The Coca-Cola Company (NYSE:KO) vs. PepsiCo, Inc. (NYSE:PEP), Apple Inc. (NASDAQ:AAPL) vs. Microsoft Corporation (NASDAQ:MSFT) or American Airlines vs. decent customer service, corporate battles are a big part of global business history. Although it’s a much younger rivalry, Facebook Inc (NASDAQ:FB) and LinkedIn Corp (NYSE:LNKD) have emerged as the two leading social networks, and they directly compete against each other in areas like online advertising.
Let’s take a look at these two companies from an investor’s point of view. Which one is a better buy, Facebook Inc (NASDAQ:FB) or LinkedIn Corp (NYSE:LNKD)?
Different Business model
Facebook Inc (NASDAQ:FB) has more than 1 billion users, way above LinkedIn Corp (NYSE:LNKD)‘s 225 million, but this is not an apples to apples comparison, because the two companies have different business models. While Facebook makes most of its money from advertising, LinkedIn makes only 25% of revenues from that business. The big cash cow when it comes to LinkedIn Corp (NYSE:LNKD) is talent solutions for employers, which provided 57% of revenue in the last quarter, with the remaining 18% coming from job search services for candidates.
LinkedIn Corp (NYSE:LNKD) estimates that its addressable market is worth around $27 billion, and it’s an industry in which the company has positioned itself as the disruptive leader. The company benefits from the network effect; users need to be on LinkedIn, since potential business partners and job recruiters are using the platform. Hiring companies want to go where all the good candidates are, especially in the case of LinkedIn, the place where they can contact people who didn’t necessarily apply for a specific job.
The value of the service grows as it gets more users, and at the same time increases its usefulness and attracts even more users and companies, creating a cycle of strengthening competitive advantages as the company expands and grows. Over time, a growing platform means that LinkedIn should retain considerable pricing power as its services become more valuable.
Facebook Inc (NASDAQ:FB) on the other hand, is fighting against a giant like Google Inc (NASDAQ:GOOG) for a piece of the online advertising cake. It’s a tasty cake, and it will most likely continue growing over time, but Facebook doesn’t have the same competitive strength as Google.
Google’s search product is almost ideal when it comes to online advertising: when someone in a certain area is searching for “Chinese restaurant,” the owner of a nearby Chinese place has some big incentives to pay up in order to come out better positioned than its competitors.
Information and context are crucial assets in online advertising, and Google has access to enormous amounts of data regarding users of its multiple services. The company knows what kinds of information its users have been searching for, and it capitalizes other services like Gmail, Maps and Chrome in order to grasp even more data about the user and make advertising as effective as possible.
While Facebook Inc (NASDAQ:FB) owns a lot of valuable information about its gigantic user base, the company has a big disadvantage versus Google when it comes to context; an ad in Facebook is more likely to be something bothering and invasive, while an ad provided by Google in search can sometimes be a valuable service.
Besides, traffic is shifting toward mobile, and Google is in a position of remarkable strength in that industry since it owns not only the leading mobile operating system on a global scale, Android, but also applications and services like Gmail, YouTube, Search and Maps, which are tremendously popular among different platforms.
LinkedIn is the top dog in online recruiting services, Facebook, on the other hand, is a relevant player in an industry clearly dominated by Google. When it comes to business model and competitive strength, LinkedIn looks stronger than Facebook.
Growth prospects
According to different surveys and media reports, many Facebook users are starting to lose interest in the social network and spending more time in networks like and among others. From The Guardian:
In the last month, the world’s largest social network has lost 6 million US visitors, a 4% fall, according to analysis firm SocialBakers. In the UK, 1.4 million fewer users checked in last month, a fall of 4.5%. The declines are sustained. In the last six months, Facebook has lost nearly 9 million monthly visitors in the US and 2 million in the UK
The number of minutes Americans spend on Facebook appears to be falling, too. The average was 121 minutes in December 2012, but that fell to 115 minutes in February, according to COMSCORE, Inc. (NASDAQ:SCOR).
The problem with Facebook is that the company needs high user engagement in order to monetize advertising opportunities, and some people, especially those erratic teenagers, seem to be losing interest in the social network. Facebook is not a novelty anymore, and it’s getting stuffed with parents and other relatives, so it’s not as cool as it once was.
The company is not going to die, it has become so big that everyone needs to be on Facebook, if only just to remain reachable and have access to the service, something similar to a utility in many ways. But for a business model depending on advertising, lower engagement could mean that growth will be materially slowing down in the middle term.
LinkedIn on the other hand, doesn’t need to be cool or novel. All it needs to be is the leading professional network in the world, and the company is strengthening its position as it becomes bigger and more relevant to professionals, hiring companies and recruiters.
The business will have its ups and downs in reaction to the economic cycle and its impact on the jobs market, but over the long term the company has the competitive strength to take advantage of its abundant opportunities for growth.
Bottom line
Facebook and LinkedIn are the two leading social networks, but that’s where the similarities end. Although Facebook is much bigger, LinkedIn has a stronger and more reliable business model, and the company is in a great position to capitalize growing demand for online hiring services in the long term. Facebook has more friends, but LinkedIn’s contacts are more valuable, so I’m picking quality versus quantity and staying with LinkedIn.
The article The Battle of the Social Networks: Facebook vs. LinkedIn originally appeared on Fool.com and is written by Andrés Cardenal.
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