Microsoft and Linked-In – Same Song, Different Key

Microsoft is buying Linked-In, and we should expect this to be a disaster.

It is clear why Linked-in agreed to be purchased.  As revenues have grown, gross margins have dropped precipitously, and the company is losing money.  And LInked-in still receives 2/3 of its revenue from recruiting ads (the balance is almost wholly subscription fees,) unable to find a wider advertiser base to support growth.  Although membership is rising, monthly active users (MAUs, the most important gauge of social media growth) is only 9% – like Twitter, far below the 40% plus rate of Facebook and upcoming networks.  With only 106M MAUs, Linked in is 1/3 the size of Twitter, and 1/15th the size of Facebook.  And its $1.5B Lynda acquisition is far, far, far from recovering its investment – or even demonstrating viability as a business.

Even though the price is below the all-time highs for LNKD investors, Microsoft’s offer is far above recent trading prices and a big windfall for them.

But for Microsoft investors, this is a repeat of the pattern that continues to whittle away at their equity value.

MSFT + LINKOnce upon a time, in a land far away, and barely remembered by young people, Microsoft OWNED the tech marketplace.  Individuals and companies purchased PCs preloaded with Microsoft Windows 95, Microsoft Office, Microsoft Internet Explorer and a handful of other tools and trinkets. And as companies built networks they used PC servers loaded with Microsoft products. Computing was a Microsoft solution, beginning to end, for the vast majority of users.

But the world changed. Today PC sales continue their multi-year, accelerating decline, while some markets (such as education) are shifting to Chromebooks for low cost desktop/laptop computing, growing their sales and share.  Meanwhile, mobile devices have been the growth market for years.  Networks are largely public (rather than private) and storage is primarily in the cloud – and supplied by Amazon.  Solutions are spread all around, from Google Drive to apps of every flavor and variety.  People spend less computing cycles creating documents, spreadsheets and presentations, and a lot more cycles either searching the web or on Facebook, Instagram, WhatsApp, YouTube and Snapchat.

But Microsoft’s leadership still would like to capture that old world.  They still hope to put the genie back in the bottle, and have everyone live and work entirely on Microsoft.  And somehow they have deluded themselves into thinking that buying Linked-in will allow them to return to the “good old days.”

Microsoft has not done a good job of integrating its own solutions like Office 365, Skype, Sharepoint and Dynamics into a coherent, easy to use, and to some extent mobile, solution.  Yet, somehow, investors are expected to believe that after buying Linked-in the two companies will integrate these solutions into the LInked-in social platform, enabling vastly greater adoption/use of Office 365 and Dynamics as they are tied to Linked-in Sales Navigator.  Users will be thrilled to have their personal information analyzed by Microsoft big data tools, then sold to advertisers and recruiters.  Meanwhile, corporations will come back to Microsoft in droves as they convert Linked-in into a comprehensive project management tool that uses Lynda to educate employees, and 365 to push materials to employees – and allow document collaboration – all across their mobile devices.

Do you really believe this?  It might run on the Powerpoint operating system, but this vision will take an enormous amount of code integration.  And with Linked-in operated as separate company within Microsoft, who is going to do this integration?  This will involve a lot of technical capability, and based on previous performance it appears both companies lack the skills necessary to pull it off.  How this mysterious, magical integration will happen is far, far from obvious, or explained in the announcement documents.  Sounds a lot more like vaporware than a straightforward software project.

And who thinks that today’s users, from individuals to corporations, have a need for this vision?  While it may sound good to Microsoft, have you heard Linked-in users saying they want to use 365 on Linked in?  Or that they’ll continue to use Linked-in if forced to buy 365?  Or that they want their personal information data mined for advertisers?  Or that they desire integration with Dynamics to perform Linked-in based CRM?  Or that they see a need for a social-network based project management tool that feeds up training documents or collaborative documents?  Are people asking for an integrated, holistic solution from one vendor to replace their current mobile devices and mobile solutions that are upgraded by multiple vendors almost weekly?

