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Facebook heads
towards profit
By Nick Clark
The Independent - Wednesday, 16 September 2009
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.
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.
Questions
1. Facebook... has become cash flow positive for the first time ever.
a) Which of the following means that a business will have a positive cash flow?
A. Total Costs is greater than Total Revenue
B. Total Income is greater than Total Expenditure
C. Total Revenue is greater than Total Costs
D. Total Expenditure is greater than Total Income (1 mark)
b) Explain your answer. (3 marks)
2. Explain two reasons why ‘Going cash flow positive doesn't necessarily go hand in hand
with profits’ (6 marks)
3. Discuss the extent to which revenue from advertising will allow Facebook to make a
profit in the future. (10 marks)
4. (Facebook) received a $200m investment from Russia's Digital Sky Technologies in
May... It also sold a 1.6 per cent stake to Microsoft in 2007.
Evaluate Facebook’s decision to accept these investments. (12 marks)
Total 32 marks
Facebook case study mark scheme
1. Facebook... has become cash flow positive for the first time ever.
a) Which of the following means that a business will have a positive cash flow?
Answer:
B. Total Income is greater than Total Expenditure
(1 mark)
b) Explain your answer. (3 marks)
Answer:
Income is Cash flowing into the business (1 mark) or Total Expenditure is the
money flowing out of the business (1 mark)
If income is greater than expenditure then cash flow is positive (1 mark)
Dismiss one of others accurately (1 mark)
Question Question
Number
2 Explain two reasons why ‘Going cash flow positive doesn't 6 Marks
necessarily go hand in hand with profits’
Answer Mark
Knowledge 2, Application 2, Analysis 2
Knowledge: up to 2 marks are available for showing 1-2
knowledge, e.g. by candidates defining cash flow and profit
Application: up to 2 marks are available for relating the 1-2
above to Facebook e.g. Facebook has received capital from
external investors such as M icrosoft; it has not been able
to make a profit to date
1-2
Analysis: up to 2 marks are available for the explanation
of the link e.g. investment from outside the business
increases the cash position as it is an increase in Income,
but it does not affect profit.
Two reasons needed in the context of LL for full marks
(3+3 marks)
Question Question
Number
3 Discuss the extent to which revenue from advertising will allow
Facebook to make a profit in the future. (10 marks
Level Ma Descriptor Possible Content
rk
1 1- Knowledge: 2 marks are Profit is calculated by subtracting
2 available for a definition of total costs from total revenue
profit
2 3- Application: 2 marks are e.g. Facebook charge businesses
4 available for candidates who to advertise on their website which
clearly contextualise their increases revenue; Facebook’s
responses costs are related to the
maintenance of the website
3 5- Analysis: up to 3 marks e.g. Facebook is has a huge
7 are available for explaining number of users (300m at the
increasing advertising may time of the article) and it could
increase profits in the future therefore charge businesses far
more than the costs associated
with placing the advertising on the
site, thus increasing profits
4 8- Evaluation: up to 3 marks e.g. Facebook adverts may be
10 are available for providing seen as ineffective as they are
balance to the answer by easily ignored; Facebook itself
perhaps arguing that may face complaints from users if
businesses may not be the adverts are deemed to be too
interested in paying for intrusive.
advertising
e.g. Facebook may have to offer
A contextual conclusion the ability of targeted advertising
should be provided to if it is to make large profits. This
achieve the highest mark will mean that businesses wanting
band of 7-8 marks to advertise will be far more
confident that their money is well-
spent and they should see an
acceptable return as a result.
Question Question
Number
4 (Facebook) received a $200m investment from Russia's Digital Sky
Technologies in May... It also sold a 1.6 per cent stake to Microsoft
in 2007.
Evaluate Facebook’s decision to accept these investments. (12
marks)
Level Ma Descriptor Possible Content
rk
1 1- Knowledge: up to 2 e.g. increased investment gives
2 marks are available for them more money to spend
simple responses such as
the business will receive
more money
QWC: struggled to use
business terminology or
write legibly with frequent
errors in spg and/or weak
style and structure of
writing
2 3- Application: up to 2 e.g. Facebook has received capital
4 marks are available for investment from other media
candidates who clearly companies (SKY Russia and
contextualise their Microsoft)
responses
QWC: will use some
business terms but the style
of writing could be
better/there will be some
errors in spg/the legibility of
the text could be better in
places
3 5- Analysis: up to 4 marks e.g. these investments both
8 are available for explaining provide valuable cash to Facebook
either benefits or costs of which it needs to pay for its rapid
accepting these investments expansion. Website programming
and maintenance as well as
administration of accounts all
QWC: candidate will use demands workers who have to be
business terminology paid – this is a considerable cash
well/style of writing is expenditure
appropriate to the
question/good spg
4 8- Evaluation: up to 4 marks The candidate balances their
12 are available for providing answers above to give two-sided
balance to the answer, responses e.g. The danger is that
Facebook has given up some
control as it has allowed outside
organisations to invest. There is
also the possibility that despite the
investment and expenditure, the
website may not be profitable due
A contextual conclusion
to a lack of revenue stream from
should be provided to
existing advertising.
achieve the highest mark
band of 11-12 marks
QWC: candidate uses Allowing outside cash investment
business terminology by what amount to possible
precisely and competitors will only be beneficial
effectively/organises their if the cash is used effectively e.g.
answer to provide a to develop more features of the
coherent and fluent website that will allow Facebook to
response/ good to excellent generate revenues that are greater
spelling, punctuation and than its costs, thus generating
grammar. long-term profit.
