Subba’s Serendipitous moments

March 31, 2009

Facebook’s positive and unique problem

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Most sectors globally are seeing a reduction in demand. Businesses are cutting down on expansion plans. Yet Facebook the poster child for social networking, continues to soar.

It signed its 200 millionth user this month, doubling its size in just 8 months. It has now established itself as the world’s most extensively used avenue for personal networking and has surpassed competitors like MySpace, hi5, Orkut etc.

Each day they are signing 500,000 users bringing in traffic, photos, data etc.

More users are getting addicted to Facebook. More than half the users use the site everyday and spend an average of 20 minutes on the site.

It is the 5th most trafficked site in the U.S. and is the largest photo sharing site on the planet.

Microsoft invested $240 million for a 1.6% equity stake in 2005 when Facebook was just making revenues of $50 million, effectively valuing them at $15 billion.

Who would not envy Facebook’s growth?

Yet paradoxically, growth seems to be the real problem.

Even with such a large subscriber base, it is not profitable. Its 2009 revenues are projected to be $350 million (based on very optimistic estimates) and its costs are spiraling upwards since it just needs to put in more infrastructure to cater to the bludgeoning subscribers. Experts reckon that the costs to run the infrastructure would be $600 million. Currently, it is still struggling to find a profitability model.

Based on Businessweek’s recent article, it is hunting for more money. It would be difficult to raise equity at the earlier valuation of $15 billion in current business environments. Hence it is looking for debt financing to lease the computers to run its sites.

The revenue projections are primarily based on advertising and is primarily for the U.S. audience which is estimates to be around 60 million. it looks like the growth in the U.S. has flattened and all the international users are not necessarily factored as prospective users for the revenue model.

Its revenue models– primarily advertising (self serve ad system) and their talks with various advertisers have been ‘soft” given the current business environment. A new kind of engagement advertising is being tested out, and is unproven.

More fundamentally, the company has been having an unprecedented challenge: It created a community and now the community has become so powerful that it is challenging the company and forcing the company to retract from several key business initiatives. It had to withdraw the Beacon advertising system in 2007 and also withdraw its earlier move to take commercial control over the user content.It also had to deal with a huge user protest over some design changes.

So, where is Facebook headed with all these positive challenges?

Will it reinvent the social networking space with some new killer applications.or just go the way other social networking platforms like Friendster and MySpace?

Will it be a candidate for acquisition either for Google or Microsoft or AOL?

What is needed to be done to monetize their user base, given that users have become dominant and aggressive in the way they would like to be treated?

And finally, is social networking as a business model viable?

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5 Comments »

  1. […] Mr. Gideon Yu is a star CFO with stints in Google, YouTube and Yahoo and was responsible for raising capital, which Facebook needs as I wrote here. […]

    Pingback by Gideon Yu — the Facebook CFO quits suddenly! « Subba’s Serendipitous moments — April 1, 2009 @ 10:23 pm | Reply

  2. My simple take on this is Web2.0 is over-hyped just like its predecessor Dot-com during the heydays of late 1990s. I have more than 250 contacts in Orkut, ~170 in FB, a few dozens in LinkedIn, use Youtube actively and own more than a dozen blogs – so I dont discount the usefulness of the social networking sites. Rather, I dont consider them as investment worthy.

    Look at the example of airlines. Millions of people use them everyday and you cannot live without them in the modern era. But, would you invest in them as an investor? No, sane person would do that.

    just like airlines, Web 2.0 serve millions of people and connect people across vast distances – but both are useless for investors. They both have flaky business models and profits per customer are too less. Atleast airlines have some material revenue stream – direct tickets to its customers.

    What revenue streams these Web 2.0 companies have? Advertising? Advertising is the most over-rated thing since the Tulips in 17th century Holland. I cannot remember the last time when I clicked a Google sponsored link, leave along purchasing any stuff through them. And many of these clicks are generated from students, unemployed and people in poor nations – all of whom are not great target customers for many of the ads. You can show a Porshe ad to a poor student in Philipines, but don’t expect a lead from there.

    If history is an indicator – blazing ideas never make money. The aircraft manufacturers of 1920s, the automobile manufacturers of the 1910s, the airlines of 1960s, the dot coms, the alternative energy companies… most of them fail and take the investors with them. If you want to really be an investor follow Buffet – he didn’t make money from fads, rather through uncool and uninteresting companies.

    Cool ideas are good to read in Life and Time magazine, but don’t plan to read them in your porfolios. Money is too worthy to be spent in junk.

    Comment by Balaji Viswanathan — April 22, 2009 @ 1:27 am | Reply

  3. What did I tell ya. Today NY times is telling the same thing:
    Call it the International Paradox. Web companies that rely on advertising are enjoying some of their most vibrant growth in developing countries. But those are also the same places where it can be the most expensive to operate, since Web companies often need more servers to make content available to parts of the world with limited bandwidth. And in those countries, online display advertising is least likely to translate into results.

    http://www.nytimes.com/2009/04/27/technology/start-ups/27global.html?_r=1&partner=rss&emc=rss

    Comment by Balaji viswanathan — April 28, 2009 @ 6:37 am | Reply

  4. […] Mr. Gideon Yu is a star CFO with stints in Google, YouTube and Yahoo and was responsible for raising capital, which Facebook needs as I wrote here. […]

    Pingback by Gideon Yu — the Facebook CFO quits suddenly! | Expanding Thought — June 28, 2011 @ 7:39 pm | Reply

  5. I read this article fully on the topic of the resemblance of hottest and preceding
    technologies, it’s awesome article.

    Comment by home improvements ideas — June 12, 2014 @ 1:01 am | Reply


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