Facebook Climbs Toward Profitability

Posted by: Douglas MacMillan on September 15, 2009

Facebook dominates the social networking landscape when it comes to membership and mindshare, but many have speculated that the company’s focus on user growth has strained its ability to ever turn a profit. On Tuesday, those concerns were momentarily quieted as Facebook announced that it’s now free cash flow positive.

This doesn’t mean the social network is a profitable operation yet. Rather, the cash it generates from advertising and other forms of revenue now exceed the cost of servers and other capital expenditures required to keep Facebook running. One-time costs, like the reported $50 million acquisition of Friendfeed last month, and operational expenses like personnel, are not included in this equation. Outside investments in the company, like the $200 million it raised from Digital Sky Technologies in May, are not accounted for either.

Facebook has never disclosed its revenues, but board member Marc Andreessen recently told Rueters that the site is on track to generate over $500 million in revenues this year.

The same day it announced its cash flow milestone, Facebook said it has added 50 million users in the past two months — bringing its total user base to 300 million and its signup rate to roughly 806,000 users per day.

That’s a huge amount of traffic to support, and the site’s accumulating stockpile of photos, videos, and other content requires an ever greater number of expensive servers. This was a serious problem for Facebook as recently as March, when my colleague Spencer Ante reported that it was seeking $100 million in debt financing directly related to server costs. Now, it appears that economies of scale are working in the company’s favor: the more members it attracts, the less it has to pay to support each one.

This is a positive note for new CFO David Ebersman, who came from Genentech in June, to start his career at Facebook. But his work has just begun. The next two priorities at Facebook are likely to be creating new sources of revenue — such as virtual goods and customized ad campaigns — and taking the company public.

Facebook’s announcement is also a positive sign for the broader social networking space, long derided by critics as a business high on hype and short on real profits. With the poster child of social sites well on a path to profitability, venture capitalists and strategic buyers will be more likely to bet big on Facebook’s smaller rivals.

Reader Comments

Ivan Walsh

September 16, 2009 02:42 AM

Hi Folks,

I would disagree with this final comment.

Facebook has the advantage that its investors (such as Microsoft) are now providing it with the strategic direction is lacked when it started.

That doesn’t mean that all SNS will become profitable.

Likewise, we should remember that the last poster child, MySpace, is fading into oblivion. It was equally hyped and had huge resources behind it.

For Facebook to really impress me, it will have to find some way to get beyond the advertising model. Selling virtual goods has its attractions but
I’m not convinced that’s why people go to FB in the first place. I go there to connect with others.

If FB had a way to improve these communications, e.g. real-time video, I’d pay to be a pro user.

Finally, the largest games/SNS in China made 1 billion last year. 10Cents (aka QQ) are someone FB should look at as only 135 of their revenue comes from advertising.

In anyone’s book, 870 million is impressive. And this is in China!

Ivan

www.ivanwalsh.com

Ivan Walsh

September 16, 2009 02:43 AM

Apologies.

The last email should have said 13% not 135. Typo on my part.

Ivan

angstcorner

September 16, 2009 04:15 AM

Nice and very good to hear this. I'm using lots of time for my website to promote and popularize. Good going on. http://www.angstcorner.com/

Ray Burton

September 16, 2009 09:30 AM

Facebook is indeed a powerful tool, not only because you have a lot of potential clients but also a wide base of connections...and the revenues Facebook gets is simply a reflection of the number of its users.
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Virtual Assistant Philippines

EB

September 16, 2009 09:50 AM

@Ivan: Facebook already has realtime videos.

Mannew

September 16, 2009 01:01 PM

I am very glad that Facebook is on track to being profitable. I for one look forward towards investing in this company,when they decide to do an ipo.

One suggestion for Facebook to generate more profits would be to combine the company that Marc Andreessen's(of Andreessen Horowitz)helped buy,Skype, and combine it with Facebook chat.

One of the things that I enjoy about Facebook is reaching my friends. Blending Skype with Facebook(for a small fee)would be something that I would enjoy.

ohaki

September 16, 2009 01:12 PM

facebook was messed up the day it became open to the non-university community. I don't care what anyone says & i don't care if facebook comes close to earning Google's money. As one of the original facebook users, facebook is so different from what it started out as that i can't really give it my blessings...

