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This Company Has The Best Business Model in Social Media

By Evan Niu, CFA – May 20, 2015 at 8:20AM

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Of all of the companies in the social media sector, LinkedIn has the best business model with the strongest monetization strategy.

When it comes to social media companies, the most obvious and common way to monetize users and traffic is advertising. This is nothing new. Social media companies can connect companies to users and earn revenue for the trouble. Facebook and Twitter both generate the vast majority of sales from their core advertising operations.

However, advertising business models might not always be the most sustainable or attractive in the long run, since the advertising market can be fickle at times. That's why LinkedIn (LNKD.DL) has the best business model in social media -- because it doesn't rely on advertising.

A tale of three operating segments
LinkedIn is uniquely positioned as the professional network of the bunch, so it brings much more to the table for users than its casual peers. LinkedIn connects professionals with other professionals, but also with companies and recruiters. LinkedIn's registered members don't mind when the company sells their information and data to recruiters because that could land them a better job.

LinkedIn's largest operating segment is its Talent Solutions business, which currently comprises about 62% of revenue. The primary products offered by Talent Solutions are LinkedIn Recruiter, Job Slots, LinkedIn Recruitment Media, and LinkedIn Career Pages. The company now has nearly 34,000 customers in this important segment.

Source: Company website.

Another 19% of revenue comes from Premium Subscriptions, in which registered members directly pay fees for greater access to career and networking resources. This is a key point of distinction with LinkedIn when compared to Facebook or Twitter. Most Facebookers and Tweeters would balk at paying even a nominal subscription fee in order to access the network. LinkedIn's premium plans start at $30 per month. For context, Facebook's worldwide average revenue per user last quarter was $2.50, which goes to show how much more effective LinkedIn's monetization strategy is.

The remaining 19% of LinkedIn's revenue comes from its marketing and advertising business. LinkedIn has been making a big push into creating a publishing platform through which members can share professional insights, while LinkedIn can monetize this content through advertising and sponsored content.

There's more money in the enterprise
Simply put, LinkedIn gets to play both sides of the job market as it undergoes a structural shift toward social media. Traditional job listing sites are on the decline, and companies seek the hiring efficiency that LinkedIn offers with its troves of user data. Meanwhile, it operates an advertising business on the side that caters to business-to-business advertising.

LinkedIn also continues to expand its presence in the professional world. The company announced last month that it would acquire, an online learning company that offers a wide range of courses, for $1.5 billion. Investors have balked at the hefty price tag, which is the fourth-largest acquisition ever in the social media sector, but once it is integrated LinkedIn can scale the service up to its large base of over 363 million registered members.

Similar to other verticals, the enterprise market can often be much more lucrative than the consumer market, and LinkedIn applies that to social media.

Evan Niu, CFA owns shares of Apple, Facebook, and LinkedIn. Evan Niu, CFA has the following options: long January 2016 $150 calls on LinkedIn, short January 2016 $200 calls on LinkedIn, long January 2016 $125 puts on LinkedIn, and short January 2016 $140 puts on LinkedIn. The Motley Fool recommends Apple, Facebook, LinkedIn, and Twitter. The Motley Fool owns shares of Apple, Facebook, LinkedIn, and Twitter. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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