How Does LinkedIn Make Money?

It’s the of summer of 2016 and Microsoft just bought LinkedIn for $26 billion dollars. What’s that all about? Had they just got sick and tired of all those pointless endorsements?

To find out, we’ve got to start by exploring LinkedIn and the work graph. The work graph is 400 million professionals and their resumes. LinkedIn turned this graph into cash in three ways. Firstly, was the same as most of the internet – advertising. Secondly it sold subscriptions to existing users. Thirdly it offered recruitment tools to companies to root through this work graph to poach the employees they really wanted.

I’m going to drill into all of these areas and then argue that the primary way to think about Microsoft’s purchase is not “what does LinkedIn do for Microsoft”, but what can Microsoft do for LinkedIn.

How does LinkedIn make money

Image: Nan Palmero

Changing the Default

LinkedIn calls its recruitment business “Talent Solutions”. This reminds me of a Dilbert cartoon where Dogbert says that he’s decided to use the phrase human capital because the word cattle is already taken.

In the first three months of 2016, recruitment was two thirds of LinkedIn’s revenues. What’s so different about them compared to Monster or Indeed?

The other guys are all supply side markets – or long lists of job vacancies. LinkedIn gave you a reason to have your resume always up and ready. This was the first corporate power trip of LinkedIn, it made broadcasting your resume the default. Previously the default was invisibility.

Invisibility isn’t a good way to get the job you deserve.

Monster and Indeed are page views looking for a job. LinkedIn is a network of people looking AND people not looking. When you get a message via LinkedIn, your first thought is I wonder if someone’s interested in me.

Recruiters want to hire people already in jobs. Even though they cost more, they feel like it increases their chances of getting the best candidate. LinkedIn lets you find more candidates with the experience you want, including the ones that are too loyal to know better.

The average price of a LinkedIn recruiter ‘seat’ is $8,000 a year according to TechCrunch, with this cost dependent on the number of searches you do, how much data outside your network you see, and how many Inmails you send. Placing a job advert is extra.

This sounds expensive except when you compare it to using a headhunter that can easily cost $10,000 for a small hire and $100,000 for a senior one.

LinkedIn profile header

Looking for a New Recruit

When a company decides to hire for a new position, a typical process might go like this. Someone important gets tired of complaining to their boss about how overworked they are, and moves it up a gear to saying that they really need some help. Can I have the budget? Is there anyone you know who might be suitable?

Perhaps they meet one or two people internally. Let’s assume that each step goes nowhere, but that the boss agrees enough to approve another head. Our hiring manager asks some friends and has a few coffees with a few external candidates.

Probably only after these meetings does HR gets a short message switching them on.

Human Resources get a bad rep because they sack people and are often clueless, but wouldn’t you have questions if all you get is “I want a senior manager, similar to Sanjay except with more marketing experience”.

The only time you can get away with exhaustive questions is when you are the police or you are six years old. HR copy and paste Sanjay’s job description and make up the rest. It used to be following this that they might make a job posting. But LinkedIn has cut ahead of that step and they log straight into their recruiter application. This is the second corporate power trip of LinkedIn, it makes HR people feel like private investigators. It empowers HR as a hunter.

You can see why LinkedIn is powerful for both recruiters and people looking, its higher up the stack than the alternatives. On platform referrals already make up 30% of LinkedIn job hires.

There is a belief that 80% of all jobs never get advertised. I’ve seen alternate numbers nearer 40%. The proportion varies by seniority and salary – and the higher either of those go, the more likely the next step is a headhunter. They might start with the names on their books, but they will likely also use LinkedIn.

LinkedIn recruiter is like a Google Maps of a recruitment consultancy’s personal knowledge and network.

HR or the headhunter may finally resort to a job posting. However, only process orientated organizations publish all their vacancies online. As you can see, in theory LinkedIn is second only to a personal referral. A personal referral has a one in three chance of getting you an interview. Depending on the competition, applying blind is more like one in thirty.

Advertising and Subscriptions

Page views are worth something. And that’s because of advertising. Look I’m going to advertise something I really like – Blinkist:

Click here to check out BlinkistThey summarize interesting non-fiction that otherwise you’ll never get round to reading.

Click on the image to download the app to your phone or tablet.

Marketing and subscriptions are both just under a fifth of LinkedIn’s revenues.

Subscriptions are somewhat more unique to LinkedIn. Penetration is low, I’d guess a few million users out of the 400m total. Because LinkedIn makes money primarily on recruitment, it makes sense to be primarily free to the user who makes up the network. Subscriptions are freemium, costing $30-$120 a month, and although they provide some analysis tools, its core purpose is to let users search for and message strangers. It is good for networking, appearing higher in search results, and potentially developing sales leads.

What’s great about subscriptions? Number one it repeats. Number two the default is it repeats. The average person inevitably keeps forgetting to cancel.

linkedin work graph

This is my LinkedIn Work Graph courtesy of Socilabs. Its size is commensurate with what happens when you work for a small firm for ten years!

