SaaS Black Friday Is a Warning Sign for Linkedin

LinkedIn Stands Firm, but Must Avoid Complacency and Invest in the User Experience

Last Friday was the worst day ever for SaaS companies, erasing $28 billion in market cap in a matter of hours. Lower growth expectations for 2016 caused a massive sell off. One notable casualty was the largest professional network and online employment service, LinkedIn. So why did this occur and can the firm recover?

It started with the plunge in LinkedIn’s share price following weak guidance for 2016. It took Twitter three months to lose 42% of their share value, LinkedIn lost 43% in hours. So what is going on here, specifically looking at the business model and monetization of LinkedIn?

Despite this stock correction, HfS still believes LinkedIn remains in a strong position, boasting a massive professional network of 414 million members, a diversified recurring revenue model and engaged members.

LinkedIn is a once-in-a-generation company, with a large addressable market and we do not believe people should panic at the drop in market capitalization in itself. Like many Internet and SaaS companies, LinkedIn traded at a high forward revenue multiple, essentially with high growth expectations already priced into the stock. Decreasing growth rates lead to a correction of the valuation, which happened to LinkedIn.

The plunge is an important warning sign for LinkedIn. In 2015, LinkedIn has seen flattening growth in members, unique visiting members and member page views.

There are issues with LinkedIn’s products that it should start to fix. However, any changes must be done cautiously, so as not to impact the value of the freemium audience, which will always be the bedrock of the LinkedIn community.

LinkedIn’s Freemium Model is Struggling to Convert Customers to Premium Subscriptions

HfS is a big proponent of freemium, making most of our research available to our audience for free. LinkedIn’s freemium offering brings a lot of value to many of its members—to such an extent that most members don’t upgrade to its Premium offering. LinkedIn struggles to effectively monetize the potential of its audience. The value proposition should be refined further and articulated better to bring more value into Premium. LinkedIn provides so much of its value for free; the incentive to go Premium is weak. Some avenues to consider:

• Introduce a subscription model with tiered pricing to lower the threshold and introduce upsell opportunities.
• Differentiate subscriptions based on career stage and professional development needs.
• Include credits for courses on Lynda.com.

Its Cluttered User Experience is Hindering Growth

LinkedIn aggressively pursued paths for monetization, resulting in Talent Solutions, Premium Subscriptions and Marketing Solutions (Advertising and Sponsored Content). LinkedIn gave a big push to the content strategy with blogs on the Pulse publishing platform. This created a number of problems in the user experience.  

• Talent Solutions attracts a lot of spam, which is bad news for the flagship product and the user experience.
• Jobs presented to members are often misfits.
• The content strategy has led to an explosion of new content on LinkedIn. But information overload is a big issue for people. The current social feed doesn’t cope well with the proliferation of content.

Strength of the Network is Becoming Diluted

Many users find the value of their LinkedIn network declining as a result of looser connection policy. The social graph is diluted by allowing connections between strangers. While there was a threshold in the past, LinkedIn is now facilitating this dilution itself by “recommending people you may know.” At the core of social networks lies the ability to reach people and audiences beyond your own “strong ties.” LinkedIn is a powerful place for discovery and learning. Though too much content pushed from the “weak ties” lead to mind-numbing experiences shifting through so much information.

Platform and Partnering Strategy Restricting Broader Adoption of the LinkedIn Experience

HfS believes the outlook for LinkedIn is strong, especially if it finds ways to forge better partnerships in the software and services community. Data is eating the world (see link), and LinkedIn sits on top of a mountain of professionals’ data. At this moment, LinkedIn is closing down many of its open APIs, forcing developers to become part of its partnership program. Twitter famously restricted the use of its APIs in 2012, with a serious backlash to its developer ecosystem. It is understandable from a financial and more short-term perspective, but long term having an open platform is a lever for innovation and value. Looking at the dynamics of the As-a-Service Economy, collaborative engagement enhances innovation and value creation for customers.

In addition, LinkedIn splashed out $1.5 billion for Lynda.com in April 2015, but we don’t see a sense of urgency to integrate the online learning platform into the LinkedIn experience. Lynda.com provides LinkedIn with a resource in its learning and development play as Massive Open Online Courses (MOOC) gain importance in corporate training. Lynda.com can play a significant role in expanding partnerships because it brings along thousands of schools and businesses currently using the platform for e-learning. Tight integration into LinkedIn’s platform is critical for the value it can add to the overall business.

LinkedIn Needs to be Wary of Creeping Competition

LinkedIn has been able to create a market with little competition. Its core product has never been great or cutting edge, but it owns its market segments and it’s good enough to maintain dominance it its area. However, the days when LinkedIn was the only social platform available to manage your professional profile are long gone, as new entrants, such as GitHub for engineers and AngelList for the startup community, have emerged. However, LinkedIn is still the biggest professional platform and barriers to entry are very difficult as it becomes increasingly hard to entice users to enter new web-based communities—many have huge trust issues sharing their private employment data with websites, and it costs huge amounts of advertising dollars to build brand and trust in new services.

Members are the most valuable asset of the business model—and LinkedIn’s members are the product. If the user experience is putting them off, LinkedIn has a significant value problem and LinkedIn has to address this or face further erosion of investor confidence. All the monetization plays have weakened the user experience, and LinkedIn needs to address these (unanticipated) effects. LinkedIn has to focus on the user experience, the platform dynamics and real value adds in the Premium Subscription. And it must invest in being a platform and a partner ecosystem, because innovation accelerates in healthy ecosystems.