LinkedIn IPO: What Must The Company Do To Succeed?

05/19/2011 02:19 pm ET | Updated Jul 19, 2011

The market value of LinkedIn, a social networking site for professionals has doubled following its initial public offering, setting off renewed concerns by critics who say the tech industry is headed into yet another bubble.

LinkedIn, the biggest Internet company IPO since Google in 2004, must continue to expand its strategy and bump up revenue in order to live up to expectations.

The company, which had revenues of $243 million in 2010, must move to monetize its huge unpaid user base by driving up engagement and securing more advertising revenue to match its huge numbers and stave off competitors. But to do so, experts say LinkedIn must manage the delicate trick of improving social features without betraying its identity as a professional network.

Despite LinkedIn’s designation as a social network, half of its revenue comes from selling recruitment services to businesses looking to find new employees. That business model distinguishes it from other social networks, like Facebook, which derive most of their money through online advertising, and makes LinkedIn similar in some ways to a software-as-a-service company, like Salesforce. Another third of the firm’s revenue comes from online advertising, while the rest comes from users who pay for premium access.

Experts say that these diversified revenue sources allow LinkedIn to rely upon the stability of its subscription model, but that the company has yet to take advantage of its unpaid user base. Yet while relying on subscriptions from businesses and consumers provides LinkedIn with the stability of a recurring income, analysts say that for LinkedIn to keep pace with expectations, it must strengthen its advertising offerings.

"It’s mostly headhunters and job seekers are paying for the subscription revenues and that doesn’t really scale," said Jonathan Yarmis, an independent technology analyst, who emphasized that LinkedIn must look to other sources of revenue to succeed. "As with Facebook, when you have a captive audience this large and this active, you have to ask, 'How do you monetize from an advertising view?' That’s an untapped monetization opportunity."

Though the company gets revenue from premium access subscriptions from users, that money comes from a very small percentage of LinkedIn's base. Of its approximately 100 million users, only about 0.5 percent of users actually pay for premium access, according to Morningstar. The company made $51.37 million in advertising in 2010. Facebook made $1.86 billion in the same period.

LinkedIn must work to improve user engagement, experts say, getting users to stay longer on the site in order to boost appeal for online advertisers. The nature of LinkedIn as a professional space rather that a social site could conflict with such a goal. Especially for users that are not looking for a job, LinkedIn may not offer sufficient reason to visit the site frequently. According to LinkedIn's pre-IPO filing, a "substantial majority" of page views are generated by a minority of members.

"The issue is the turnover of users on the sites: the stickiness of the user, the reliability of the repeat user. You want a sticky user base for ads and revenues," said Kathleen Smith a principal at Renaissance Capital, an IPO investment advisory firm. "What happens when users say I have the job I don’t want to be out there on LinkedIn?"

Some experts disagree, saying that LinkedIn need not emulate Facebook to succeed.

“People live their lives in Facebook. People are not living their lives in LinkedIn and they won’t and that’s fine," said Josh Bernoff, VP of research at Forrester, a tech research firm, who added that getting users to spend more time on the site would be "very difficult."

Most agree that the site must devise creative ways to enhance its social offerings, without straying too far from the professional purpose it serves. LinkedIn has already started to add social features, such as a news-sharing option that looks much like a news feed on Facebook.

The challenge is to create social, professionally oriented features that users will want to use even when they’re not looking for a job. Analysts warn that if LinkedIn cannot innovate, it could face competition from established companies, like Facebook or Google, as well as startups in the space leveraging Facebook’s platform, like Branchout or Work4labs.

"The soul of any social network is engagement, and because they’re a professional network and not a more broad social network, they’re unlikely to ever have the kind of engagement Facebook has," said Lou Kerner, a social media analyst with Wedbush Securities. "But we think there’s very significant room for growth in engagement around the professional networking concept."

“We think that LinkedIn has just scratched the surface in terms of the monetization of their user base," he added.

UPDATE [3:56 PM]:

A previous version of this article stated that LinkedIn's market value had nearly doubled since its IPO to $7.5 billion. As of the time of this post, the valuation has hit $10 billion, and may continue to change.

Additionally, though LinkedIn's 2010 revenue was originally stated to be $161.4 million, that figure reflects LinkedIn's revenue for the first nine months of 2010. For the whole of 2010, LinkedIn took in $243 million in revenue.

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