Last week, the share price of social network LinkedIn soared on its first day of IPO – up to over $90 from $45 – bringing the company value to over $10 billion. LinkedIn has captured a large “share of life” of its 100 million users – a community larger than Japan. Extracting value from such a big share of life is hard work, and even harder is to sustain and grow this value. eCommerce sites can learn from LinkedIn how to focus on a share of life of their users they can chew, meaning: turn it into valuable information for their users and themselves.
Network effects of social media are overestimated
With 100 million members, LinkedIn is one of the largest social networks in the world and claims to be adding 1 million new members each week.
Those who invested in LinkedIn may have based their share price estimate on Metcalfe’s law of network effects which says that the value of a network grows proportionally to the square of its size, meaning very fast.
But Metcalfe’s Law does not directly apply to social networks because they are not pure communication networks but rather social media. As a social media, LinkedIn’ value depends on the value of its content. LinkedIn derives its revenue from subscriptions and advertising. Currently 41% of its revenue comes from hiring solutions — essentially premium database access sold to employers, 27% from premium subscriptions to employees and 32% from advertising.