Facebook vs LinkedIn

3rd August 2012

Facebook's share price hit new lows on Thursday, dipping below $20 for the first time after the social network reported slowing growth and admitted nearly a tenth of its accounts may be fake. Meanwhile, LinkedIn celebrated another stellar quarter, with its shares rising to close around $93.51.

LinkedIn connects professionals seeking jobs and companies looking for employees, setting it apart from other social media companies. It has concrete profiles based on career histories, while Facebook is a pure social networking experience, making it prone to abuse.

In fact, it has more than 80m fake users. About five per cent of its 955 million members have duplicate accounts and around 83 million accounts could be fake.

Facebook says: "While these numbers are based on what we believe to be reasonable estimates of our user base for the applicable period of measurement, there are inherent challenges in measuring usage of our products across large online and mobile populations around the world."

Facebook's profiles include millions created for users' pets and a large number of accounts the company deems "undesirable", it has admitted. Hardly an enticing prospect for prospective advertisers!

Perhaps Rick Summer, an analyst at Morningstar, put the difference between the two sites particularly succinctly. "LinkedIn has a distinct value advantage. They own an identity in the professional user," he says.

"They have different ways to monetize the user. That is a distinct advantage to how investors are receiving the stock."

So while Facebook is an ‘open' system with some mystery surrounding fake profiles and an uncertainty that makes it a less attractive investment proposition, it is clear what you're getting with LinkedIn.

Facebook largely depends on advertising revenue, and the latest fake profile news isn't going to bolster this. LinkedIn, though, is business-oriented and utilises three different veins of revenue: subscriptions to its premium service, advertising and companies that use LinkedIn for hiring.

So the difference is clear, and while people remain hopeful of future prospects for LinkedIn, many predict that Facebook will suffer the same fate as MySpace.

Psychology Today comments: "Becoming MySpace, of course, is the spectre that haunts the nightmares of every Facebook investor.

"The company has been super aggressive in trying to avoid that fate by attempting to metastasize into something grander than the automated blogging site it started out as, sending out tentacles everywhere in order to become a ubiquitous presence that binds together every aspect of the internet experience. They have strived for immortality through intrusiveness. And this, I think, is exactly what will be their undoing.

"At its heart, Facebook is about gossip."

LinkedIn was one of the first major social networking sites to execute an initial public offering that smashed expectations, with shares are trading at more than double their IPO price of $45.

However, Facebook's public entry in May was a dismal failure, with its shares losing almost half of their value since the company's IPO at $38. Facebook was able to raise a good chunk of capital to develop and expand the business, to get it set for an IPO. Early investors in the company did well, as they were able to cash out some portion of their earlier investment at good prices. But fundamentally we should be asking now whether it offers a particularly valuable service?

The world is in economic crisis – a situation which is probably also aiding LinkedIn. As Forbes points out: "LinkedIn is a magnificently well run company, filling a huge need for professional networking and recruitment. We all change jobs on average 7 times in our lifetime, and many of us change careers many times as well."

It's vital to look at the potential for future profit as well as part success when investing. As Mindful Money's pyschology blogger Ken Eisold highlighted earlier this year in his blog, investors may find in the future that it pays to be sceptical about hot new company offerings.

 

More on Mindful Money:

Knight Capital loses $440M after trading blunder

Reforming and restoring big finance

How could we value a Money Saving Expert IPO?

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35 thoughts on “Facebook vs LinkedIn”

  1. Andy Zarse says:

    The depressing thing is Shaun, you were probably able to write 99.9% this blogs weeks ago and then simply fill in the spaces when the figures were released earlier this morning.
    How on earth are we ever going to see any economic growth in the UK when people’s spending power is being eroded at such an annual rate over such a long period of time? That is before we even mention collapsed deposit interest rates, smashed annuity rates etc.
    God what a mess.

    1. JW says:

      Hi Andy

      Depends on your perspective. Not a ‘mess’ if you are one of the 1% , gradual reduction in living standards for the majority without massive civil insurrection, ‘feudalisation’ of society,protection of asset wealth; what’s not to like?