And, who really thinks Microsoft is good at acquisition integration?  Remember aQuantive? In 2007 Microsoft spent $6B (an 85% premium to market price) to purchase this digital ad agency in order to build its business in the fast growing digital ad space.  Don’t feel bad if you don’t remember, because in 2012 Microsoft wrote it off.  Of course, there was the buy-it-and-write-it-off pattern repeated with Nokia.  Microsoft’s success at taking “bold moves” to expand beyond its core business has been nothing less than horrible.  Even the $1.2B acquisition of Yammer in 2012 to make Sharepoint more collaborative and usable has been unsuccessful, even though rolled out for free to 365 users. Yammer is adding nothing to Microsoft’s sales or value as competitor Slack has reaped the growth in corporate messaging.

The only good news story about Microsoft acquisitions is that they missed spending $44B to buy Yahoo – which is now on the market for $5B.  Whew, thank goodness that one got away!

Microsoft’s leadership primed the pump for this week’s announcement by having the Chairman talk about investing outside of the company’s core a couple of weeks ago.  But the vast majority of analysts are now questioning this giant bet, at a price so high it will lower Microsoft’s earnings for 2 years.  Analysts are projecting about a $2B revenue drop for $90B Microsoft next year, and this $26B acquisition will deliver only a $3B bump.  Very, very expensive revenue replacement.

Despite all the lingo, Microsoft simply cannot seem to escape its past.  Its acquisitions have all been designed to defend and extend its once great history – but now outdated.  Customers don’t want the past, they are looking to the future.  And no matter how hard they try, Microsoft’s leaders simply appear unable to define a future that is not tightly linked to the company’s past.  So investors should expect Linked-In’s future to look a lot like aQuantive.  Only this one is going to be the most painful yet in the long list of value transfer from Microsoft investors to the investors of acquired companies.

 

Irrelevancy leads to failure – Worry for Yahoo, Microsoft, HP, Sears, etc.

The web lit up yesterday when people started sharing a Fortune quote from Marissa Mayer, CEO of Yahoo, "We are literally moving the company from BlackBerrys to smartphones."  Why was this a big deal?  Because, in just a few words, Ms. Mayer pointed out that Research In Motion is no longer relevant.  The company may have created the smartphone market, but now its products are so irrelevant that it isn't even considered a market participant.

Ouch.  But, more importantly, this drove home that no matter how good RIM thinks Blackberry 10 may be, nobody cares.  And when nobody cares, nobody buys.  And if you weren't convinced RIM was headed for lousy returns and bankruptcy before, you certainly should be now.

But wait, this is certainly a good bit of the pot being derogatory toward the kettle.  Because, other than the highly personalized news about Yahoo's new CEO, very few people care about Yahoo these days as well.  After being thoroughly trounced in ad placement and search by Google, it is wholly unclear how Yahoo will create its own relevancy.  It may likely be soon when a major advertiser says "When placing our major internet ad program we are focused on the split between Google and Facebook," demonstrating that nobody really cares about Yahoo anymore, either. 

And how long will Yahoo survive?

The slip into irrelevancy is the inflection point into failure.  Very few companies ever return.  Once you are no longer relevant, customer quickly stop paying attention to practically anything you do.  Even if you were once great, it doesn't take long before the slide into no-growth, cost cutting and lousy financial performance happens. 

Consider:

  • Garmin once led the market for navigation devices.  Now practically everyone uses their mobile phone for navigation. The big story is Apple's blunder with maps, while Google dominates the marketplace.  You probably even forgot Garmin exists.
  • Radio Shack once was a consumer electronics powerhouse.  They ran superbowl ads, and had major actresses parlaying with professional sports celebrities in major network ads.  When was the last time you even thought about Radio Shack, much less visited a store?
  • Sears was once America's premier, #1 retailer.  The place where everyone shopped for brands like Craftsman, DieHard and Kenmore.  But when did you last go into a Sears?  Or even consider going into one?  Do you even know where one is located?
  • Kodak invented amateur photography.  But when that market went digital nobody cared about film any more.  Now Kodak is in bankruptcy.  Do you care?
  • Motorola Razr phones dominated the last wave of traditional cell phones.  As sales plummeted they flirted with bankruptcy, until Motorola split into 2 pieces and the money losing phone business became Google – and nobody even noticed.
  • When was the last time you thought about "building your body 12 ways" with Wonder bread?  Right.  Nobody else did either.  Now Hostess is liquidating.

