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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.

				
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