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?