LinkedIn: The Competition

The next step in our strategic evaluation of LinkedIn is a look at the professional network’s key competitors. For the sake of this exercise, we have identified three primary competitors:

1. CareerBuilder
2. Facebook
3. Twitter

LinkedIn maintains a unique and commanding position among social networking platforms. The firm’s financial niche market dominance, rapid user growth, and financial resources have given the company a source of strength against would be competitors. While the number of firms that pose a credible threat is shrinking, there are a number of companies with the potential to jeopardize LinkedIn’s growth. As previously stated, in 2011, LinkedIn generated 50% of its revenues from Hiring Solutions, 30% from advertising, and 20% from Premium Subscriptions. CareerBuilder poses the most significant threat as it directly competes for LinkedIn’s most lucrative revenue source. CareerBuilder is currently the largest online job board in the U.S., generating over 24 million monthly visitors, and having well established relationships with many of the world’s largest businesses. Jointly owned by Gannett, Tribune Company, and McClatchey, CareerBuilder has the ability to compete financially with LinkedIn in the Professional Network Services.

Twitter has the resources necessary to aggressively pursue the online job search market, evidenced by investors recent valuation of Twitter at $10 billion, a number similar to that of LinkedIn following its IPO. Studies have shown that Twitter users may be more inclined than those of LinkedIn or Facebook to apply for job postings. It is not clear whether Twitter has prioritized these opportunities, but the market could prove attractive as Twitter searches for ways to generate revenue. Additionally, Twitter’s large user community, and accompanying data, could enable it to compete with LinkedIn’s targeted advertising market.

The biggest challenge that Facebook offers to LinkedIn is in the space of revenue from online advertisements. Facebook has over 845 million users and currently does a much better job of keeping users on its website by the use of widgets and third party apps. Due to these factors its revenue generation from Ads is much higher and possess a threat to LinkedIn. And although Facebook is financially the strongest of these three firms, and has the largest user network, its early results from its foray into online job search appear to be mediocre. Similar to Twitter, Facebook has also struggled to create revenue opportunities and could make a larger push in the future.

LinkedIn Revenue Model

Revenue Model

LinkedIn’s revenue model is based on three revenue streams: hiring solutions, marketing solutions and premium subscriptions. Hiring solutions accounts for half of LinkedIn’s total revenue and depends heavily on the marketing and field sales force efforts. The fact that hiring solutions became the most important stream is consistent with the constant increase in marketing and sales investment made by the company, and the increase in corporate customers. On average a corporate consumer generates $29K in revenues, and it costs the company $42K to acquire a new corporate customer. Given the high operating cost structure of LinkedIn, however, it is difficult to generate additional gross margins from new corporate customers. Their lifetime value is not high enough to offset the acquisition costs, making this revenue model not sustainable in the long run unless cuts on operating costs are made or higher revenues are generated.

The other two revenue streams used by LinkedIn depend directly on the member base. The more members, the larger the benefit for all: advertisers, existing members and corporations. With a larger number of users, more members are willing to demand premium features, and a higher number of advertisers are attracted. LinkedIn has managed to grow its base through investment in new product development. That base, however, has started to mature, making increased growth more difficult.
Marketing solutions is the second most relevant income generator for LinkedIn, accounting for 30% of its sales. This proportion has remained unchanged since 2009, indicating that the company has been able to maintain its revenue stream by leveraging its growth in registered members and page views. The greater the number of members and page views, the more attractive the social network becomes. Pageview growth rate, however, is lower (30%) than member base growth rate (39%). Because both rates have been decreasing, the average number of pages seen by a consumer has decreased, making LinkedIn less attractive for advertisers.

Economies of Scale

LinkedIn has decided to focus on a particular market segment; thus acquiring economies of scales is more difficult than if they were to target the market as a whole. Growing their member base does allow them to achieve economies of scale in fixed costs, however. That is the case for all costs except marketing and advertising expenditure which have been rising.

It is also important to note that because the member base is already large, and its growth rate is declining, customer acquisition costs will raise if they do not stop increasing advertising expense. In other words, they have to establish a level of expenditure for marketing and keep it steady in order to continue to benefit from economies of scale.

Results to Date

LinkedIn has shown an increasing growth trend in terms of revenue. Revenue per user went from $4 in 2011 to $5 in 2012. They also, however, have a high operating cost structure (mainly due to marketing expenditures) which does not allow for high profits. There is an evident need to search for ways to increase revenues, while maintaining the same member base and without increasing operating costs.
According to the footprint, LinkedIn is trying to cut each cost by almost 10%, however it has almost doubled the marketing and sales budget. Effects of this policy are explained in the higher proportion of hiring solution product sales, but have not generated enough sales to obtain higher profitability. Therefore they need to cut and establish a limit on marketing spending and also potentially cut the product development expense.

Due to the low operating profit and low net income, the company has not been able to deliver an attractive ROE to its stakeholders (2.4% in 2011). Moreover, it has also failed to make its assets profitable, indicated by a low ROA (1.6% in 2011). One reason that the asset turnover is low is due to increasing working capital, indicating that growth is leveraged on accounts payable which increase the asset base, but are not productive assets. Short term investments are also responsible for this result.
One positive consideration is the fact that the company became less of a risk to stakeholders after the IPO in 2011, because of a lower asset to equity ratio, resulting in a company that is now less financially leveraged.