Vertical social networks are the greatest threat to LinkedIn

Vertical social networks – new ways in which professionals in similar sectors are meeting and building relationships online – are growing rapidly and threaten to usurp the dominant position of LinkedIn, just as Microsoft digests its colossal $26.2bn purchase.

Though most vertical networks are still experimenting with methods of generating revenue – and few have reached profitability – they too are being eyed as acquisition targets by major corporations in the technology, finance and media sectors.

Offering higher levels of interaction than ‘one-size-fits-all’ horizontal networks such as LinkedIn, the best vertical networks are fast becoming an integral part of daily working life for most people in a profession. Vertical operators gather high-value knowledge about members, which facilitates precision marketing –and attracts investors looking for the next big thing in social media.

Microsoft purchased LinkedIn because it is undoubtedly the leading network for business – with a membership base of 433m – sitting alongside consumer-focused juggernauts such as Facebook and Twitter. Its growth has been truly stellar; today more than two new members join LinkedIn every second.

But what is breathtaking is the way in which the concept of the group discussion has taken off. LinkedIn now boasts in excess of 2.1m groups, membership of which can vary from one or two people to 1m. Businesses and professionals find them an invaluable resource.

Linked:HR, for example, is a group that has attracted more than 975,000 members from the human resources profession around the world since it was created in 2007. Non-HR people are barred from joining and meaningful discussion is boosted by a ban on members posting promotional messages. Engagement levels are high as a result, with an average of 70+ responses to each group discussion and weekly group announcements consistently attaining a click-through rate of 1 per cent.

In many respects, the better LinkedIn groups such as this have enabled businesses to do what their sales departments have often struggled to; build long-lasting relationships with customers and potential customers based not on sales pitches but on demonstrating knowledge in areas that are important to members.

Companies on LinkedIn have the option to sponsor, support, run, manage or simply actively participate in subject-matter expert groups to which many decision-makers and opinion-formers in that company’s space naturally flock. But while groups attract much of the network’s daily traffic, LinkedIn has largely disregarded groups and group operators. Now – spurred by uncertainties about Microsoft’s future plans for such groups – some are starting to explore using platforms of their own. This accelerating trend may threaten the very parent from which they have sprung.

Growth of vertical networks

Some subject-matter groups on LinkedIn and elsewhere have spawned the development of what have effectively become specialist social media networks in their own right. These vertical networks have a number of distinguishing features, as compared to the classic business social media group:

  • they tend to cater for a specific profession, not just a set of interests
  • they operate from their own IT platforms under their own brand
  • they deliver value by offering tools, resources and information that is of practical use to members of that particular profession.

Spiceworks is a shining example of that last quality, allowing more than 6m IT professionals to take part in more than 369,000 discussions about technical topics such as ‘WDS Deployment – Image Failing’, ‘Consumer SSDs in an Enterprise Environment’ and ‘RAID 10 Setup’. Members collaborate with each other and share advice regarding IT-related services and products available from over 3,000 technology vendors present on the site.

Spiceworks 1

“Where users join LinkedIn for networking and to promote themselves for potential job offers,” wrote Hannah Kuchler in the Financial Times in October 2014, “professionals use vertical social networks to perform functions that are core to their jobs. The real advantage of vertical networks is the knowledge that they can communicate about sensitive topics with people who have been verified.”

What are the benefits of vertical networks?

Vertical networks are attracting increasing investment. Spiceworks has received more than $110m of financing, most recently $57m of Series E finance from Goldman Sachs in 2014. Investments of more than $75m each have been made in other vertical networks such as Behance (with a membership of more than 4m creative professionals), Practice Fusion and Doximity (both serving doctors) and Edmodo (education). The biggest single investment so far was $250m in July 2015 by Sequoia Capital in the 14m-member technology-focused community GitHub, which was valued at approximately $2bn.

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So what is it about vertical networks that is proving so attractive? According to Altimeter Group, the main differences between business social media sites and vertical professional networks are pretty basic.

The former offer broad topical range, low specialisation and less privacy. The latter cover specific topics in depth, with a high degree of specialisation and a more private, gated approach to membership. They offer a consistent flow of high-quality editorial content written in the appropriate style. Specialist content providers and groups of high-end journalists with extensive experience in business have recognised the “secret sauce” that is essential to driving engagement and discussion to savvy, professional audiences. Features must not be too long, for example, and must take account of the fact that English is not the first language for many participants. It is important that the content is laced with questions, thereby prompting readers to respond.

Critically, vertical networks offer what Altimeter calls “workflow applications”.

Doximity, for example, has quickly attracted more than half of all practising doctors in the US with a unique, free facility to share electronic patient records. Tight restrictions on membership have allowed Doximity to meet all legal compliance challenges and attract funding of more than $80m despite the fact that its total potential membership is only around 1m practising doctors in the USA. Providing added-value services such as this is where vertical networks have the edge over conventional business social media groups.

From the point of view of businesses that want to target vertical communities with products and services, the outlook is certainly good. Vertical networks offer a more curated user base than conventional business social media groups. This means their advertising value – and consequent ability to generate revenue from such finely-targeted promotion – is also that much greater.

How vertical networks can make money

Vertical networks are the 21st-century equivalent of trade magazines. They combine the same elements of editorial and advertising content with a readers’ letters section and are served up to a self-selected audience. In theory, they should be even more profitable because the costs of publishing and distribution are dramatically reduced.

