Market Watch

Facebook Reported to Generate $1.2bn in First Nine Months of 2010


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Facebook, the social network, generated total revenues of $1.2bn, with a net income of $355m in the first nine months of 2010, according to internal documents distributed by investment bank Goldman Sachs to potential investors. The company's net income for the entire year is estimated to be in the area of $500m. The financial statements were not audited by any external parties and have been reported as offering little additional detail on how Facebook monetizes its more than 500m users.

As a privately held company, Facebook is not required to disclose any financial information; however, this is a significant increase from leaked revenue figure in 2007 of $150m.

Analysis
Social networking audiences have traditionally proved to be very difficult to monetise and Facebook has proved to be no exception. In the first three quarters of 2010 the social network had a monthly ARPU (average revenue per user) of around $0.25; by contrast, over the same period, Google had a monthly ARPU of $1.82 (based on net advertising revenue of $14.6bn, and comScore data suggesting an average global user base of 893m) and Comcast, the world's largest pay TV operator, enjoyed an ARPU of around $85.

The challenges associated with monetising social networking are well known. Shortly after News Corp. acquired the company behind MySpace for $580m in 2005, Google signed a deal worth $900m over three years to provide advertising and search on the site; however, the search giant was soon reported as being unhappy with the deal because the traffic it was getting from MySpace was generating very little revenue. Similarly, AOL bought Bebo for $850m in 2008 with the goal of making the site a key component of its plans to reinvigorate its advertising network Platform A. Fast forward to 2010: the site was sold for less than $10m.

Compared to some of its forefathers, Facebook has compensated for its low ARPU with scale and is increasingly diversifying its revenue stream away from a purely ad-funded model into things like providing a billing platform for online games (where it typically takes around 30 per cent of each small transaction). But long term challenges for the site remain, specifically:

  • Improving monetisation,
  • Making sure that its audience stays loyal

Of these the former should be comparatively straightforward over the near term. Over the past two years the reputation of 'social' advertising, and Facebook in particular, has improved considerably amount among a number of major brands. In part because Facebook is offering accountability and a guaranteed return delivered through a self-service platform (which is importantly similar to Google's proposition in search).  While at the same time the company has been increasing its ad sales footprint, opening offices in fast-growing regions such as Germany and Singapore in 2010. 

By contrast, the latter - making the audience loyal - poses the biggest long-term challenge for Facebook. Since before Yahoo bought GeoCities for $2.87bn in 1999 internet audiences have been nomadic, moving from one social site to the next. The so called 'network effect', which means that audiences online cluster together and which has helped Google and Amazon achieve dominance in their respective sectors, has historically only ever applied over the short term with social networks. By way of a comparison, since Google came to prominence in the early 2000s, at least four sites have had good claim to the title 'king of the social web' (specifically GeoCities, Friendster, Myspace and Facebook). With the exception of YouTube, which has a very specific function, no social web site has been able to sustain a large audience over an extended period of time.

Facebook has taken a number steps to ensure that it won't meet the same fate as its predecessors; specifically, it has not been afraid to redesign its user experience in the light of new threats and trends (notably Twitter) and it has moved far more aggressively to spread itself across the internet in order to make its platform 'part of the web', rather than simply a destination. Though unproven, this latter strategy is likely to help Facebook over the long term for a number of reasons: i.) the extended Facebook network stands to sustain audience engagement, much as embeddable video has helped build and sustain YouTube, and ii.) the network has the potential to develop into a very powerful ad network, leveraging the self-service platform and reaching Facebook users across a wide portfolio of sites and serving ads that are targeted to their known interests, age and social group. iii.) it is also quite possible that Facebook will extend its billing platform and Facebook Credits to sites across the network, which would further increase revenue generating opportunities. These measures are going to be key if the company is to grow its ARPU by more than 700 per cent and reach Google and then a business that is truly comparable to that of a mature Google.

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