LinkedIn’s Platform Business Model Poises Company for Astronomical Future Growth

LinkedIn is an example of a company with an effective alignment of its business and operating model. LinkedIn is the world’s largest professional network with 332 million users, operating a multi-sided business model platform. To help assess LinkedIn’s business and operating model, I’ll use the “business model canvas” in conjunction with the firm’s operational assets as a framework.

 

 

 

LinkedIn is an example of a company with an effective alignment of its business and operating model. LinkedIn is the world’s largest professional network with 332 million users, operating a multi-sided business model platform. To help assess LinkedIn’s business and operating model, I’ll use the “business model canvas” in conjunction with the firm’s operational assets as a framework.

Customer Segments
LinkedIn’s customers are individual professionals and representatives from companies and agencies. In other words, LinkedIn’s mission and vision represent the value that the company endeavors to create for its users. Specifically, the consumer groups consist of recruiters, advertisers & marketers, developers, and professionals who use the Internet.

Value Proposition
LinkedIn’s mission is to “connect the world’s professionals to make them more productive and successful” and has a vision to “create economic opportunity for every professional in the world.” Specifically, LinkedIn allows its professional users to manage a professional online identity. For companies and agencies, LinkedIn provides a platform to reach and identify talent.

Cost Structure
According to LinkedIn’s 2014 annual revenue, the company’s operating margin is 3%. This number compares to Facebook at 30%. I’m evaluating the cost structure, specifically the expenses of the firm’s operation, to assess the firm’s operating effectiveness. Although the operating margin seems to indicate that LinkedIn is ineffective in its operations, upon closer inspection, one realizes that these expenses result from discretionary and variable costs. A mere 35% of operating costs are as a result of General & Administrative expenses and Traffic Acquisition Costs. The bulk of its operating costs result from sales & marketing and product development, costs for which the firm can scale back without damaging the underlying firm assets.

Revenue Streams
While the firm’s operating effectiveness can help to gauge the model operational effectiveness of the business, the revenue earnings can provide insight into a firm’s business model effectiveness as revenue represents a firm’s ability to capture value. LinkedIn has three primary revenue streams: Talent Solutions, Marketing Solutions, and Premium Subscriptions. Talent solution products made up 57% of LinkedIn’s Q4 revenue, marketing solutions 23% and premium subscriptions 20%. The firm captures value primarily from its corporate key customers rather than the professionals for whom the company seeks to create value as stated in the mission and value statements. The fact that only a fifth of revenue is generated from individual professionals is an impairment to an otherwise healthy business model. LinkedIn also seems to recognize this as an issue as the company’s CEO, Jeff Weiner, stated that LinkedIn will increase prices for its premium users in its most recent earning call.

Key Activities
The key activities of LinkedIn are indicated in by its cost structure and are sales & marketing and the development of its platform, which is the company’s most readily apparent asset. LinkedIn’s business model is unique in that network effects are both “same-sided” and “opposite-sided.” LinkedIn’s activities help to facilitate the network effect on the “same-side” through professional network connection requests and endorsement of skills. This activity of the users aided by the company’s activities creates a network effect that attracts “opposite-sided” users, such as businesses and marketers.

Key Partners
The key partners for LinkedIn are Equinix, which is LinkedIn’s Internet service provider and the content provider of its website. Equinix, Inc. is the world’s largest IBX data center & colocation provider and hosts carrier-neutral data centers. LinkedIn’s key partners is an indication of how well the firm manages the assets of other firms for the company’s own advancement. While the firm’s operating and cost structure can lead to insight into the effectiveness of a firm’s operations, an analysis of key partners helps to assess its effectiveness in managing assets of others. LinkedIn has been extremely successful in that the vast majority of the content on LinkedIn is sourced from outside the company. Information is almost wholly user-provided. This has positive effects on cost structure — an operational measure — and the company captures the value through corporate fees, a business model measure. Thus, LinkedIn captures the value on assets the company facilitates, rather than provides itself! As a result, I’m inclined to say that the firm has excellent business model and operating model alignment.

 

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8 thoughts on “LinkedIn’s Platform Business Model Poises Company for Astronomical Future Growth

  1. Very interesting. Do you think that they can scale the business up in a way that will fully eliminate the old CV/cover letter mechanism?

  2. Yes and no. In many ways, LinkedIn will be able to eliminate the resume and cover letter through the standardization of several elements of resumes across several companies and the ability to perform big data modeling on this data. It is positioned to not be a great resume/CV replacement but a tool for which a company can accurately gauge the future performance of candidates within their own companies through things such as those people who are part of the user’s network. This is already being done with gauging the credit-worthiness of people, even in countries such as the U.S.A.

  3. This is very interesting– I did not know that its operating margins are so low. I wonder if all that product development will result in additional platforms. It’s also fascinating how they use a pull mechanism by creating a usership base first and using that to make money off the institutional customers.

  4. Interesting post… did you notice the complete makeover of their mobile app? It’s kind of amazing…ahaven;t seen such a drastic change in such a major brand before… do you think it will work?

  5. Rahkeem – I’m so glad that you chose to do Linkedin. I’ve found more and more value in it in recent years and I often now turn to it to make connections and search for people before any other social network platform (even before facebook for both professional and social purposes). I’m not surprised that its managed to grow to have ~20% of facebook’s users and I’m sure it will continue to grow, to your points! It just creates so much value for so many users, to your great points. I’m curious what you think the drawbacks are for HR departments and recruiters using LinkedIn vs. other widely/typically used sources… do you think LinkedIn could ever be more than a supplement in this respect for larger, more established companies?

    I found your breakdown of their revenue streams very helpful in terms of understanding their BM and how they make money. Do you think they can improve upon their 3% operating margins as they grow?

  6. @Marco Iansiti: Just checked it out, so far I’m impressed! It seems as if they’ve taken a few cues from the Facebook app, although I’m sure many of their changes were natural.

    @Charlotte: A friend of mind who attends Stanford GSB mentioned to me recently that they have a Stanford written case on LinkedIn, and the consensus that LinkedIn is positioning itself as the primary talent sourcers and is only in the beginning of the data science and analytics it can perform on its users. Also, most definitely! It seems to be an informed decision to invest so heavily in product development.

  7. Very interesting Rahkeem. I like your analysis of their cost structure and its scalability. Another point to consider is that other big tech companies, like Facebook, own their data centers instead of leasing them which I think would be viewed as CAPEX instead of operating costs. Do you know if this is the case of their partnership with Equinix? If so, I wonder how the partnership will change as LinkedIn grows and the upside of owning the IT structure becomes bigger.

  8. Very interesting, Rahkeem. I had a similar concern to @mrosetto – did you read this key partnership with Equinix as a potential problem in the future at all? I know Facebook benefited greatly from having their own datacenters, and wonder how easy it would be to switch partners or create their own data centers should Equinix prohibitively increase the price in the future.

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