Now We Know Why Microsoft Bought LinkedIn

Six months after Microsoft announced plans to pay more than $26 billion for LinkedIn, we now know even more about why the career-focused social networking site was so valuable. Today, Microsoft revealed that LinkedIn founder Reid Hoffman has joined its board.

It’s impossible to overestimate the significance of this move for Microsoft. CEO Satya Nadella is three years into a turnaround that few people believed possible. When he was promoted to CEO in February 2014, Microsoft was in a bad place. Six months earlier, the company had posted its first-ever quarterly loss. Steve Ballmer announced he would step down, but before leaving, he pushed through the acquisition of Nokia. It was a costly mistake. Microsoft ended up paying $7.9 billion for the Finnish cellphone maker, according to an April 2015 SEC filing; the company wrote off nearly the entire sum in the final quarter of 2015.
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Microsoft’s chief problem was this: Though the Redmond-ites made a lot of money, the company’s core business was declining, a dynamic that was set in motion more than a decade ago, when nearly every enterprise owned and ran Windows-powered PCs and servers. Microsoft had parked itself in the middle of Innovator Dilemma-land. The company had little incentive to invest in future businesses that might disrupt the business it was already in.

It also had a lousy reputation, particularly in Silicon Valley, where camaraderie and collaboration are hallmarks of tech’s evolution and every major player enjoys frenemy status with its adversaries. Microsoft wasn’t a company that partnered with outsiders. It scorned the open-source community and looked down its nose at tech upstarts. In a public conversation with Marc Andreessen in October 2014, investor Peter Thiel called Microsoft a bet “against technological innovation.”

In an early analyst call, Nadella quoted philosopher Friedrich Nietzsche, telling listeners that Microsoft must have “courage in the face of reality.” Three years later, this courage is paying off. Microsoft has been profitable for the last four quarters, and in January, it surpassed analyst expectations, doubling its revenue from its cloud-computing offering, Azure. Its search engine, Bing, has a hold on one fifth of the search market (even more, if you add AOL and Yahoo search, which are powered by Bing). With the launch of Microsoft Teams, it has aimed squarely at competitor Slack. It’s well on its way to transforming into a company that sells services in the cloud. Meanwhile, it has put $35 billion toward R&D for ambitious projects such as its mixed reality headset, the HoloLens, attempting to establish itself as a company that can bring credible innovations to market.

To succeed, however, Nadella must do more than fix the company’s business. He must turn around Microsoft’s lethargic, boastful, go-it-alone reputation — especially in clubby Silicon Valley where deals are made over dinners, the most talented entrepreneurs have their pick of big-name investors, and talent is hard to woo. In the constant competition over engineers, designers and product managers, Microsoft must establish itself as a smart place to do great work. In other words, in Silicon Valley it’s gotta be cool.

There’s no doubt Nadella has improved the company’s relationship with developers, partners, and investors outside its Redmond headquarters—particularly with those in the Valley. The company made peace with the open-source community, and one of its top engineers even said it wasn’t out of the question that one day Microsoft could open-source the code that underpins the company’s Windows operating system, its crown jewels. Nadella has also spent the past few years getting to know the startup founders the company once ignored. In October 2014, I went to hear him speak at a developers’ conference in London and witnessed firsthand the new amiable approach he was advancing. Since then, he has only amplified his efforts. But even if they’ve enjoyed a warmer reception in recent years, Nadella’s team of top executives and board members are, for the most part, not valley insiders. (The exception would be former Symantec CEO John Thompson, who chairs Microsoft’s board and helped with many Valley introductions early on.)