Markets

Why Linkedin and Zillow Prosper While Pandora and Tumblr Struggle

By Jim Edwards

Updated on: October 10, 2011 / 5:12 PM EDT / MoneyWatch

Linkedin (LNKD) will take 3 percent of all social media ad dollars this year, according to a forecast by eMarketer, and social media generally -- Facebook, Twitter et al. -- will take more than 10 percent of all web ad dollars by 2012. eMarketer predicts Linkedin's ad revenues will be $140.8 million in 2011.

The prediction wasn't a tough one to make: Linkedin already reported display ad revenues of $66.2 million in the first six months of the year, with total revenues of $215 million during that period.

Linkedin has been profitable in both Q1 and Q2 of this year and last -- quite a feat for a company that gives its main product away for free and relies upon the goodwill of advertisers to pay its operating costs. What explains Linkedin's rude financial health? The company has a couple of things going for it that the likes of Pandora (P), Demand Media (DMD), Tumblr, and Twitter do not:

It's a transactional medium: People come to Linkedin when they want to make a decision that will either cost them or win them a large sum of money, i.e. when they're hiring someone or when an employee is looking for a new job.
Its ad revenue is bolstered by subscription revenue: It's a truism in the online media business -- you can't make money just by selling ads next to free content. You need a subscription base too.

Here's what Linkedin's revenues look like when compared to its costs:

As long as that blue line stays on top, Linkedin will be just fine.

The transactional/subscription axis is at work in another profitable .com business: Zillow (Z), the real estate web site. Zillow's business is strikingly similar to Linkedin's: It sells ads to people who have buildings to sell. Most of its content is free, but it offers premium ad space and access to realtors who pay a subscription. Here's a chart that expresses its recent results as the percentage difference between its costs and revenues:

(To generate these numbers I mixed recent quarterly numbers with full-year numbers. They're still relevant because they're expressed in percentages, not whole dollars.) Note that in Q2, Zillow finally came good: Its operating costs were 10 percent less than its revenues. The company made a $1.5 million profit on revenues of $16 million in Q2 2011.

The transactional/subscription basis of Linkedin and Zillow is what makes their ad space so valuable: Clients can buy media in front of people who have already made a decision to spend a lot of money. You cannot say the same of users of Twitter, Tumbler and Pandora. They're just there for free stuff, and advertisers on those sites are essentially shooting in the dark.

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Image by smi23le, CC.