To date, however, few vertical networks have made money. Media buyers have yet to grasp their significance and despite investors’ obvious interest, most are still in funding mode. In thinking about profitability, it’s necessary to understand the principal income streams that vertical networks can generate.

Firstly, in the manner of LinkedIn, there is revenue from recruiters, who will pay for sponsorship, advertising and profile-matching in order to mine the network’s membership for suitable job candidates.

Then there is the revenue that can be generated from vendor advertising and sponsorship. Organisations badly want a presence on vertical networks, so they can steer active conversations in highly-targeted professional communities towards the issues and solutions that, in turn, play to the strengths of their products and services. Such close alignment between vendor and audience is something that businesses will, of course, pay royally for.

A third way for vertical professional networks to generate revenue harks back to the specialist tools that the most successful provide to help members do their jobs more easily. Usually those tools are provided free, which drives initial uptake and helps grow membership. But paid extensions can be made available, too – an additional source of revenue for the network.

Lastly, networks can make branded marketing platforms available as a paid service to vendors within the network. These enable vendors to sell their products, while network owners can potentially realise revenue share from such sales.

Ben Boyer, managing director at venture capital firm Tenaya Capital, says: “Utilities [such as the patient record-sharing available through Doximity] are required to drive people on to the network and keep them there. If you have that you have something that drives a true network effect.” Such ‘utilities’ are features of the vertical network that cause members to return time and time again. “All of these businesses tend to be winner takes all,” he suggests.

High levels of engagement are a universal essential, but there are significant differences in the ways in which vertical networks generate revenue. “If you have got something that you think can drive millions of users in a highly-engaged fashion,” Boyer asks, “how are you going to make money out of it?”

Achievement can be measured in many ways; market penetration, levels of engagement and revenue model are the most important.

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Code sharing site GitHub is estimated to be worth around $2bn

“Vertical networks are not going to be taken seriously by purchasers until they hit certain numbers,” according to Thomas Keslinke of Chefs Roll. “You are only taken seriously when you reach a certain percentage. If, for example, you have got 25 per cent of doctors in the US on your network and 15 per cent are engaging on a daily or weekly basis, then you are definitely a player.”

No one can know for sure which vertical networks will fail and which will succeed. But what is clear is that they are having a growing impact on business media in general and horizontal networks in particular.

“Is this death by a thousand cuts for LinkedIn?” asks Boyer. “I don’t think so.” Many of the professions such as doctors and scientists were never very strongly represented on LinkedIn anyway, he explains. “But these businesses can develop into very, very meaningful properties within their vertical sectors. I wouldn’t be surprised if at some point LinkedIn doesn’t start buying some of these vertical networks – particularly when they get to a real critical mass.”

“If LinkedIn was going to be smart about wanting to stay the biggest fish in the biggest pond,” says Keslinke, “they have to start buying up vertical networks because if they don’t they are going to lose.

“The smartest play that LinkedIn could do,” Keslinke continues, “would be to buy up verticals as they are starting to grow and buy up the teams that are building them. LinkedIn has a mountain of money and a mountain of knowledge, so there’s definitely talk about [it] trying to acquire some of the bigger ones.”

LinkedIn has made a number of acquisitions in the past, including Pulse ($90m), SlideShare ($119m), Bright ($120m) and Bizo ($175m) – before itself being bought by Microsoft. However, it is unclear how LinkedIn would manage such vertical networks or fit them within its current business model. “There’s no way LinkedIn can verticalise the experience for all industries,” Boyer suggests. “It would lose the beauty of LinkedIn with its single look and feel.”

He speculates that they would remain ostensibly separate from LinkedIn. “I would see them being run as a standalone network, but also mapped back into LinkedIn so you can share monetisation capabilities across.”

Greg Stout, then CTO at Proformative, took a similar view. “LinkedIn is keeping an eye on all of this and they are probably going to buy, rather than build, the first few vertical networks once they see ones which are big enough.”

But LinkedIn is not the only potential purchaser of vertical networks. The webinar, lead generation and web community elements of Proformative were purchased by Argyle Executive Forum in September 2016 for an undisclosed sum, leaving CEO John Kogan running the remaining eLearning elements under the new Illumeo banner.

Lots of major organisations are waking up to the potential of this new medium, as Stout observes. “Some players like SAP or Oracle are trying to pull vertical networks together,” he says. “They want to reach the same information. They want to get to the same people. Do they want to get into this market? Absolutely.

“Media owners are also likely buyers of these more focused networks,” says Stout. The publishing and education company Pearson, for example, demonstrated interest in the sector with its early investment in Edmodo. “These communities do better. They help people. The problem has always been ‘how do you make them profitable?’”

This has long been a challenge for business publishers that have sought to encourage their readers and subscribers to be actively involved in their ‘online editions’. The growth of vertical networks may foster additional interest in this area, but business publishers are unlikely to succeed until and unless they can identify and establish high-value utilities that will drive repeat visits and frequent usage. Discussing news stories is not enough.

Dave Sumner Smith is chairman of Metzano, which operates Linked:HR – the largest single-profession group on LinkedIn – and recently launched Metzano.com as a vertical network for the HR profession. He has written regularly for business sections of the
Sunday Times and Daily Telegraph.

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