      1. forbin says:

        DUNE style here we come….

        Forbin

        or Harry Harrisons Homeworld

        1. Justathought says:

          Hi Forbin,

          “Very few beings really seek knowledge in this world. Mortal or immortal, few really ask. On the contrary, they try to wring from the unknown the answers they have already shaped in their own minds — justifications, confirmations, forms of consolation without which they can’t go on. To really ask is to open the door to the whirlwind. The answer may annihilate the question and the questioner.” Author Unknown

        2. Anonymous says:

          Hi Guys

          I reread some of God Emperor of Dune last night and can report that those running UK monetary policy have none of the skills of Leto Atreides. In fact they regularly demonstrate the reverse!

          1. JW says:

            Hi Shaun

            The attached analysis courtesy of ZH confirms that the German’s are far further along the feudal path.

            http://www.zerohedge.com/news/2013-04-16/germany-land-poverty-or-prosperity

      2. Justathought says:

        Hi JW,

        While civilization has been improving our houses, it has not equaly
        improved the men who are to inhabit them. It has created palaces but was it able to create noblemen and kings? Henry David Thoreau

  2. Oll says:

    Hi Shaun – excellent work as always – a must on my daily reading list.

    I apologise as you are probably asked this question all the time but where do you see house prices going? This also needs to be split into London and the rest of the country.

    Do you think London, will for the foreseeable future, be seen as a safe haven and prices will continue to rocket upwards? As a young married professional couple, even a small one bed in anywhere semi-decent is unaffordable. I can see how prime London can continue upwards but can the rest of London continue to follow?

    Then looking at the rest of the UK – how can prices ever begin to rise if, as you say, real wages are falling and credit is much more difficult to obtain than in the past. Are there other factors that I am overseeing that can lead to price increases?

    Finally (and sorry this is so long), do you think we could be in for a nasty inflationary shock with Carney coming into the BoE, companies storing a lot of cash and QE money not currently in the system? I can see how with the pound being devalued we import inflation but this should not affect house prices (apart from prime London) but I can’t see how there can be any house price inflation without a rise in credit on real wages.

    In fact I am generally confused how prices have been rising since 2009 when nothing has improved?

    Any insights would be extremely helpful!

    Thanks

    1. Paul C says:

      Oll, I am sure that Shaun will reply in due course however my views are that prices of things including houses are affected greatly by inflation itself. You need to be clear about the question you are asking, real house prices or nominal prices. You will notice that prices are “firm” in the M4 corridor, and south-west of England, with nominal increases of up to 2% (but real falls of 3%). In the Midlands and north we have seen significant falls in nominal (4%) and perhaps 8% in real terms. London is an investment haven for international money and by self-fulfilling reputation thus. What will happen in the future. I propose a continuation of the current trends as long as the QE/Inflation policies deliver maintenance of the “status-quo”. The “status-quo” is that the insolvent banks and govt. continue to “fund” their grievous position at expense most legitimate businesses and families who are caught in enduring financial repression. I am sure that others will have strong views on this inflammatory subject and watch with interest. regards Paul Chadwick BSc

      1. geoffk says:

        HERE is what has happened to new build prices near me.. from property bee

        #

        14 April 2013 00:07:59
        Agent found: Bellway Homes Ltd
        Agents Location found: Bellway Homes Ltd
        Agents Telephone found:30 January 2013 15:00:57
        Price changed: From £286,995 £209,995 31 March 2010 23:51:50
        Status changed: New home, Premium Listing home 20 August 2009 22:21:49
        Price changed: From £281,995 £286,995 13 June 2009 11:37:00
        Status changed: New home home, Premium Listing 12 May 2009 07:51:44
        Price changed: From £329,995 £281,995 20 February 2009 12:57:02
        21 January 2009 12:53:12
        Brief Description found:
        Price found: From £329,995
        Status found: New home
        Subtitle found: 4 bedroom detached house

        Not bad £329k to £209k in four years….

