LinkedIn And Facebook Econ 101

LinkedIn & Facebook are at the top of the social media food chain. Both sites help people connect socially with each other – a very “noble” claim. Have you ever wondered how they make money?  In reality, they are models of Econ 101 – capitalism in action.

In a Fortune article (HERE), here's a dirty little secret about social networks: No matter how much they talk about designing their sites for users, it's not true. Social networks are about making money off their users. Facebook makes money when it gets users to interact with big corporate brands on their site. For any successful social network, users ARE the revenue – they are the “eyeballs” that the company can “sell” to advertisers. It’s all about the Benjamin’s, as they say.

It's much the same for LinkedIn, which goes public Thursday. The prospectus has lots of high-minded rhetoric about its vision "to create economic opportunity for every professional in the world" and how it's "transforming the way people work by connecting talent with opportunity at massive scale." It almost sounds like LinkedIn is going for a Nobel Peace Prize, not an initial public offering.

But make no mistake. LinkedIn is going public, and that means it needs to be profitable, especially with its surprisingly large $4+ billion valuation. So while the site's may be designed to persuade workers into using its site as a platform for career networking, the company's income statement shows who the true customer is: 49% of LinkedIn's revenue comes from companies looking to hire talent (recruiters or corporations). Only 21% comes from members who are paying subscription fees to the site. The other 30% comes from ad revenue.

So if you’ve ever wondered about the phenomena of Social Networking as I have, the model is collect “users” by offering them something they’ll like; once you have enough “users” / “eyeballs” – find someone to “sell” them to – find companies that want to advertise to those “eyeballs”. Think of it as a “distribution” network – the Social Network compiles the “users / eyeballs”, then distributes them to advertisers. Not that there is anything wrong with it, I love capitalism in action – these sites provide a service to both the “users” & the advertisers.  Pretty cool stuff…