Tagged: LinkedIn

LinkedIn has an invitation to connect with David Ricardo

I would like to return to the issue of the value of LinkedIn.  This is prompted by the fact that I have been reading Tim Harford’s excellent book The Undercover Economist.  The opening chapters of this book reference the pioneering work of the 19th century economist David Ricardo and his investigations into price (income),  costs and the importance of what happens at the margin to determining the relationship between the two and thus profitability.

Ricardo highlighted the importance of marginal costs (i.e. what it costs to produce one more unit of production or add one more customer) in setting prices and thus generating revenue and creating profits.  Very basically, what Ricardo showed was that in a relatively competitive and open market, you cannot generate revenue from your product that is significantly more than the marginal cost.

In 2010, LinkedIn revenue was $243 million (according to Mashable) and in March 2011, LinkedIn claimed 100 million users.  This means that revenue per user is around $2.43.  According to Ricardo this should indicate that marginal costs will be close to that i.e. the cost to LinkedIn for adding an additional user and servicing them for one year should be not be significantly less than $2.43.  If they were, LinkedIn is either not operating in an open and competitive market or else something else rather odd, and probably unsustainable, is going on. Continue reading →

Groupon: four reasons why it might actually be the “next big thing”

We have been waiting for a “next big thing” since Twitter went mainstream some years back.  Could it be that Groupon is going to be it?  I am coming round to thinking it might be because it has a number of characteristics I find attractive.

1. It is relevant and real time

Groupon is about stuff that is happening right now in your area.  It is very specific, relevant and useful – all the hallmarks of what the world of social media (i.e. the world where information is not married to expensive distribution technologies) is all about.  No-one is going to ask the question “why should I bother with Groupon” in the same way people still ask “why should I bother with “Twitter?”.  When you see what it does, it is obvious how you use it.

2. It runs with the community tide

I have always believed that the “next big thing” in social media would be a new behaviour rather than a new tool and I have also believed that this form of behaviour would be linked to the formation of communities.  In particular that people would get together within communities to manage their interactions with institutions, in preference to allowing themselves to be managed within communities controlled by institutions.  While Groupon is a tool it sort of fits the bill in that a large part of what it does is based around the creation of communities – communities of purchase.  And also that it effectively provides a medium within which individual consumers can manage their interaction with brands.

3. It uses editorial narrative

The unique feature of Groupon is that it has an editorial department of 400 people to effectively “write the ads”.  This recognises that the one-size-fits-all approach to creative that characterises traditional advertising just doesn’t work in social media, which is a medium much more adapted to stories and storytelling.

4. It makes money

For the outset, Groupon has a real business model for making money that is rooted in what it does as a business.  It doesn’t rely on the Facebook / LinkedIn approach which is all about building a user base first and then trying to impose a revenue model on top.  In this respect, it is akin to Demand Media – another company I like – in that its business model is 100 per cent adapted to work in the social space and aligned against how its customers use the service.  This is unlike Facebook or LinkedIn who try and raise revenue on being a media platform or information channel to their users when their users actually use the service as a communications infrastructure.

Certainly – if I had money to invest I would far rather invest it in Groupon than in some personal data storage facility like LinkedIn.

LinkedIn CashedUp CrashReady

LinkedIn has ended its first day of trading as a public company with valuation of $8.9 billion.  This is 36 times its 2010 revenue.  That’s right – 36 times revenue.  As this Mashable piece points out this compares with Google at 5.5 times 2010 revenue and Demand Media at 4.4 times revenue.

What is the difference between LinkedIn and Demand Media? Well,  Demand Media has a business model: a business model that is currently working and which is rooted in the fundamentals of its business.  LinkedIn has none of these things.  Perhaps that fact that Demand Media has a functioning business model means that analysts have some form of reality upon which to base their assessments, whereas for LinkedIn all we  have is a model that appears to be a cocktail of one part fantasy and one part ignorance.

Whatever model the ever-so-clever money men are using, it will probably be one that basically regards LinkedIn as a form of content platform or media.  However, LinkedIn, Facebook et al are not forms of media, they are actually infrastructures – that is certainly is the way people use them.  I don’t know how you value LinkedIn as an infrastructure, especially when it is an infrastructure that didn’t really cost anything to build, where the idea behind it easily replicatable and the content within it essentially remains the property of its users.  That sounds to me like a max three or four times revenue multiple proposition.

At some point in it is going to dawn on Wall Street that these properties are largely disposable infrastructures that simply host content on behalf of users – basically branded data storage facilities with some service add-ons.  And then we will get the crash.