
It’s (mostly) Rock ‘n’ Roll
Then there is this from Weekly Standard writer Matt Labash who writes a long rant on Twitter and why it is eating our brains. Didn’t they say things like that about Rock ‘n’ Roll? Obviously, they were right. Matt seems like a man off his meds but like many such savants he can make some interesting points sometimes.
Labash’s target is Twitter, and he points out, “Even after seven years of nonstop media hype, only 16 percent of Internet users tweet, the same as the percentage of 14-49-year-olds who have genital herpes. The difference being that the latter are not proud of their affliction, while the former never shut up about theirs.”
I suspect the herpes numbers are kept down by increased condom use, but what about Twitter?
Ok, seriously, I get it. Twitter. One hundred forty chars. Bad.
Maybe I don’t though.
You may have noticed that about the only things I Tweet are blogs like this or pieces from the New York Times. I don’t read my tweets unless they are delivered by email and I hardly follow anyone. When I go to shows they supply me and my buds with tables, WiFi and power in the hopes that we’ll live tweet the event. I write articles and check email. Ever read the tweet stream from a show when the twits reach critical mass?
“Look at Marc’s sox!”
“Stripes gonna be big!”
“Talkin’ ‘bout Marketing Cloud”
“Marketing next big idea”
“You going to the dinner?”
It’s not for any political reasons that I am Twitter agnostic, I am just an introvert. I can go for days hardly interacting with humanity, truth be told. My wife hates it but I think it’s normal and no, I am not shy. When I have something to say, I… you know…say it. There’s a lot happening in my head and I don’t usually have time to check out just to check in. It’s more interesting in there. I suspect most writers are like that, which might explain Labash’s incredulity about Twitter.
But introverts make up only about 25 percent of the population according to Susan Cain, author of “Quiet, The Power of Introverts in a World That Can’t Stop Talking”. Perhaps the paperback might modify the title to include those who can’t stop Tweeting.
Regardless of my habits, I think I get Twitter. It’s a communication mode that unfortunately enables people with a need to know, to inquire as often as they like from the whole world about their status in it. Twitter and some other social media have vast power to amplify our thoughts as well as our insecurities. But look, only 16 percent, according to Labash, are that insecure. And if insecurity is a form of neurosis then we haven’t made much progress since Freud and Jung but neither have we backtracked a lot.