      2. Anonymous says:

        Double post

    2. Anonymous says:

      Hi

      House prices could do anything, what is inflation going to do ? Are they suddenly going to raise interest rates harshly to fight inflation ?

      We might see inflation shrivelling existing mortgages (even if you struggle with interest payments for a few years). This is good for mortgaged property owners.

      We might see a deepening recession and falling house prices. This would be uncomfortable for those who bought at the top – negative equity – bad.

      We might see interest rates soaring, punishing recent buyers and triggering many repossessions – terrible.

      The different courses may be caused by events, dear boy, events (Harold McMillan) and affected by the timing of your purchase.

      House prices seem overvalued compared wages using historical norms. I recently sold my UK house – it was rented and the rent didn’t cover mortgage & loans. I got a decent chunk of equity out. I was lucky to buy the first house in 97, when they were undervalued.

      Property is a long game. Most mortgages are 25 years, you assume you may need to live there for 25 years paying it off – the questions are Do you want to have a family in a small London flat ? Where do you want to be living in 10 years time etc ? Can I afford it ? Is renting cheaper ?

    3. Anonymous says:

      Hi Oll and welcome to the comments section of my blog

      I see that you already have a few replies so will contain myself to discussing where I live which is Battersea in South London.

      I have lived in the same flat for 20 years (which is scary in its own way…..) and in that time there have been ebbs and flows however whilst we are not in the heart of the current “bubble” it does have influence here. What this means is that a 20 years younger Shaun looking to buy this flat on the equivalent of the very good City based wages I had then could not afford to buy it. So a “homeboy” if I can put it like that as I was born about 2 miles away is extremely unlikely to ever be able to buy what does that mean?

      I suspect that it means that the bubble has to be finite or to be more specific to last it requires an increasing amount of ever more wealthy foreigners wanting to buy here…

      1. BoyfromTottenham says:

        Hi from Oz, Shaun and your readers – and congrats on a great blog! I really feel sorry for you folk in the UK – looks your govt has put you in a bigger hole than even our incompetent Labor / Green coalition, but at least (a) we aren’t in the EU and (b) we have a 99.99% probability of chucking our Labor govt out in exchange for a fairly sensible Liberal (i.e. Conservative) govt come this September. Getting to the point of this post, as a recently retired Ten Pound Pom I am pleased to say that with some diligence (and half an economics degree) I am able to earn better than 10% REAL returns on my superannuation account (for the past several years, anyway…), and look like continuing to do so. This being the case, and hearing the godawful state of things over in the Old Country, I’m bl**dy surprised that you aren’t all queueing up to join me – believe me, with our 3 million square miles there’s plenty of space for you!

        1. JW says:

          Report from Central Committee speaks of reducing growth will lead to slowdown in imports of ‘dirt’ from Southern Territories. Risk of load ‘popping’ noises down under.

        2. Drf says:

          Hi BoyfromTottenham,

          Many of us would like to join you there, but the problem is getting in now! The immigration policy is quite severe unless you are a multi-milliionaire?

          1. BoyfromTottenham says:

            Not sure about the current rules (haven’t tried myself since 1961) – check with Australia House! But as far as I am aware we are letting about 150000 a year in on 457 work visas alone, plus we have the ‘buy citizenship’ visa if you have enough dosh (or pretend to). Or you could marry a local. 😉 cheers!

  3. Anonymous says:

    You could have added to this fine blog that returns on savings are also negative. In fact real incomes from almost all sources are falling due to the effect of inflation. Falling real incomes combined with on-going deleveraging of household debts means consumption will remain weak. The current account remains in the red, and currency devaluation imports additional inflation and further reduces real incomes more than it corrects the trade balance. In short, the weak macro outlook is exacerbated by inflation; inflation is an important part of the growth problem, letting it run will not help growth increase.

    1. Anonymous says:

      Hi Derrick

      You also remind me of the past claims that if the UK could control its consumption growth then the trade deficit would improve but even with devaluation it has simply not happened.