Being relevant is incredibly important, because markets shift quickly today. As they shift, either you are part of the trend going forward – or you are part of the "who cares" past.  If you are the former, you are focused on new products that customers want to evaluate. If you are the latter, you can disappear a whole lot faster than anyone expected as customers simply ignore you.

So now take a look at a few other easy-to-spot companies losing relevancy:

  • HP headlines are dominated by write offs of its investments in services and software, causing people to doubt the viability of its CEO, Meg Whitman.  Who wants to buy products from a company that would spend billions on Palm, business services and Autonomy ERP software only to decide they overspent and can never make any money on those investments?  Once a great market leader, HP is rapidly becoming a company nobody cares about; except for what appears to be a bloody train wreck in the making.  In tech – lose customesr and you have a short half-life.
  • Similarly Dell.  A leader in supply chain management, what Dell product now excites you?  As you think about the money you will spend this holiday, or in 2013, on tech products you're thinking about mobile devices — and where is Dell?
  • Best Buy was the big winner when Circuit City went bankrupt.  But Best Guy didn't change, and now margins have cratered as people showroom Amazon while in their store to negotiate prices.  How long can Best Buy survive when all TVs are the same, and price is all that matters?  And you download all your music and movies?
  • Wal-Mart has built a huge on-line business.  Did you know that?  Do you care?  Regardless of Wal-mart's on-line efforts, the company is known for cheap looking stores with cheap merchandise and customers that can't maintain credit cards.  When you look at trends in retailing, is Wal-Mart ever the leader – in anything – anymore?  If not, Wal-mart becomes a "default" store location when all you care about is price, and you can't wait for an on-line delivery.  Unless you decide to go to the even cheaper Dollar General or Aldi.

And, the best for last, is Microsoft.  Steve Ballmer announced that Microsoft phone sales quadrupled!  Only, at 4 million units last quarter that is about 10% of Apple or Android.  Truth is, despite 3 years of development, a huge amount of pre-release PR and ad spending, nobody much cares about Win8, Surface or new Microsoft-based mobile phones.  People want an iPhone or Samsung product. 

After its "lost decade" when Microsoft simply missed every major technology shift, people now don't really care about Microsoft.  Yes, it has a few stores – but they dwarfed in number and customers by the Apple stores.  Yes, the shifting tiles and touch screen PCs are new – but nobody real talks about them; other than to say they take a lot of new training.  When it comes to "game changers" that are pushing trends, nobody is putting Microsoft in that category.

So the bad news about a  $6 billion write-down of aQuantive adds to the sense of "the gang that can't shoot straight" after the string of failures like Zune, Vista and early Microsoft phones and tablets.  Not to mention the lack of interest in Skype, while Internet Explorer falls to #2 in browser market share behind Chrome. 

Browser share IE Chrome 5-2012Chart Courtesy Jay Yarrow, BusinessInsider.com 5-21-12

When a company is seen as never able to take the lead amidst changing
trends, investors see accquisitions like $1.2B for Yammer as a likely future write down.  Customers lose interest and simply spend money elsewhere.

As investors we often hear about companies that were once great brands, but selling at low multiples, and therefore "value plays."  But the truth is these are death traps that wipe out returns.  Why?  These companies have lost relevancy, and that puts them one short step from failure. 

As company managers, where are you investing?  Are you struggling to be relevant as other competitors – maybe "fringe" companies that use "voodoo solutions" you don't consider "enterprise ready" or understand – are obtaining a lot more interest and media excitment?  You can work all you want to defend & extend your past glory, but as markets shift it is amazingly easy to lose relevancy.  And it's a very, very tough job to play catch- up. 

Just look at the money being spent trying at RIM, Microsoft, HP, Dell, Yahoo…………