Risks to LinkedIn’s Business Model

Despite its recent dominance, LinkedIn could fall victim to diminishing returns on assets as it continues to expand its already large market shares. According to LinkedIn, the firm has already addressed large proportions of key markets, including $27 billion of the $85 billion talent acquisition and administration market, and $25 billion of the $69 billion online advertising market. Customers could become harder to acquire, driving up LI’s customer acquisition costs.

In its early days, LinkedIn focused on individual business users and differentiated itself from other social networks by providing users with a simple site and user interface largely free of non-professional information. As the company has attempted to improve user engagement to levels seen by other social media competitors, it has added many new features including news feeds, article sharing, and status updates. These additions appear to be inconsistent with the simplicity value originally provided to users, potentially encouraging user attrition.

As the company has broadened its scope to target companies, it has swiftly increased its employee headcount and increased its number of physical locations worldwide. Large scale increases in real estate assets could endanger prospects of improving returns on assets.

The company has pursued a rapid pace of international expansion while simultaneously adding new products and services. LinkedIn risks a loss of focus as it continues to increase the breadth and depth of its offerings.

In 2011, LinkedIn derived approximately 50% of its revenue from Hiring Solutions, and 30% from advertising. Both components are highly cyclical, and the company’s revenue is tied to a strong economy. An economic downturn could damage a significant portion of its revenue streams. Though LinkedIn’s Premium Subscription model is countercyclical, it does not seem likely to compensate for other losses.

The company highlights its growing store of user data as a source of strength moving forward. However, the untapped potential of such data could be compromised by end-user privacy concerns. A backlash could discourage users from utilizing LIs services, or even lead to government regulation. An absence of public privacy concerns could also negatively impact LinkedIn. Data rich and well-heeled companies such as Facebook, Google, or Twitter could seize the opportunity to make a serious push into the industry.

Finally, industry domination could drive from its ecosystem many of the recruiting firms that often double as customers.

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