  4. ernie says:

    Hi Shaun
    I’m so glad you wrote this post as I read an interview with Miles on the Ed Conway blog last week. It so infuriated me that I posted a response making more or less the same points as you (although I haven’t had a response to that response!). I was more trenchant in that I don’t avoid the politics – I suggested that he and his ilk should be sacked forthwith. You made the same points about inflation and growth as I did, but of course with more detail and in a more erudite way. On the overall point of falling incomes, that is the central point of my view which I have expressed here before – the “failure” to lend more money into the economy is actually because the demand for loans is not there. Net, people and companies are deleveraging, either voluntarily or not as the case may be. I believe this to be a generational sea-change which, backed by demographics, will last for quite some time. All the QE they throw at it will make little difference, except possibly to risk serious ruin on the currency.

    1. forbin says:

      Hello Ernie,

      Well I’m de-levering thats true – why save when the returns are so low but the costs of mortgage or loans ( esp credit cards ) are so historically high ? in this era of 0.5% base rates ??

      All we need is mr Charlie Bean on TV again ….;-)

      Also It hasn’t escape my eyes that those cheap mortgages – assuming you get offered one – come with high fees – I remember these rip off fees from the 80’s – stuff that for a lark!

      basically the banks have put the costs of low interest rate loans into these fees – heads they win , tails they win!

      oh, and I earn less now than I did in 2005 & job is less safe as well. – so why should I take on more debt ?

      back to the popcorn ….

      Forbin

    2. Anonymous says:

      Hi Ernie

      There is a fundamental question which I have mentioned on this blog but should really do a full post on and it starts with a simple question. Why should anyone now save?

      If I was setting economics MSc and PhD questions/syllabuses then it would definitely feature. After all at their likely ages it will be an even bigger question for them.

      1. Patrick says:

        It would be an interesting read, but you might need to partner it up with a “Why should anyone now spend?”

      2. Anonymous says:

        Psychologically speaking people save either because they have an aim in mind such as a holiday or a new house etc or because they are scared. Usually they are scared of being without a job, of not having enough money to pay the rent or mortgage, of not being able to support their children or of being poor in their old age. At the moment people are more scared than usual. People are quite right to be scared so in one sense they are quite right to save. It may make no economic sense in the overall scheme of things but it helps many people sleep a little easier at night.

        Until fear reduces individuals and businesses will not spend or invest. It is no longer a question of economics but of psychosocial forces.

  5. jrbearbull says:

    I really don’t think economic policy is being formulated with regard to whether inflation is eroding wages, or indeed to promote growth. At 2% inflation it would take 35 years to inflate away half of our debt. At 3% we do it in just under 24 years. Given the amount of Government debt plus the cost of other commitments such as public sector pensions, PFI contracts and so forth we will need persistently higher inflation to deal with the situation. The only problem is that Osborne was supposed to be eliminating the structural deficit in the meantime to stop he level of debt from going up and we now know that isn’t going to happen.

    1. Anonymous says:

      I don’t think it’s that simple. The problem is the indices. Defined as they are, they constantly understate the amount of inflation in the economy. Result: inflationary expectations are low (and thus pressure for wage increases) but the real rate of disappearance of debts relates not to the ONS fairy tales, but the genuine rate of inflation, which is perhaps 5%. Plug in 5% and you find 63% of current value has gone after 10 years. Maybe that’s what is really going on?

  6. Mike from Enfield says:

    Hi Shaun,

    I read your blog mainly because you are a rare Economist who sticks to trying to understand what is happening or has happened, with just a few cautious suggestions about what might or should happen. (If only there were more like you).

    Unfortunately the majority of the profession, as represented by the MPC and Professor Miles, takes the polar opposite approach. We are offered religious levels of certainty about the future whilst their memory cells are conveniently erased as soon as their policies fail. Add to that papal style infallibillity, cognitive dissonance, confirmation bias and seemingly universal influence among politicians and the media and it is hardly surprising we have problems.

    I fear that even if we did get people in charge whose ideas were not completely mad, this fundamental problem would remain. If ever there were a case where you want to avoid giving the top jobs to the most highly “qualified”, then this is it!