Work Graph

One of the increasingly valuable aspects of the internet’s graph’s (Facebook’s social graph, Twitter’s interest graph), is the phone directory aspect of them. This is something I explore in my article on Whatsapp. Inmails are core to the value proposition of the individual and organizational subscriptions they sell. LinkedIn claims people are more likely to read Inmails on their platform than regular emails. The ability to contact people and know who they are is extremely powerful. Higher conversion is free money.

Microsoft has floated the use of LinkedIn’s work graph in its Cortana personal assistant. Cortana might give you a quick profile of each of the people you are scheduled to meet during your next calendar appointment. This is valuable but hard to put dollars on.

They have also talked about LinkedIn becoming the social fabric of all its applications, whether it’s Outlook, Excel, Skype, PowerPoint, Word or SharePoint. You know the profile screens they offer on all of these that you never fill in. Well now they’re going to be filled in. But again what’s the value of that?

How will Microsoft make money from LinkedIn

Image: Mike Mozart

How is Microsoft Going to Make Money from LinkedIn?

Microsoft has 1.2 billion Office users, including 70 million monthly average users of Office 365. Skype has almost 300m monthly users.

LinkedIn has 430 million members with 105 million monthly average users.

All these users operate like a network of fax machines. One fax machine is worthless, two is nice, and three fax machines is worth three times what was there before. The value rises exponentially on the number of connections.

Microsoft valued LinkedIn’s 430m members at eight times revenues. What if Microsoft now gives away LinkedIn subscriptions free with Office 365? What if the easiest way to login into Outlook became LinkedIn?

It wouldn’t be bizarre for Microsoft to be able double the size of LinkedIn in 5-10 years. And remember, double the size could be more than double the value of the asset they’ve just bought. That’s the magic of the network.

In terms of what LinkedIn could do for Microsoft, I think it will be less about dollars and more about adding value to the end user. Microsoft is under pressure from Google and Apple across PCs and applications. LinkedIn offers a way to make Microsoft’s existing offerings more compelling, increasing user stickiness and organizational loyalty.

Companies have a love hate relationship with LinkedIn. Although it might help with their recruitment, they also know that it makes their employees easier to poach.

This likely stymied LinkedIn’s efforts to sell organizational offerings. Imagine you’re the CEO of a small business with fifty employees. You want to get a report on a competitor. Wouldn’t it be great if you could call up the LinkedIn profiles of all your employees and search for who worked at that competitor?

I don’t think you can sell this info, because you the CEO knows that forcing your employees on LinkedIn is almost like putting your key assets in a shop window.

But I think Microsoft could easily give this away for free to its enterprise customers. The fear of losing this might incrementally discourage you from outsourcing your Outlook server or Enterprise license.

A LinkedIn Post

Image: from my feed

Mergers the Value Destroyer

Microsoft has a poor track record with acquisitions. The fruits of both Yammer for $1.2bn and aQuantive for $6bn are hard to discern. However, LinkedIn appears to have deeper moats than many other internet businesses, and the intention is to run it separately, which seems to be helping Facebook’s acquisition of Whatsapp succeed.

What’s really crazy about Microsoft is that it is so profitable it is actually unlikely that LinkedIn will move the needle for Microsoft for many years to come. Microsoft’s revenues are $93bn – LinkedIn’s was under $3bn in 2015 – so 3%!

However, this is without touching on the $2 billion dollars of operating expenditures at LinkedIn. Microsoft might hope to cut some of this away.

What About the News Feed? And Why has LinkedIn been underperforming?

Page views are valuable so the LinkedIn News Feed is valuable. However I struggle to really imagine people regularly using LinkedIn as a leading content consumption channel. Unlike Facebook no one is posting photos of your attractive friends you secretly have a crush on.

How Does LinkedIn Make Money Logo

The underperformance issues are definitely worth discussing further. Many of the internet and enterprise software names lowered revenue guidance over the last eighteen months. Workday, Splunk and LinkedIn all started cutting guidance between spring and summer 2015. Their estimated long term growth rates have all come down dramatically.

Is the economy weaker than expected? Are their products less useful than people thought? Has penetration peaked out?

One thing I tend to find is that when you get a multitude of excuses, it means that (1) no one really knows, including the company, and (2) they’re all likely to be small contributors to the problem.

Imagine a company paying $20,000 to LinkedIn for two seats. Maybe they push back a little harder on pricing this year and get a discount to $18,000. Maybe they figure out a way to be smarter about how they use LinkedIn recruiter and get that cost down to $15,000. I think this can all be true and at the same time this company can increase its use of LinkedIn in its hiring from here to eternity.

People may have been over buying LinkedIn relative to their usage and now they have to grow into that. However LinkedIn continues to be the leading recruitment tool of the internet age.

Want to read more stories about the evolution of the internet? This blog charts out the rise and fall of Mozilla Firefox.

Yuen Lo

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