Facebook heads towards profit

Nick Clark
Wednesday 16 September 2009 17:41 BST

Facebook has this week hit two significant milestones in its history. The social networking phenomenon now has a staggering 300 million regular users around the world, and has become cash flow positive for the first time ever.

While experts agreed it was a landmark moment as the site really looks to take control of its future, one said the group had not yet cracked the “major hurdle to light the touch paper of profits”.

Mark Zuckerberg, who created Facebook from his dorm room at Harvard just five years ago, revealed this week that users had grown at a rate of five million a week since July, to hit 300 million on Tuesday. “It's a large number,” he said before unveiling the company's grand scheme. “The way we think about this is that we’re just getting started on our goal of connecting everyone.”

Analysts called the growth - up from 100 million last year and 200 million in March - “incredible”. Eden Zoller, analyst at Ovum, said: “Facebook's growth has been pretty consistently phenomenal. At that size, keeping the momentum isn't its sharpest challenge.”

The real issue throughout the recent growth in social networking sites has been how the companies, which also include MySpace, Bebo, LinkedIn and more recently Twitter, were to turn their huge audiences into profit. Yet, Facebook's announcement this week was also promising for its investors.

Mr Zuckerberg had predicted earlier this year that the group would be cash flow positive “sometime in 2010”. In the blog post on Tuesday he said Facebook was ahead of schedule after it “achieved this milestone last quarter”. He added: “This is important to us because it sets Facebook up to be a strong independent service for the long term.”

Ms Zoller said: “Going cash flow positive doesn't necessarily go hand in hand with profits, but it is important as it means there is cash to play with and Facebook is less reliant on its institutional investors.” The group received a $200m investment from Russia's Digital Sky Technologies in May, which valued the group at $10bn. It also sold a 1.6 per cent stake to Microsoft in 2007.

Facebook said its financial strength continues to grow despite the downturn, driven by the rise in users as the advertisers have followed. The company is private so it is difficult to track exactly where the money is made, but Mr Zuckerberg has said revenues should grow 70 per cent this year. “Facebook revenues are growing pretty fast, and it gives the group control over its future,” Ian Maude of Enders Analysis said, adding: “Revenues follow eyeballs but there’s often a bit of a lag as advertisers switch to a new medium.”

Nick O’Neill, founder of unofficial news site allfacebook.com said: “If the company can cover the cost of scaling to 1 billion users and still manage to break even, there's no doubt that they will have a great opportunity to rake in billions.” He also predicted that the company would hit 380 million users by the end of the year.

Facebook is principally funded by display advertising. The group is looking at different ways to use and deploy advertising on the site, after inital returns were weaker than expected. Now, rather than simple banners, brands can tailor their products to individual users.

Kelly Dempski, director of research at Accenture Labs, said: “The company is talking about deeper engagement. Advertisers can learn about their customers and how they operate on the internet.” He pointed to Facebook Connect, in which users can connect their identity to third party websites, as a particularly good initiative.

Nigel Gwilliam, head of digital at the Institute of Practitioners in Advertisers, said: “This is a milestone, but one has to be cautious about it. To not be haemorrhaging money is an achievement, but not one that signals wild profitability. Facebook has not yet demonstrated it possesses a licence to print money in the manner of Google and its paid-for search model.”

He added: “Many consider the real value of websites like Facebook lies not in advertising but in engagement and participation. But no one has cracked the business model for this yet.”

It has also boosted the move to profitability by cutting costs lifting efficiencies. Recently it cut the cost of hosting the millions of photographs uploaded each week with the launch of Haystack, which cuts storage constraints.

The gift shop, where users buy each other virtual property, has also provide surprisingly lucrative.

“How those future revenue models will play out is still unknown however advertising and initial revenues generated through the Facebook gift shop have apparently been able to support the company," Mr O'Neill said.

Mr Zuckerberg said the group is looking to perform faster and more efficiently. “We face a lot of fun and important challenges that require rethinking the current systems for enabling information flow across the web,” he said.

It overhauled its search engine last month, and now offers Facebook Lite for lower bandwidth connections especially aimed at emerging markets. It is trialling an online payment system, growing the community through applications and is expected to be the ability for users to talk to each other via the internet. “It's starting to look pretty good,” said Ms Zoller. “They are doing things rather than talking about them.”

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