Editor’s note: So what does the Microsoft acquisition of LinkedIn really mean? It’s all about data from LinkedIn’s users and putting it to work through Microsoft applications, says Stuart Williams, vie president of Technology Business.Research.

HAMPTON, N.H. – Social data from LinkedIn adds value as Microsoft takes on challenge of community building.

Over the last several years, Microsoft has awoken to the revenue potential inherent in understanding people – either through its own experience gained by selling cloud services or by seeing the explosive revenue growth of firms like Facebook who directly monetize the social graph of their members. The announced LinkedIn acquisition is all about the data – the professional social graph data – volunteered by members and captured by LinkedIn.

Data, especially validated data about individuals, is increasingly more valuable than the applications through which people work. Microsoft offers LinkedIn new routes to market and monetization opportunities for the data. The market forces driving the deal also compelled IBM to acquire the Weather Company, and for many competitors to partner with Facebook.

Microsoft can use the social graph data to add value across its productivity, search, advertising and business software portfolio. However, it’s biggest risk is in maintaining the good will of the membership. So long as members see the value of engagement, they will return, contribute and participate with others. If they feel that they are being turned into product without getting a personal return, then they will leave and the capital spent on the deal and all opportunity is lost. This is a huge challenge for Microsoft, who has successfully built its consumer Xbox membership, but the LinkedIn community is a different and more sensitive group.

  • Deal details

On June 13, 2016, Microsoft announced it intends to acquire LinkedIn for $26.2 billion, a 50% premium to LinkedIn’s market capitalization on the previous day’s close. Microsoft will finance the transaction primarily through the issuance of new indebtedness. The deal is expected to close by the end of the calendar year, pending shareholder and regulatory approvals.

There have been few blockbuster acquisitions on this scale outside the professional services arena. HP acquired EDS for $13.9 billion, never gained the synergies sought, and is now in the process of spinning out its HP Enterprise Services group to CSC for $6.9 billion. The only other blockbuster acquisition that comes close is the $19 billion acquisition of WhatsApp by Facebook, which provided the basis for Facebook Messenger, its mobile messaging platform.

Microsoft previously spent $9.4 billion to purchase of Nokia Corp.’s mobile phone business, most of which the company has written off. The company acquired Skype, the voice and video chat provider, for $8.5 billion in 2011, and $2.5 billion in 2014 for Mojang AB, the developer of the “Minecraft” game.

  • Before and after

The LinkedIn acquisition begins to narrow the wide functional gap Microsoft has between its Office365 productivity suite and its business process –focused Dynamics portfolio. Microsoft had little to connect the daily work of employees with the broader functions of the enterprise. The social data and content from LinkedIn begins to offer a pathway to knit these two functions together. Personal work can be informed by profile information, recent publications and peer reviews of collaborators.

Business, especially sales and recruiting, can be informed by searches across and through the social graph. Account-based marketing, a hot topic in B2B sales, can largely be informed by the collective data shared within LinkedIn’s personal and business profile information.

LinkedIn will operate as a stand-alone business unity under the leadership of its current CEO Jeff Weiner who will report directly to Microsoft CEO Satya Nadella. It offers Microsoft three new services lines it can sell to enterprises: talent management; learning management and marketing.

Key to the potential value is linking the two “graphs” of enterprise workflow information and professional relationships by connection of LinkedIn data and content with Dynamics, Office365, Cortana, Bing. Microsoft (self-reportedly) has captured over 10% of its $200 billion TAM while LinkedIn has captured 3% of its $100 billion TAM. New pathways for selling data, services, advertising and insights at the intersection of function and data are the key to growth.

Slowing the synergies down is a lack of continuous engagement by LinkedIn members. Only 105 million members are active on a recurring monthly basis out of 433 million. Improving this ratio of engagement is one key to driving more opportunity and revenue. If customer experience drives revenue, increasing engagement is key.

  • Implications to competitors

Person-based data represents a premium. Each of the large software vendors are racing to build out their data-economies. CRM vendors like Salesforce, SAP, Oracle and IBM are partnering with Facebook to gain access to its consumer-level personal profile data. Adobe is building an open data consortium that opts-in consumers across a collective of brands.

Salesforce previously made multiple acquisitions to build out its enterprise data portfolio, adding Jigsaw for corporate profile data, Dimdim for conferencing and Manymoon for content development. Google built its Google+ circles, but has failed to attract millions of subscribers. IBM acquired The Weather Company.

Accessing personal data is different than accessing machine data in that people need to offer, participate and maintain the data. Firms like Slack are winning enterprise share since the network effect is easier to apply within the bounds of a business than across the global population. Building and maintaining a professional membership site requires securing personal information as well as needing to add business value.

The skills are specialized and valuable – hence the premium paid for LinkedIn. It is a never-ending task Microsoft will own. Once the acquisition closes, Microsoft will have 433 million new relationships to manage – and if it can pull off this trick – it will have stolen a march on all of its competitors except Facebook.

  • Implications to partners

LinkedIn has either gone directly to subscribers or sold directly through its internal sales team. This is a big change for Microsoft, who primarily works through partners. While LinkedIn will operate as its own unit, TBR expects that multiple new pathways will open up for monetization. Two direct pathways are: 1) gaining access to LinkedIn data while not being a member, is a possibility – at the risk of angering members; and 2) selling access to members for new productivity, sales and educational applications is a clear pathway.

Partners, especially systems integration partners, will want to access the LinkedIn API in order to pull information into Dynamics and other applications. Microsoft should be wary about the use of member information. LinkedIn has been careful, but at the cost of becoming closed off from the application of the data. Developers, from analytics to machine learning to Cortana, will want to access the LinkedIn API. Adding new, person-based insights to existing applications is a strong incentive.

  • Implications to customers

Maintaining the trust and participation of the LinkedIn members is the greatest risk and potential reward for Microsoft in this acquisition. Microsoft will own the platform on which thousands of communities and relationships are formed and grown. Limiting or validating how personal data is used will be the key. All uses of the data must, in the end, be useful to the members who volunteer and maintain their profiles and engagement. So long as Microsoft abides by the spirit of LinkedIn as a personal professional social network, it can use that data to add value to other offers.