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LinkedIn Could Get Banned in Russia

By Evan Niu, CFA - Nov 10, 2016 at 6:36PM

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Will the professional network comply with data localization requirements?

Image source: LinkedIn.

Professional networker LinkedIn ( LNKD.DL ) is very much still in growth mode, particularly in regions outside of the U.S., so it could potentially be bad news that the company is staring down a possible ban in Russia. A local court has upheld a court decision against the company, saying that LinkedIn was not in compliance with the country's data protection rules that require any personal user data regarding Russian citizens to be stored on Russian servers. LinkedIn had appealed a prior court decision, which is now being upheld.

Despite being around for two years, the law has never really been enforced. The goal is to protect Russian user data by physically storing it within the country, although the skeptical view is that the Russian government could also more easily get its hands on that data itself if it's stored locally.

The ban could be implemented within the next week or so. LinkedIn says it is still interested in meeting with regulators to resolve the concerns around data localization.

How important is Russia to LinkedIn?

LinkedIn reportedly has approximately 6 million registered users in Russia, which only represents about 1% of the 467 million registered members that the network had as of the end of September. Of that total, about 106 million members are in Asia-Pacific (APAC), which is the fastest-growing region for LinkedIn memberships.

Members by Region

Q3 2015

Q3 2016

Growth (YOY)

U.S.

122.3 million

133.8 million

9%

Other Americas

67.8 million

79.1 million

17%

EMEA

127.4 million

148.2 million

16%

APAC

78.8 million

105.8 million

34%

Total

396.3 million

466.9 million

18%

Data source: SEC filings. YOY = year over year.

APAC is also quite modest in terms of revenue relative to other regions.

Revenue by Region

Q3 2016

Percent of Total

U.S.

$588.2 million

61%

Other Americas

$50.6 million

5%

EMEA

$235.2 million

25%

APAC

$85.8 million

9%

Total

$959.8 million

100%

Data source: SEC filings.

This makes sense since LinkedIn's actual business lags user growth, since the majority of sales come from monetizing user data with products like LinkedIn Recruiter. It all starts by building the member base, and monetization comes later. So while Russia is small, it is growing and remains an important market for the company.

While LinkedIn does not disclose further detail within these segments, it's quite likely that China is a much more important part of APAC revenue. There are now an estimated 20 million registered members in China, which is pretty solid progress considering LinkedIn only entered China officially about two-and-a-half years ago.

The bigger picture

Beyond LinkedIn, Russia's crackdown on tech companies potentially has implications throughout social media as well as a broader group of U.S.-based tech companies. Particularly regarding companies that collect user data, they may have trouble entering the Russian market unless they're willing to comply with local regulations. It's a somewhat expected issue, much like how LinkedIn had to navigate censorship concerns in China, but that won't make it easier if companies disagree with the spirit of the law.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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