Facebook – Circling The Drain?
Tuesday, November 4th, 2008
Michael Arrington at TechCrunch posted an interesting and in-depth article last Friday about the state of Facebook’s finances. Facebook currently has 160 million unique visitors a month and as one of those visitors I have often contemplated just how long Facebook can hang in there if the ad model doesn’t pan out. Presumably, 99.9999% of Facebook’s visitors don’t even think about it nor do they care as long as they can have a Vampire bite their friends.
The article is titled ‘Facebook May Be Growing Too Fast. And Hitting The Capital Markets Again.’ It seems that Facebook’s success could be its downfall.
Before we get to Arrington’s numbers here’s a question – If Facebook’s growth and future potential growth is mainly abroad, with the USA shrinking fast to only 20% of the total global user base, what happens to the idea of Social Media and advertising here in the USA? It seems like a Catch-22 situation for Facebook – its revenues are dependent on advertising income but its advertisers will be faced with pitching their products to either a shrinking USA market or to a larger global user base. Geo-targeting might help as long as there is a heavy use of localization in foreign markets. It doesn’t sound promising given how Facebook users are not especially fond of those push ads on their profiles anyway.
And let’s not forget how MTV Europe stumbled at first as it entered the TV/Cable markets in Europe. One language does not fit all they found really quickly – regional accents and dialects were all important and soon there were many versions of MTV Europe in different countries. Meanwhile Facebook members have jumped in to the fray with their own user-created translated versions of the site.
And companies are still playing with fire by jumping into social networks with their brands. Oliver Marks at ZDNet reports on how Virgin Atlantic Airlines had to fire 13 flight attendants who used the Virgin Atlantic Facebook group to malign their customers in unsavory terms. As Marks points out – “Virgin Atlantic (one of my favorite airlines) seem to have fallen into the classic trap of forgetting that FaceBook is a public forum – looking at their online presence there I see a cocktail of different marketing communication focuses, some slightly irritating, and not much in the way of building a relationship with me.”
Here’s some excerpts from Arrington’s article –
Facebook Is Growing, But So Are Costs
There’s no doubt that Facebook is growing at a breathtaking pace. A year ago, according to Comscore, they had just 74 million unique monthly visitors and 35 billion page views. Today those numbers have grown by 118% and 74%, respectively, to 161 million unique visitors and 61 billion page views per month.
Facebook’s growth, thanks to all these user-created translated versions of the site, has probably exceeded even their own internal projections. And running this engine isn’t cheap.
The company is likely spending well over a $1 million per month on electricity alone, say experts we’ve spoken with. Bandwidth is likely another $500,000 or more per month on top of that. The company has earmarked $100 million to buy 50,000 servers this year and next. And sources say they’ve been buying one NetApp 3070 storage system per week just to keep up with all this user generated content. At up to $2 million each, that adds up quickly – we’ve heard estimates that they may have spent as much as $30 million this year alone with the company. And the icing on the cake – earmark another $15 million per year in office and datacenter rent payments.
And don’t forget those human assets. With 750 employees and growing, Facebook is spending at least another $10 million per month on payroll.
It costs a couple of hundred million dollars a year just to keep the lights on at Facebook. But the real problem is keeping up with growth, particularly storage needs. Add another $100 million or more per year for capital expenditures, and you’ve got a company that’s doing exactly the opposite of printing money.
So How ‘Bout Those Revenues?
eMarketer estimates $265 million in revenue for Facebook in 2008. That’s great, right? Well, not really. The company is still losing money – lots of it – at current revenues. And it’s not clear that revenue will grow as robustly as costs.
Most of Facebook’s growth is outside of the U.S. A year ago, according to Comscore, Facebook had 31 million U.S. visitors, about 42% of the total. Today, U.S. visitors have grown to just 41 million.
19 million live in Africa and the Middle East. 26 million are in Asia. Europe, with 48 million Facebook users, has a larger share than the U.S. Another 16 million are in Latin America.
Just one in four Facebook users come from the U.S. today.
As we wrote last summer, most of these international users can’t be monetized today. And to make things worse, bandwidth costs in those countries is generally much higher than the U.S. So the users cost more, and they don’t bring in any revenue.
That international growth might be ok if U.S. growth remained strong. But the U.S. market just seems to be tapped at this point, and gaining market share from MySpace is a battle. As we wrote in August, at current growth rates it will take Facebook 18 years to overtake MySpace in the U.S.
[Update 11/11/08]
“I haven’t heard of anyone purchasing something off an ad on Facebook,” says Angie Tulgetske, vice president of RE/MAX Preferred Choice Properties, which resells timeshares and spends thousands of dollars a month on search ads but avoids social-networking sites. “I wouldn’t think any of my marketing dollars would be spent advantageously there.” From Facebook Tries To Woo Marketers