    1. forbin says:

      I’d laff except you summed it up perfectly

      makes me wonder if this lot aren’t related to the Golgafrimcham B Ark….

      Forbin

      1. Mike from Enfield says:

        You may be on to something with the ‘B’ Ark…

  7. Drf says:

    Hi Shaun,

    It was all summed up well by of all people James Callaghan in a speech made on 30th January, 1976.

    “We used to think that you could spend your way out of a recession
    and increase employment by cutting taxes and boosting government
    spending. I tell you in all candour that that option no longer exists,
    and in so far as it ever did exist, it only worked on each occasion
    since the war by injecting a bigger dose of inflation into the economy,
    followed by a higher level of unemployment as the next step.”

    The problem is that few politicians and central bankers have paid any attention to that wisdom since then!

    1. Anonymous says:

      It is a false wisdom. Callaghan was in thrall to the monetarists and his government pursued a fixed exchange rate policy which required the borrowing of foreign currency.

      I am sceptical that the current government’s economic policy reflects the mirror opposite of what Callaghan is saying.

  8. Rods says:

    Hi Shaun,

    An excellent overview as always.

    Lord King until very recently still wanted the pound to drop further adding more UK inflation, where it would help rebalance the economy! This has also been another total failure by the BOE. A headmaster’s report on the BOE since 2000 would not make pretty reading! I think the grades in most policy areas would be FFF- with no signs of any improvement, maybe replacing the head boy in June will help, but I won’t be holding my breath!

    I think if you looked at the essentials list of water, food, energy and rent / mortgage costs then these have gone up by much more than average inflation figures, which of course impacts much more on the poorer members of society where these make up a much higher percentage of their outgoings.

    So stagflation, stagflation and stagflation it is, until the Government runs out of credibility and people to fund the £120bn deficit, then with money printing and QE to fill the gap. Inflation will be measured in the words of Backman Turner Overdrive – “You ain’t seen nothing yet”!

    House prices outside of London is an interesting one, where I’m of the opinion that prices aren’t particularly over valued. I have always had the view that prices are set by what first time buyers can afford and this multiplier has changed along with society where it being now normal for most families to have two breadwinners. So for an average UK price of £170k a 25% deposit means a mortgage of £127,500 and 3.5 salary multiplier means that they need a combined £36,500 income or about £19,000 each. I think the biggest obstacle is the 25% deposit and the Government is going to underwrite 80% of this, so with a national housing shortage will we start to see property inflation again?

    The current global slowdown might dampen inflation slightly but I’m sure the head of the BOE will be writing many letters in the future to the Chancellor explaining why inflation is temporally over target! For the BOE and Chancellor with the current debt overhang, high inflation is in the words of Ray Lemontage “Forever my friend”.

    1. ernie says:

      Rods, what you say is interesting and I certainly can’t argue with the point about inflationary increases on essentials. However, I’m not convinced about the “inflate away the debt” argument. I know it’s a common theme but I’m just wondering… if income levels are going to be below the rate of inflation, then even allowing for indirect taxes the total tax revenue may not benefit so much. And then the government’s own expenses rise too – they also purchase many goods, not least including energy. They also pay out entitlements, even if they don’t keep pace with the overall rate of inflation. I’m not sure about the repayment of gilts – don’t the BoE own most of them anyway ? Is the idea of repaying johnny foreigner in devalued pounds overstated? Or maybe I’m not understanding it fully?

    2. Anonymous says:

      Hi Rods

      I was struck earlier by the price of one of the essentials which is the price of a Cauliflower which was £1.95 in the supermarket I went to. I looked it up to see that in 2011 there was a supermarket report saying that there was little demand for them over a pound……According to a reply on twitter I need a Aldi nearby as they sell them for £1.07 but even so that is quite a rise on the prices that I remember from fairly recently.

      I do not mean to imply that one has to eat Cauliflowers but that relatively basic foods are shooting up in price.

  9. Anonymous says:

    Real wages are falling because someone other than the sellers of labour time have pricing power.

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