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LinkedIn is Linked to the Best Type of Ads; Facebook Faceplants

Posted: 06/18/2012 2:12 pm

On the eve of Facebook's IPO announcement in May, I argued that Facebook has some serious structural problems that will limit how profitable it can be. The argument works like this:

Before going public, Facebook had two core groups they tried to make happy: users and advertisers. In academic speak, we'd say that the interests of these two stakeholder groups are not aligned: One benefits at the expense of the other. When Facebook gets pushy with ads, advertisers are happy, but users are unhappy. (A new study shows that one-third of Facebook's one billion users say they spend less time on the social network) If they ease off on ads, not only are advertisers unhappy, but Facebook makes less money.

Clearly, this isn't great for Facebook, but as a privately-held company, it wasn't the end of the world. By going public, Facebook added a third type of stakeholder: the shareholder. Shareholders only care about ROI (return on investment), and it's the legal responsibility of every company to "maximize shareholder value." This means that in order to satisfy their shareholders, facebook has to increase the pressure on the already tenuous, misaligned relationship between advertisers and users.

It turns out that knowing what people like to chat about when they should be working isn't a very effective way to match advertisements to eyeballs. This doesn't mean that the people at Facebook aren't competent or that the problem is unsolvable, it just means that Facebook isn't currently in a position to disrupt or reinvent advertising.

LinkedIn, on the other hand, is fundamentally different from Facebook. LinkedIn is in a number of businesses. First, many people pay for premium features like increased profile statistics or the right to introduce themselves to strangers. Second, while LinkedIn is paid to serve ads, they serve a very specific type of ad: job postings. There are few types of ads that people are as eager to see as job postings (with the possible exception of "free kittens").

Since your LinkedIn profile is essentially your digital resume, it's tagged with all the relevant keywords that employers will be using when deciding who sees their job postings. If you don't have a great job today, you're ecstatic to be introduced to a great job opportunity. Even if you do have a great job, you're still probably intrigued to hear about alternatives. For LinkedIn, finding suitable candidates and displaying ads are one and the same activity, and the company happens to be very good at it. Returning to our academic language, the interests of LinkedIn's stakeholders are very nicely aligned.

The day-to-day trading on the stock market is not the perfect barometer for a company's long-term prosperity, but it often tells a story. It is worth noting that LinkedIn started trading in May 2011 at $45 and now costs about $100 a share. Facebook, on the other hand, launched at $38 a share when it went public a year later in May 2012. But Facebook currently trades at around $30.

All companies have stakeholders and the smartest companies make money by aligning as many stakeholders as possible: create as much value for as many people as you can, then find unobtrusive ways to capture it. Wal-Mart makes money by letting manufacturers produce at great scale and by offering very cheap prices to customers -- everyone wins. Amazon does the same, but with customers not even having to leave their homes. Google knows what we're looking for this instant and matches our interests to advertisers. These are companies that, generally speaking, we like doing business with. And the list goes on.

As an advertising company, Facebook will continue to be challenged to create a win-win-win relationship between their stakeholders as these other companies have. And that's why they're exploring other options like having their own currency.

If you buy the arguments that they won't be able to turn advertising around and that Facebook is running out of new users to join the site, then microtransactions are one alternative they have right now to deliver against their inflated share price. The problem is that there are a number of other stakeholders in (or entering) the payment business already including banks, credit card companies, telecoms, handset manufacturers, PayPal and the like.

If you think that aligning the interest of two or three stakeholders is hard -- try doing it for dozens.

 

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