What LinkedIn's Profit Says About Facebook's Ad Business

Why might Facebook's early investors want to cash out now, before the company has solidified its business model? The explanation from Reuters is that the social media titan's valuation has grown so explosively there's not much growth in it left, so it's time to bail before the stupid money arrives.

They aren't the only people who think Facebook might be overvalued. There are plenty of unanswered questions about the quality of Facebook's finances, and whether a significant portion of its revenues comes from advertising or not.

One way to think about Facebook is to compare it with a similar business which has actually published some hard data: LinkedIn. OK, they operate on very different scales with different audiences -- but they're both large social networks whose business depends on connecting individuals' profiles, and their cost structures ought to be similar.

LinkedIn made a 2010 profit of $15 million on revenues of $243 million. Of that revenue, 42 percent came from help-wanted ads and only 33 percent came from traditional advertising:

Although LinkedIn's ad business doubled last year, its help-wanteds nearly tripled. LinkedIn's future is in helping corporations find new talent, not in selling banner ads.

That does not bode well for Facebook if advertising is 60 percent of its sales, as some believe. There have been recent rumblings that all is not well in the world of Facebook ad sales. The company seems uninterested in selling ads inside its mobile app platforms. (And, of course, the entire basis of the split between cofounders Mark Zuckerberg and Eduardo Saverin -- at least in the movie -- was Saverin's insistence that Facebook ought to carry advertising and Zuckerberg's baffling disinclination to make money that way.)

It also explains why Facebook is trying to generate revenue through a Groupon competitor (Facebook Deals) and an internal credit currency system (Facebook Credit) rather than doing the far easier thing, which would be to sell profile page takeovers to movie studios and tech companies.

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