Let's not kid ourselves. Microsoft Corp. (MSFT) is not shutting down its LinkedIn service in China due to a sudden pang of conscience over oppressive Communist censorship. It is shutting it down because it is not making money.
Microsoft has spent almost 30 years building China into a multibillion-dollar market after Bill Gates himself established the Beijing office in 1992. "Today, our most complete subsidiary and largest R&D center outside the United States is in China," Microsoft says proudly in a page on its web site devoted to its time in the Middle Kingdom.
Both software sales and, increasingly, cloud computing are growth businesses. Microsoft says it has built a customer base at the "enterprise, city, provincial and national levels," indicating Chinese local and national governments are big-ticket customers. The company jokes its software is everywhere in China, but customers who paid for it legally are not.
LinkedIn is not lucrative enough. It has struggled in a society where it is politically dangerous and collectively unusual to share tons of personal information. What's more, China is ratcheting up the cost base by introducing new Big Tech rules. That's why the software giant is shutting it down.
If Microsoft was suddenly super-concerned about rolling over to show its belly to the Chinese government, the company would not be rolling out a bare-bones job listings site, which is what it is going to do later this year. This new service, InJobs, will have job postings but no social media or sharing functions.
The concerns that have come up about monitoring and censorship are operational. It is expensive to keep tabs of what you need to suppress, and mistakes are even more expensive when you make them because the Chinese Communist Party will hand out punishment to the line of business that suits it best. The profit center will hurt the most.
That's the truth behind the decision. LinkedIn was not generating enough activity to justify the expenses it was racking up. "While we've found success in helping Chinese members find jobs and economic opportunity, we have not found the same level of success in the more social aspects of sharing and staying informed," LinkedIn's head of engineering, Mohak Shroff, explains in a blog post. He's responsible for building, scaling and monetizing the LinkedIn service.
Not only were LinkedIn's bells and whistles not ringing and blowing, but the costs were increasing. "We're also facing a significantly more challenging operating environment and greater compliance requirements in China," Shroff admits. This social media experiment no longer makes financial sense.
In the Beginning...
LinkedIn launched a localized version of its site in China in February 2014, in simplified Chinese. It already had 4 million users inside China at the time and clearly saw the scope to expand what it assessed as a market of 140 million professionals inside China.
The social media site will now "sunset" that service, in Silicon Valley speak, or put a bullet in its head.
Censorship is a smokescreen. I'm pretty sick of the trite line that, oh well, we're just abiding by local law, so we have to censor all this content. Sorry about that, but there's nothing we can do. What if your corporate sensibilities, charter and mission statement conflict with a law? What if your employees disagree? What if that law runs counter to the law you support elsewhere in the world?
Those questions still linger. This is how LinkedIn explained it away in 2014, in a blog post by then-CEO Jeff Weiner:
"As a condition for operating in the country, the government of China imposes censorship requirements on Internet platforms," it said. "LinkedIn strongly supports freedom of expression and fundamentally disagrees with government censorship. At the same time, we also believe that LinkedIn's absence in China would deny Chinese professionals a means to connect with others on our global platform, thereby limiting the ability of individual Chinese citizens to pursue and realize the economic opportunities, dreams and rights most important to them."
Ain't that sweet?
They were censoring all those mentions of the Tiananmen Square massacre and the Uighur genocide in Xinjiang and self-immolation by separatists in Tibet purely because they were taking a stand on individual rights in China. By implication, freedom of speech is apparently not one of the rights most important to Chinese people.
No, it does not make much sense. There was also some nonsense about LinkedIn's presence in China helping to create the "world's first economic graph," which wasn't really explained but would "digitally map the global economy, identifying the connections between people, companies, jobs, skills, and professional knowledge, thus allowing all forms of capital - intellectual, working, and human - to flow where it can best be leveraged."
Did that happen? I can't say for sure, because I'm not entirely sure what it means. But it doesn't seem like all forms of capital are now perfectly allocated everywhere in the world. I'm pretty sure that has not occurred.
The costs are cranking up for all tech companies in China, foreign and domestic. Microsoft faces a fine in China for monopolistic behavior, just like every other Big Tech company in the country.
Government Weighs In
The antitrust State Administration for Market Regulation began a formal investigation in 2014, inspecting Microsoft's offices in Beijing, Shanghai, Guangzhou and Chengdu. The regulator has presented "preliminary views" on possible violations.
It looks like all 13 of China's largest tech companies will face similar sanction. They were all summoned to talks with Chinese financial regulators in April, where they were told to cut out behavior that harmed consumer choice and change their ways.
China also passed a data privacy law in August that's one of the strictest in the world. The Personal Information Protection Law will go into effect Nov. 1 and is similar to the General Data Protection Regulation that Europe introduced in 2018. It will raise the compliance cost for apps and web sites, tighten up data storage rules and requires companies to improve "social responsibility" and submit to "social supervision" by the government.
I wrote on Monday about the US$535 million fine leveled on the food delivery app Meituan (MPNGF) . The punishment actually caused the company's shares to leap because it wasn't quite as bad as it could have been, at 3% of its 2020 sales inside China. Alibaba Group Holding (BABA) shares behaved the same way in April when the e-commerce platform landed a record US$2.8 billion fine, or 4% of its sales in China.
Microsoft may face something similar. The company doesn't give a regular public breakdown of how much money it is making in China, but it sees it as a major source of growth.
Microsoft plans to add four new data centers in China by early 2022 in a bid to expand its capacity, according to a Bloomberg report in June. Those plans would see it "effectively double" its cloud computing capacity in China, the report states. Microsoft has six existing Chinese data centers operated with its local partner 21Vianet. (Investment in sensitive sectors such as the Internet and telecoms must take place in conjunction with a joint venture Chinese partner.)
Cloud computing in China is due to grow to a US$46 billion market in 2023, according to a government white paper that Microsoft has seen. The U.S. rival clearly feels up to the fight against strong domestic players including Alibaba, Huawei Technologies, Tencent Holdings (TCTZF) and Baidu (BIDU) and is supplying Chinese customers with its Internet-based subscription software suite, Office 365.
The app business is a minefield in China. The newly influential Cyberspace Administration of China in May sanctioned LinkedIn among 105 apps for the illegal collection and use of customer data. The Chinese version of TikTok as well as apps from Alibaba, Tencent and Baidu were on that and earlier lists of 84 and then 33 apps criticized for the same thing and told to rectify their practices.
It seems like an age ago that Microsoft was negotiating to buy the U.S. operations of TikTok from its Chinese owner, ByteDance. That would have given it the eyeballs and scrolling fingers of around 100 million daily U.S. users, most of them young. Microsoft said it was out of that running in September 2020, as I discussed back then, with ByteDance instead pursing a vaguely defined "technical partnership" with Oracle ORCL that never came true.
So it's back to software and storage, with the Microsoft search engine Bing still available in China but surely on the endangered species list. MSFT President Brad Smith said in 2020 that China only accounted for 1.8% of Microsoft's revenues, which would still be around US$3.0 billion if projected onto its fiscal 2021 sales of US$168 billion for the year through June 30.
That US$3 billion is nothing to scoff at, of course. With cloud computing poised to double, core sales in China look set to expand significantly. China is trying to tightening up intellectual property rules that might make more Microsoft Office sales legit, and paid. Microsoft has decided social media sharing and vetting the news posted on LinkedIn in China just isn't worth risking that outlook anymore.