LinkedIn’s announcement to (mostly) exit China created a lot of headlines this past week.

Why did LinkedIn leave? The one-sentence answer: it's a media company.

In a market like China, where the media environment is tightly controlled, all advertisement-funded social networks are regulated as media companies. Russia has banned LinkedIn since 2016 for more or less the same reason. Countries like Brazil, India, and Nigeria are all working on their own policies based on similar logic to regulate social networks as media companies. The US has yet to modify Section 230 of the Communications Decency Act, so social networks are still not regulated as media properties but neutral platforms.

Interestingly, China did not technically ban LinkedIn. It just made the compliance cost of operating too high to be worth the effort. LinkedIn still plans to keep a small piece of itself in China by launching a recruiting-only app called InJobs, so this is not a wholesale departure.

The larger story worth unpacking here is how different types of networks demand different levels of compliance. The tradeoff between network strengths and compliance cost determines whether a foreign market is worth entering or not.

There are three broad types of networks:

• Social network
• Transactional network
• Collaborative network

LinkedIn occupies social and transactional, but not collaborative. Let’s unpack all three types contextualized in compliance cost to understand why LinkedIn (mostly) left China and, more importantly, what kind of network-based product can still do well in a place like China.

Social Network: Strong Network, High Compliance Cost

Even though Facebook is the ad-funded social network juggernaut, LinkedIn was earlier to this business model. LinkedIn launched its first ad product in 2005, after founding the network in 2003. (Facebook was founded in 2004 and launched its first ad product in 2007.)

A social network has strong network strength, as it mimics, amplifies, and accelerates human-to-human connections digitally. The number and degree of interconnectedness of the users in a network determine its value. This value grows as the network grows over time; this is network effect 101. That’s why the most successful social networks to date are all “free” services, because “free” maximizes user numbers, connections, and longevity on the network. The operation is paid for by distributing media content while selling advertisements alongside that content. The telephone is one of the oldest forms of social network.

LinkedIn may be more known for its Talent Solutions (recruiting) or Sales Navigator (deal transactions) products, but its advertisement product has always been a dependable cash cow -- still commanding one-third of the US’s total B2B display ad revenue.

This media-based business model works beautifully in the American Section 230 world, where media freedom is guaranteed and social networks are not treated as media. (How long this will last is a different topic for another day.) However, in a controlled media environment, this model triggers high compliance costs in the form of content moderation, redundant server infrastructures (so sensitive content is partially removed to comply, but not removed elsewhere to maintain a somewhat consistent network), and investment in legal and government affairs expertise. As the media environment becomes more controlled, this cost increases. Thus, the size and strengths of the social network must also increase to justify the continuous operation.

China’s media environment is quickly becoming more controlled. LinkedIn China’s social media network has not become more valuable nearly as quickly. Thus, as Rui Ma of Tech Buzz China suggested, the rational business decision for LinkedIn is to leave China.

Transactional Network: Weak Network, Low Compliance Cost

However, LinkedIn is not just a social network, it has also built a transactional network. This portion of LinkedIn continues in China, reincarnated as InJobs. Thus, unlike all the headlines, it is more accurate to say LinkedIn mostly left China.

How LinkedIn can continue operating in this limited fashion is worth pondering. A transactional network facilitates discrete, short-term tasks. These tasks may be valuable in isolation, but the overall network strength is weak, because participants only join the network when they need to complete those tasks. (That’s why there’s a strong correlation between the moment a person updates their LinkedIn profile and that person's intention of looking for a new job. As soon as the new job landed, that person tends to disappear from the network.)

Hiring and recruiting is an example of such a transactional network. This task maps directly to LinkedIn’s Talent Solutions product, which surely will serve as the foundation for InJobs. A transactional network may be weak, but so is its associated compliance cost. There is no media to distribute, no content to moderate, and not much data is created, unlike a social network. That’s why LinkedIn’s official announcement clearly stated that InJobs “will not include a social feed or the ability to share posts or articles.”

Whether InJobs will succeed or not is anyone’s guess. But what’s clear is that these weak, transactional networks are allowed to exist in China, even ones built by a foreign company. Their survival will be left, ironically, to the free market.

A relevant precedent is Uber China. Ridesharing is also a transactional network -- getting a ride from point A to point B is a discrete, short-term task, supported by a network of drivers. Uber China lost to Didi, but it lost from a brutally capital-intensive, Darwinian, free market competition. And even after it lost, Uber was allowed to own a piece of the winner in Didi -- 17.7% to be exact.

Collaborative Network: Strong Network, Medium Compliance Cost

The one type of network that LinkedIn does not have is collaborative network. This type belongs to products like Slack, Microsoft Teams, Zoom, Atlassian’s Jira, GitHub, and many other enterprise-focused SaaS products. Some of these have been available in China for years. Others can still enter the market and do well, if they understand the fundamental difference between themselves and LinkedIn, and not get spooked by the headlines. Meanwhile, Chinese tech companies are creating their own collaborative network products to expand beyond China, like DingTalk (from Alibaba), WeChat Enterprise (Tencent), and Lark (ByteDance).

In this day and age, collaborative network products actually have a better chance of becoming successful globally than social network products, including in a highly-controlled media environment, because they are not media. As soon as you get into “media” or are perceived as such, that triggers harsher scrutiny. Content generated from a collaborative network is internal to the users who are collaborating; they are by definition not public and thus not media.

Therefore, a collaborative network’s compliance cost is somewhere in between a social network and a transactional network. It generates much less content and data than a social network, but usually more than a transactional network. The content type is also less varied than an open social network. Even if content moderation is required for compliance purposes, the workload is done in a smaller environment (typically a company’s intranet) with less variety, and thus less costly. Unlike a transactional network, a collaborative network is ongoing, not task-based, so its size, complexity, and value grow over time, more akin to a social network. All three types of networks have to abide by local data governance laws, so the compliance cost difference on this dimension is only predicated on the volume and type of data generated.

Effective collaboration requires common context. Thus, customers of collaboration products typically like to standardize on one solution. Companies that don’t tend to be less effective, less collaborative, and ultimately less successful. A startup that uses WeChat Enterprise for its China team and Slack for its US team, which is not unheard of, would need to deal with more context-switching and communications costs than a startup standardized on just Slack, Teams, or something else.

This “standardization efficiency gain” can be extended to the cloud infrastructure level too. A German car maker who uses Microsoft Azure in its home market would prefer to also use Azure for its China-based, US-based, or Russia-based teams, instead of a local cloud solution. With clear business value, strong network effect, and medium-level compliance cost, the tradeoff to continue operation in less hospitable markets may still be worthwhile.

So should LinkedIn’s (mostly) wholesale departure from China concern all foreign tech companies? Maybe a little, but LinkedIn destiny was written the moment it decided to sell ads alongside media content generated in a social network.

Collaborative network products on the other hand, foreign or domestic made, still have wide lanes to expand into in China’s fledgling enterprise software market. The trick is: don’t accidentally become a media company or be seen as such!

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