Microsoft’s LinkedIn Buy Proves Social Media Is Graying

In Silicon Valley, five years might as well be an epoch. When LinkedIn, the online network geared for professionals, went public in May 2011, it was heralded as the opening of a lucrative new frontier for fast-growing social-media firms. The stock popped 109% on its first day of trading as Wall Street fawned over the future IPO prospects of Facebook, Groupon, Twitter, Yelp and others. That frontier closed definitively on June 13 when Microsoft announced it was buying LinkedIn for $26.2 billion, one of the largest technology tie-ups ever and an acknowledgment that the sector is starting to show its age.

Executives from both firms touted the benefits of the union, which is expected to close this fall. “We can reinvent ways to make professionals more productive while at the same time reinventing selling, marketing and talent management,” wrote Microsoft CEO Satya Nadella in a memo. He went on to outline how the massive trove of data generated by LinkedIn’s 433 million members could augment Microsoft products like Office and Dynamics, a suite that caters to salespeople.

Since he became CEO of the Redmond, Wash.–based software giant two years ago, Nadella has been refocusing Microsoft on services for corporations. Some of that has involved unwinding his predecessor’s deals, including the 2013 acquisition of Finnish phonemaker Nokia, which was written down as a $7.6 billion flop less than a year later. Academic studies have shown that 70% to 90% of mergers and acquisitions don’t pay off.

Aside from Facebook, which dominates in online advertising, social-media firms have struggled of late. In February, LinkedIn’s stock price was nearly halved overnight after weak earnings, a shock that venture capitalist Mark Suster compared to the Lehman Brothers collapse in 2008. Twitter’s market cap has been cut almost in half in the past year as a long-promised turnaround failed to materialize, making it a takeover target. Yelp, Zynga and Groupon–each worth barely $2 billion after initially flying high–are widely viewed in the same way.

More than anything, the deal shows how much has changed as social media matures. Slowing user growth is making investors less sanguine about such sites’ prospects as vehicles for selling ads. But larger firms see data as the ultimate prize. They envision new lines of business based on so-called machine learning, the hot field of making sense (and profit) from aggregating and parsing huge information storehouses. Nadella described how Cortana, Microsoft’s digital assistant, might tap LinkedIn data to give users contextual information about prospective clients, for example.

To make that a reality, Microsoft needs a large set of users. And that’s why, despite the risk, the company wants to connect with LinkedIn’s several-hundred-million-strong professional network now.