Business model strength, not numbers, should drive Facebook’s valuation
Are investors making a fundamental mistake in using LinkedIn’s market capitalization as a reference point for Facebook’s potential value? Selling consumer ads (at least twice the market size of B2B ads) to a network over six times LinkedIn’s 135 million members, why shouldn’t Facebook’s value be $100 billion, about twelve times LinkedIn’s $8.4 billion market capitalization? Think again.
LinkedIn’s revenue increased 115% from 2010 to 2011, from $234.1M to $522.2M with adjusted earnings before interest, taxes, depreciation and amortization increasing from $48.0M to $98.7M. For six straight quarters year-over-year revenue growth exceeded 100%. Behind these powerful numbers is a smart set of business models.
The business models are synergistic as each leverages LinkedIn’s social media platform, a platform about advancing careers. The platform connects professionals through vital professional histories, business-related articles and commentary. My daughter introduced me to her college life through Facebook. I’ll help her create a professional, post-graduate LinkedIn page.
Just as Expedia and Sabre disrupted travel agencies, LinkedIn disrupted the recruiting industry. Corporations and professional recruiting firms (50% of LinkedIn revenue) use LinkedIn’s network to connect to talent, saving resources previously spent to access search firms’ networks.
Job hunters and sales people purchase premium subscriptions, contributing 20% of LinkedIn revenues. Because LinkedIn is often the shortest distance from where you are to the person you want to meet, sales people and job-hunters pay a premium to more easily make the connection.
Finally, marketers placing ads on LinkedIn contribute 30% of revenue. (Like premium subscriptions, ads are falling as a share of total revenue.) This business model, like Facebook’s, offers advertisers greater success through targeting ads on members’ personal information and social media behavior. Google is rightfully worried about the advantage of social media ads over traditional search-engine advertising.
Social. Social. Social. With 845 million active users (40% of US residents), Facebook’s the most used social media platform worldwide. 2011 revenues (exceeding $4 billion) came largely from display ads, with a growing share of revenue from games integrated into the Facebook’s platform. Facebook’s done a great job securing company pages and fans, an area LinkedIn is trying to duplicate.
Are Facebook and LinkedIn users each worth the same market value? Advertising rates won’t differ. Marketers are ultimately paying for conversion success, with better targeting increasing the likelihood of converting click-through interest to revenue. Yes consumer advertising is a larger served market than B2B advertising, but that doesn’t mean that any Facebook ad should be worth more than a LinkedIn ad.
Other than its larger served market, does Facebook have any other advantages over LinkedIn? I think not.
- LinkedIn users willingly supply personal information and want it to be public. Facebook users (especially in Europe) may demand privacy.
- More data analytics are required to reach the right Facebook target and Facebook must still prove that targeting on social media measures generates higher ROI than alternative advertising media. It’s not hard, on the other hand, to define professionals and industries in need of your profession or industry’s products and services. LinkedIn’s value promise to sellers is thus clearer: faster and more targeted access for a faster sale.
- Professionals are open to learning about goods and services that enhance their professional success. But are social networkers open to ads? Isn’t this why click-through rates on Facebook are so much lower than other websites and most people use a TiVo-device to block TV ads? AdBlocker’s owes its existence to people wanting to block Web ads. Facebook to me is more attractive as a place to sell APPS that make us more social than as a place to sell products and services. I could argue, in fact, that LinkedIn, which generates about a quarter of Facebook’s ad revenue per member, has untapped potential in its advertising business model as B2B marketers typically lag B2C marketing best practices, which today includes targeted digital ads.
- Google is going after Facebook with Google+. Google can keep its social media platform ad-free (like Android); its search engine and emerging phone business pay the bills. Ad-free social media could encourage many to leave Facebook as it streams more ads to please its new shareholders. There’s no Google parallel that I know of to challenge LinkedIn’s network effects advantage.
Furthermore, LinkedIn’s two non-advertising business models drive valuation, generating $2.71 of revenue per member, more than double its ad revenue per member. LinkedIn is also well positioned to become a source of hyper-local business news, adding to its advertising potential, as well as to emerge, with the right acquisitions, as a leading Recruitment Processing Outsourcing company.
LinkedIn reminds me of the Wall Street Journal. Its readers pay for information linking to clear business success while advertisers pay expensive space rates to reach a clearly defined target market. As for Facebook? To me, it feels more like a community newspaper where the community is my friendship-family circle. In the newspaper industry, the WSJ generates attractive shareholder returns while other newspapers suffer.
NOTE: Another good read about Facebook’s overvaluation is Big Picture blogger Barry Ritholtz’s Washington Post column.