John

September 16, 2009 01:53 PM

That's not really free cash flow positive. Free cash flow is NET income minus cap ex, not revenue minux cap ex. Also, excluding one-time expenses is misleading, since the whole point of free cash flow is to capture these kinds of expenses over time. Excluding one-time expenses is something Enron would have done.

This is why Facebook will never live up to its expectations. I haven't seen any hint of business sense.

sylvie chen

September 16, 2009 03:33 PM

It will create an interesting target to hackers due to Facebook's coverage and user size. They should publish membership by world's geographic areas.

Look for Facebook apps with malware and trojan code to start appearing. There are already apps that scour the users profile and network of friends.
Scary...

NURREDIN

September 16, 2009 03:35 PM

DON'T BELIEVE THE HYPE. When was the last time you clicked on a Facebook ad and made a purchase? This is a Bernie Madoff type setup. The people at Facebook are trying to hype an IPO so they can cash out and leave the suckers with worthless paper. A privately held company can say anything about profits and cash flow and not have to prove it. When the advertisers realize Facebook is 300 million people doing a WHOLE lot of nothing,it's going to collapse. The question is whether the collapse comes before or after the IPO. NO ONE is going to pay a dime for a Facebook page. NO ONE is buying anything. So where's the profit coming from? Facebook is depending on advertising dollars just like the newspapers are. We all know where newspapers are heading. Facebook's profit model is no different. They're not going to replace Paypal, that's a big joke! So if income is solely based upon advertising, the job isn't getting done! When the Russian money runs out, Facebook is toast. I ask you again, when was the last time you bought something from an ad on Facebook? I rest my case.

JDM

September 16, 2009 05:59 PM

Zuckerberg wrote "Earlier this year, we said we expected to be cash flow positive sometime in 2010, and I'm pleased to share that we achieved this milestone last quarter."

So why did the author say that this excludes employee expenses and other ruses of cash? "Cash Flow positive" is a very specific statement which does not carve out for other uses of cash. What did I miss?

Mannew

September 17, 2009 04:38 PM

To NURREDIN: Actually,you can't rest your case,if you hadn't made one in the first place.

Fact one. Facebook borrows from the Google playbook: more people on the site,the more money it charges to companies to place ads. Google got that same play from the business model that radio and tv used.

Fact two. You're right,private companies don't have to prove anything about their profits/lack of profits. However,when Companies are about to invests millions into a private company,they have a right to look at the books,and see the true nature of a private company's real worth.

Fact three. While TV/Radio,Newspaper ad dollars are drying up;what,you failed to mentioned is that the same ad dollars are moving into websites/portals/Social Media Sites(like Facebook)with lighting speed(thus explaining why companies like Microsoft,Digital Sky Technologies,i.e.,"the Russians",are sinking millions into Facebook).

Fact four. When was the last time you bought something from Google? Oh...that's right,you don't have to...all their money is made off money they charge companies for ad space. Gee...I wonder how Google's stock price is doing,since going public. I mean,since Google and Facebook's business models are so alike...maybe Google,like Facebook,is on par with Bernie Madoff...

Kasey

September 17, 2009 07:27 PM

Facebook has been growing in the right direction lately. It's moving away from its former reputation of being just for the 18-22 year old crowd and has become a tool for professional networking and keeping in touch over long distances. I'm glad that it's gaining profit, and I hope it avoids the fate of MySpace.

Vince

September 18, 2009 07:05 PM

To MANNEW:

Your "FACT FOUR" is not correct.

The advertiser ONLY pays Google if somebody CLICKS on their ads, this is what makes Google unique.

Facebook has a similar pay-per-click or impression system. So the real question is, how many people regularly CLICK on Facebook ads and what would motive people to do so? With google, the ads are targeted based on Search - so if I'm searching for a new CAR, car dealer ads may show up beside my search listings. There is INCENTIVE for me to click on those ads because I'm actively searching for a product. The ads are useful. In Facebook's case it's not quite the same situation.

Kelly

October 27, 2009 01:24 PM

I am shocked that with all of the demographic targeting available to them that they have not yet found a way to be profitable. You would think an advertiser who had the choice between targeting a generic user searching for "widgets" and one who was in their state, in their age demographic, and had a confirmed interest in "widgets" would pay a significant premium for that exposure.

Kelly
Paradise Valley Tanning Salon
Sunless Self Tanner

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BusinessWeek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, Douglas MacMillan, and Spencer Ante dig behind the headlines to analyze what’s really happening throughout the world of technology. One of the first mainstream media tech blogs, Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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